Lithuania’s banking sector in Q3: deposits and housing loans grew further, profitability declined
Deposits in the banks operating in Lithuania continued to grow significantly in Q3. The loan portfolio growth was mainly determined by the demand for housing loans, whereas lending to businesses continued to decline. As a result of the coronavirus crisis, bank profits earned in the first nine months of 2020 were lower year on year by one-fifth.
“Challenges of the pandemic did not shatter the foundation of stability of Lithuania’s banking sector, however, banks encounter issues related to loan quality, declining profitability and efficient use of the flow of deposits. It is important to ensure that the challenges do not become an obstacle to banks while they perform the role of sustainable financial intermediation in the economy,” said Jekaterina Govina, Director of the Financial Market Supervision Service of the Bank of Lithuania.
After the quarantine, banks returned to the ordinary pace of their operation: renewed the work of their branches and provided services to their customers as usual. This is reflected by their Q3 results: after falling substantially in Q2, net fee and commission income returned to its previous level in Q3.
However, as a result of the coronavirus pandemic, the banking sector’s net profit earned in the first nine months of 2020 was €213 million, i.e. almost €60 million or 21.6% lower than in the same period of 2019. Ten banks or foreign bank branches earned a profit, whereas six of them incurred a loss. Bank profits were mainly reduced by the increased loan impairment losses.
After the first quarantine was imposed and a part of bank customers faced the fall in cash flows, banks deferred repayment terms of loans amounting to almost €1.5 billion (both under moratoria and bilateral agreements with customers). Together with temporary state support for the economy and the recovery of economic activity after the quarantine, this allowed the majority of borrowers to meet their obligations timely.
Despite these challenges, all banks complied with capital adequacy ratios set for them, their liquidity indicators improved, whereas bank assets grew by €2.1 billion (6.4%), to €35.3 billion, in the period under review.
The reason behind this growth was the further increase in the flow of deposits. In Q3, deposits in banks surged by €1.5 billion, to €28.7 billion. Deposits increased by 5.6%, compared to Q2 2020, and by as much as 23.7% year on year. The growth of business deposits (€730 million) and household deposits (€642 million) was the largest. This phenomenon can be explained by the fact that enterprises and residents were inclined to save instead of spending due to uncertainty. The accommodative policy pursued by the government also contributed to deposit growth. On the other hand, 84.5% of total deposits are current deposits, for which banks do not pay interest or even apply negative interest rates.
The loan portfolio amounted to almost €20 billion in Q3 2020. Only loans to residents grew, whereas loans to public institutions, other financial enterprises and businesses declined. The total growth was negligible (0.3%), compared to Q2, whereas the year-on-year growth was negative (-2.2%).
Households were mainly interested in housing loans, which went up over the quarter by as much as €206 million (2.4%), to €8.7 billion. The positive change over the year comprised 8.1%.
The business loan portfolio value shrank by €119 million (1.4%), to €8.3 billion, and was 11.3% lower than a year ago. It may be the case that lending to businesses was also reduced by the state support (subsidies, tax reliefs) or the postponement of business expansion plans by the companies themselves. The portfolio of loans to information and communication, real estate and manufacturing sectors shrank most substantially. However, contrary to Q2, the value of loans to wholesale and retail trade companies went up.
In Q3 2020, ten banks held a banking or a specialised bank licence in Lithuania, while seven banks operated as a foreign bank branch. At the end of November, one more specialised bank licence was issued.
The Banking Activity Review for Q3 2020 is available here.