Bank of Lithuania
2003-01-30

At the end of 2002, there were 10 banks operating under a license from the Bank of Lithuania, 4 foreign bank branches and 2 foreign bank representative offices. In May 2002, a new VB Mortgage Bank was established and was issued a restricted license by the Board of the Bank of Lithuania. In addition, in early 2002 the Bank of Lithuania issued permission to the Finnish bank Nordea Bank Finland Plc Lithuania branch to operate in the Republic of Lithuania (prior to that this branch operated in Lithuania under the name of Merita Bank). The privatisation of the Agricultural Bank of Lithuania was completed in March 2002, and Norddeutsche Landesbank Girozentrale of the Federal Republic of Germany acquired from the state a 76 per cent stake in the bank.

In the course of the year, the market share of the three largest banks contracted from 78 per cent to 74 per cent, and the remaining market share was divided among the smaller banks and foreign bank branches. The development of selected items of the balance sheet in the banking system is presented below.

Development of some asset and liability items in the banking system

LTL million

No.

Item

1 Jan 2002

1 Oct 2002

1 Jan 2003

Change over Q4 (%)

Change year on year (%)

1

Assets

15350.6

16215.4

17220.5

6.2

12.2

2

Granted loans

6502.8

7275.9

7933.2

9.0

22.0

3

Deposits and letters of credit

10415.7

11441.0

11677.4

2.1

12.1

 

private companies

3077.8

3614.2

3753.9

3.9

22.0

 

natural persons

6357.1

6615.6

6877.6

4.0

8.2

4

Shareholders’ equity

1441.3

1642.1

1731.2

5.4

20.1

5

Profit (loss) for current year

-22.5

141.1

146.5

   

According to the unaudited data for 1 January 2003 presented by the banks, operating domestic commercial banks were characterised by the following:

? assets totalled LTL 17.2 billion, increasing over the year by LTL 1.9 billion (12.2%). In comparison, banking assets in 2001 had increased by LTL 2.25 billion (17.2%);

? total loans granted to clients amounted to LTL 7.9 billion, increasing in comparison with 1 January last year by LTL 1.4 billion (22%);

? deposits totalled LTL 11.7 billion on 1 January 2003, increasing over the year by LTL 1.3 billion (12.1%);

? including individual deposits of LTL 6.9 billion, increasing over the year by LTL 521 billion (8.2%);

? including deposits in the national currency of LTL 7.5 billion, increasing over the year by 31.9 per cent;

? including deposits in foreign exchange of LTL 4.1 billion, decreasing over the year by 12 per cent.

2. Compliance with Prudential Requirements

In 2002 most banks remained conservative in their operations, which is proved by their compliance with the prudential requirements with a sizeable reserve; according to the unaudited statements presented on 1 January 2003, the capital adequacy in the banking system was 14.75 per cent and exceeded the minimum 10 per cent capital adequacy requirement set by the Bank of Lithuania; the liquidity ratio was 42.03 per cent and was also considerably higher than the minimum required 30 per cent.

In 2002 all domestic commercial banks and foreign bank branches were in compliance with all prudential requirements set by the Bank of Lithuania.

3. Loans

In the background of economic growth in 2002, banks were more active in their crediting activities, which resulted in the fastest growth of their loan portfolio since 1994. The share of loans in net value increased from 41.3 to 45.6 per cent of total assets.

2002 saw a continued growth of the proportion of long-term loans in the loan portfolio from 67 per cent in early 2002 to 72 per cent on 1 January 2003. On the one hand, long-term loans create favourable conditions for bank customers to develop investment projects and for the economy to grow; on the other hand, they pose higher credit risk for banks as economic conditions may change over a long period.

Long-term loans granted to the population increased by 76 per cent over the year. Housing loans have prevailed among the long-term loans granted to natural persons, the amount of which, according to the bank survey of 1 January 2003, made up LTL 989 million, i.e. 81 per cent of the total loans granted to natural persons. Fast growth of such loans can be expected further as banks offer favourable terms and the demand for them remains high. The growth of housing loans should be additionally encouraged by the household income tax relief effective as from 2003 which reduces taxable income by the amount of interest paid on housing loans.

It should be noted with respect to loan portfolio quality that loan portfolio quality indicators improved further in 2002. In addition to the renewal of the loan portfolio and economic growth mentioned above, this was also influenced by the improved financial standing of some borrowers and the regular write-offs of bad loans and their transfer to non-systemic accounts.

The development of loan portfolio quality in the banking system is presented in the table below.

Development of loan portfolio quality in the banking system

Date

Loan provisions/granted loans, %

Category III, IV, V loans/total loans, %

1 Jan 1997

20.68

32.1

1 Jan 1998

18.52

28.25

1 Jan 1999

5.92

12.46

1 Jan 2000

4.47

11.92

1 Jan 2001

3.73

10.79

1 Jan 2002

2.55

7.45

1 Jan 2003

1.08

5.82

4. Deposits

Deposits and letters of credit serve as the most stable and fastest growing source of funds in the bank liability structure. The increased share of private company deposits resulted in a relative decrease of individual deposits from 61 per cent to 58.9 per cent of total deposits.

In absolute figures, individual deposits grew by half a billion litas in a year. This growth was determined by the increase of demand deposits, while the individual time deposit market, that had seen annual growth of over LTL 800 million for three consecutive years, in 2002 declined by LTL 66 million, i.e. 1.5 per cent. The volume of individual deposits was also pushed down by the decline of the US dollar exchange rate.

By the end of the year, compared to the beginning, balances on the accounts of private resident companies had increased by LTL 595 million (21.7%).

5. Capital

On 1 January 2003 the registered share capital of the banking system made up LTL 1,110 million. In 2002 four domestic banks registered increases of share capital, and a new VB Mortgage Bank was established in May with an LTL 20 million share capital.

Following the completion of the bank privatisation process in 2002, the share of banking capital held by foreign investors increased, with a corresponding reduction of the state-controlled share that on 1 January 2003 made up as little as 0.15 per cent. The above development was primarily related to the privatisation of AB Lithuanian Agricultural Bank. The development of the share of foreign investors in banking capital is presented below:

1 Jan 1996 ? 16 per cent

1 Jan 1997 ? 25 per cent

1 Jan 1998 ? 32 per cent

1 Jan 1999 ? 39 per cent

1 Jan 2000 ? 35 per cent

1 Jan 2001 ? 58 per cent

1 Jan 2002 ? 81 per cent

1 Jan 2003 ? 88 per cent

There has been a significant domination of Scandinavian capital in the Lithuanian banking system, yet its share saw a relative decrease owing to a marked investment by a German bank.

6. Profitability

The total unaudited result of the domestic banking system in 2002 was a profit of LTL 146.5 million, which was the best achievement after the restoration of the country’s independence. Eight banks and three foreign bank branches earned a profit of LTL 204.5 million, while two banks (Agricultural Bank of Lithuania and Sampo Bank) and one foreign bank branch (Nordea Bank Finland Plc Lithuania Branch) incurred a total loss of LTL 58 million. In comparison, in 2001 the banking system incurred a loss of LTL 22.5 million. The performance of the banking system and profitability indicators are summed up in the table below.

Results of operating banks

No.

Bank

Profit for current year (LTL million)

1 Jan 2002
(audited)

1 Jan 2003
(unaudited)

1.

Agricultural Bank of Lithuania

8.2

-50.4

2.

Ūkio Bank

4.4

4.6

3.

Vilniaus Bank

95.2

126.5

4.

Šiaulių Bank

2.4

3.4

5.

Bank "Snoras"

4.5

11.7

6.

Medicinos Bank

1.6

1.0

7.

PAREX BANKAS

-7.1

2.8

8.

Bank Hansa-LTB

-114.0

50.1

9.

VB Mortgage Bank

-

0.05

10.

Sampo Bank

-10.1

-4.9

 

TOTAL banks

-14.8

145.0

11.

Kredyt Bank S.A. Vilnius Branch

0.7

1.8

12.

Norddeutsche Landesbank Girozentrale Vilnius Branch

-2.2

2.3

13.

VEREINS-UND WESTBANK AG Vilnius Branch

-2.2

0.1

14.

Nordea Bank Finland Plc Lithuania Branch

-4.0

-2.7

 

Total foreign bank branches

-7.7

1.5

 

Total:

-22.5

146.5

Interest rates that were declining fast during the first half of 2002 stabilised by the end of the year, and the real interest margin declined but slightly over the year (by 0.25 percentage points) and stood at 4.08 per cent on 1 January 2003. It should be noted that the real interest margin of foreign bank branches is significantly lower than that of commercial banks. In the conditions of a declining real interest margin, a positive factor was that with the growth of banking assets, the share of interest-earning assets increased in proportion. From the start of the year, the ratio of interest-earning assets to total assets went up by nearly 2 percentage points to 79.95 per cent on 1 January 2003, i.e. a continually increasing proportion of assets earned interest.

With the decline of interest rates, the banking system earned a lower interest income in 2002 and incurred lower interest expenses than in 2001. Net interest income was LTL 25.1 million higher in 2002 than the previous year.

Operational expenses, as before, accounted for the largest share of banking expenses. However, the rate of growth of operational expenses was significantly slower that in the previous year with an annual increase of 5.2 per cent, while in 2001 they went up by 14.7 per cent.

7. Lithuanian Central Credit Union

In November 2002, the Board of the Bank of Lithuania passed a resolution to issue a license for the operation of the Lithuanian Central Credit Union (LCKU). The Central Credit Union was accorded a statutory function to support the liquidity and restore the solvency of credit unions.

According to the data of 1 January 2003, the assets of the LCKU made up LTL 6.2 million; it held LTL 0.8 million of credit union deposits and LTL 0.5 million of loans to credit unions. The share capital of the LCKU consisted of the share of the Government of the Republic of Lithuania (LTL 5.3 million) and the shares of 36 LCKU credit union members of LTL 1 thousand each.

From the start of its operations, the LCKU earned an unaudited profit of LTL 135 thousand.

8. Operations of Credit Unions in 2002

On 1 January 2003, there were 53 credit unions in Lithuania; financial accounts were presented by 51 credit unions with the total of nearly 21 thousand members. In 2002 thirteen new credit unions were established, which was the highest number from the start of credit unions, and the license of one credit union was revoked.

Development of the main items of assets and liabilities of credit unions

No.

Balance sheet item

Amount (LTL thousand)

Change year on year (%)

1 Jan 2002

1 Jan 2003

1.

Assets

33837.6

70103.7

2.1 times

2.

GS

1972.1

2636.3

33.7

3.

Granted loans

21063.7

45885.9

2.2 times

4.

Deposits

26514.1

56514.6

2.1 times

 

Of which members and associated members

20676.0

50090.4

2.4 times

5.

Share capital

4013.0

7535.2

87.8

6.

Profit (loss) for current year

359.5

415.5

-

The activities of credit unions expanded fast last year. According to the statements presented by the credit unions, their operations in 2002 were characterised by the following:

? assets increased by 2.1 times and on 1 January 2003 made up 0.41 per cent of total assets in the banking system. The assets of two largest credit unions ("Ūkininkų viltis” and Pakruojis farmers) accounted for 20.7 per cent of total assets of credit unions on 1 January 2003;

? granted loans increased by 2.2 times and made up 65 per cent of total assets.

? on 1 January 2003, 31 credit unions held specific provisions (LTL 255.7 thousand);

? investment in Government securities increased by 33.7 per cent;

? deposits increased 2.1 times, of which the largest share (89 per cent) were deposits of members;

? the share capital of credit unions grew by 87.8 per cent.

Last year, 37 credit unions earned a profit, while 14 credit unions incurred losses. According to the unaudited financial statements, not approved by the general shareholders meetings, in 2002 credit union profit was LTL 415.5 thousand, which was the highest since the restoration of the country’s independence (in comparison, in 2001 it was LTL 359.5 thousand). Higher profits were determined by the increased volume of operations, but the relative profitability and efficiency indicators somewhat declined.

Similar to previous years, the main source of income was interest income (87.1 per cent of total income). Interest expenses and operational expenses accounted for the largest share of expenses, 46.6 and 42.7 per cent, respectively.

On 1 January 2002, all credit unions complied with the prudential requirements of the Bank of Lithuania.

SUPERVISION OF CREDIT INSTITUTIONS IN 2002

The Bank of Lithuania continued performing its statutory functions in credit institution supervision by making efforts to implement a supervisory system meeting the best international standards, improve the transparency of banking operations and market discipline through enhanced disclosure of information on performance indicators, improve comprehensive risk management in banks and ensure adequate contingency planning, strengthen international co-operation and continue the process of implementing EU legislation in preparation for membership in the Community.

The recent progress made by the Bank of Lithuania in strengthening banking supervision has been recognised by renowned foreign institutions. In 2002 experts of the European Commission and EU Member States supervisory authorities carried out a peer review of financial institution supervisory authorities, including the Bank of Lithuania, with the aim of establishing how EU legal provisions were implemented in national legislation and assessing the efficiency of financial institution supervision. At the same time the results of a similar, if broader, IMF and World Bank Financial Sector Assessment Programme (FSAP) carried out earlier were published. FSAP conclusions and the Commission Report noted essential progress achieved in the country in ensuring safe and reliable functioning of the banking system in the country, significant qualitative changes in the area of banking supervision in implementing compliance with prudential requirements, in applying supervisory measures and the Core Principles for Effective Banking Supervision of the Basle Committee on Banking Supervision, while the current Lithuanian credit institution supervisory system was considered in compliance with international practices and EU requirements. The Bank of Lithuania developed an action plan for implementing the recommendations of the European Commission, including the improvement of credit institution supervision and implementation of the core principles for effective banking supervision.

Taking into account the recommendations in relation to the management of credit risk concentration, in 2002 the Bank of Lithuania set certain lending restrictions to other companies of the financial group including the bank (i.e. to the parent company of the bank, other subsidiaries of the same parent company or subsidiaries of the bank) where the Bank of Lithuania does not carry out their consolidated supervision, as too high lending to the companies of one economic sector could have a negative impact on the bank’s financial standing in the event of unfavourable developments in the market. In addition, requirements to consolidated supervision were adjusted. Banks are required to provide information on their investments in the shares of other companies not only above 10 per cent of bank capital but also on all other invested amounts. In line with the new requirements, this information has to be provided by all banks and not only banks that own subsidiary companies. This decision was based on the argument that with the increasing size of bank capital, investment below 10 per cent of bank capital may also be significant to the bank’s activities.

Last year the Bank of Lithuania continued the harmonisation of its legislation with the European Union (EU) directive requirements. In 2002 the Bank of Lithuania started the implementation of the new concept of the Loan Risk Database managed in a centralized way that facilitates the use of external and internal rating systems and internal risk assessment models by banks as provided in EU directives and the New Basle Capital Accord and thus facilitate a move to a new qualitative level in assessing the financial standing of borrowers. In addition, a wider scope of data will be submitted to the database as from October 2003, including, next to loans, other operations such as repurchase transactions, assets sold at deferred payment, factoring and bill operations, etc.

In 2002, aiming to ensure better assessment and forecasting of the impact of factors of the major banking risks, such as credit and liquidity risk, on the stability of banking operations, the Bank of Lithuania started the stress testing of the banking system. It was decided that as from 2003 the assessment of the expected impact of certain market risk elements on the performance of banks using the data from the newly approved Interest Rate Gap calculation statement form would be started. The information presented in the form will facilitate the analysis of the scope of interest rate risk assumed by banks and assessment of the impact of interest rate changes over the nearest one-year period on net interest income of banks.

International experience shows that public confidence in banks is supported by their increased transparency and opportunities for interested market participants to get information about bank financial indicators. In compliance with the minimum disclosure requirements set by the Bank of Lithuania, in 2002 banks started publishing on their internet sites key information on their financial situation, asset quality, compliance with prudential requirements, etc. Also, the Bank of Lithuania publishes on its internet site quarterly information about the general banking indicators.

Like before, in 2002 the Bank of Lithuania continued to focus on improving financial accounting and reporting of credit institutions, especially in relation to the issues of implementation of the International Accounting Standard (IAS) No. 39 “Financial assets: recognition and evaluation”. This area has seen close co-operation with international auditing companies. Taking into account the fact that a new EU directive was adopted last year, regulating the application of the method of fair value in the recognition and evaluation of financial assets, the Bank of Lithuania decided not to impose restrictions in introducing the application of IAS 39 to those banks that were well prepared and correspondingly adjusted statement forms for supervisory information and publishing. In addition, taking into account the requirements of the newly adopted Law on Accounting and some new provisions of the International Accounting Standards, the Key Principles for the Preparation of Credit Institutions Financial Accounting and Reporting were approved, introducing more detailed regulation of the compilation of financial accounting and reporting, conditions for introducing changes in the accounting policies and other issues.

In 2002 the Bank of Lithuania continued to strengthen international co-operation with its counterparts in other countries and aimed to ensure effective supervision of banks belonging to the same group operating in different countries. In this area, the Bank of Lithuania established contacts with the Swedish Financial Supervisory Authority and renewed its Agreement with the National Bank of Poland. Last year, business meetings were held and joint inspections of bank subdivisions were carried out together with the representatives of Polish, Finnish and Estonian experts. The Bank of Lithuania continued regional co-operation in sharing experience about the applied supervisory practices and the newest risk management methods. Together with the Financial Stability Institute of the Bank for International Settlements, in September the Bank of Lithuania organised a seminar in Vilnius for supervisory authorities of Central and East European countries on the subject of the New Basle Capital Accord and decisions involving problem banks. The seminar presented the most progressive credit, operational and interest rate risk management methods and discussed the role of supervisors as well as key market discipline elements in the context of the New Capital Accord, shared the experience about the possible ways of dealing with banks in bankruptcy through restructuring, mergers, acquisitions and other measures.