Operations of Credit Institutions in Q1 2003

1. Banking Development

According to the financial statements for 1 April 2003 total assets of operating domestic commercial banks made up LTL 17 billion, declining over the quarter by LTL 223 million (1.3 %). The decline was determined by the following major reasons: the decline of the US dollar exchange rate, lower private company and individual deposits, the transfer in February of LTL 91 million assets and liabilities under management into off-balance sheet accounts by Hansa-LTB.

Total loans granted to clients amounted to LTL 8.2 billion, increasing in comparison with 1 January by LTL 315 million (4 %). Deposits totalled LTL 11.5 billion on 1 April 2003, decreasing over the quarter by LTL 153 million (1.3 %), of which deposits of individuals made up LTL 6.8 billion, down by LTL 110 (1.6 %) over the quarter. Development of some asset and liability items in the banking system LTL million

Compared to Q1 2002, the market share of the three largest banks contracted from 76 per cent to 73 per cent, and the market share of the smaller banks and foreign bank branches increased regardless of the fact that NORD/LB Vilnius Branch transferred the major part of its assets and liabilities to the Lithuanian Agricultural Bank at the end of 2002.The decline of concentration in most segments of the bank market has been observed for three consecutive years.

2. Compliance with Prudential Requirements

According to the bank statements for 1 April 2003, the capital adequacy in the banking system was 14.65 per cent and exceeded the minimum 10 per cent capital adequacy requirement set by the Bank of Lithuania; the liquidity ratio was 39.9 per cent and was also higher than the minimum required 30 per cent.

In Q1 2003 all domestic commercial banks and foreign bank branches were in compliance with all prudential requirements.

3. Loans

Compared to Q1 2002 the share of loans at net value increased from 43 to 48 per cent of total assets.The period saw continued growth of the proportion of long-term loans in the loan portfolio from 72 per cent in early 2003 to 74 per cent on 1 April 2003.

Mortgage loans made up a significant part of the long-term loans granted to individuals, the amount of which, according to the data for 1 April 2003, made up LTL 1.1 billion (up by LTL 119 million, i.e. 12 % over the quarter).Fast growth of such loans can be expected further as banks offer favourable terms and the demand for them remains high.

Loan portfolio quality improved further during the quarter.In addition to the rather fast renewal of the loan portfolio (given that too short a period has passed for the possible risks related to new loans to emerge) and economic growth, 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

4. Deposits

As mentioned above, total deposits declined over the quarter by LTL 153 million (1.3 %). The largest decline was recorded in private company deposits (by LTL 132 million, 3.5 %) and deposits of individuals (LTL 110 million, 1.6 %). It should be noted that the overall decline in the volume of deposits was determined by the contraction of foreign currency deposits (LTL 288 million, 7 %), while litas deposits increased by LTL 135 million (1.8 %). The growing confidence in the national currency has been supported by the fact that the share of litas deposits has been consistently increasing for a second year and reached the highest level over the past 7 years of 66.6 per cent of total deposits on 1 April 2003.

5. Capital

Shareholders’ equity increased during Q1 by LTL 57.4 million (3.3 %) to reach LTL 1.8 billion on 1 April 2003. This was mostly influenced by the LTL 59.1 million profit earned over the quarter. The capital base did not weaken after the distribution of the profit of 2002 as bank shareholders allocated the earned profit to cover last year’s loss or to the reserve capital. Only a small part (LTL 380 thousand) was allocated by one bank for dividends. 

None of the domestic banks registered any increases of the share capital during the quarter, and the total registered share capital of the banking system amounted to the same LTL 1.1 billion on 1 April 2003. However, the shareholders of three domestic banks adopted decisions to raise their share capital. Thus Ūkio Bank decided to increase the capital by LTL 16 million, Šiaulių Bank by LTL 5.3 million and Bank Snoras by LTL 25 million. 

The share of capital owned by foreign investors has been stable for several periods, which has been primarily related to the completed bank privatisation process. 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 Apr 2002 -89 per cent

1 Jan 2003 -88 per cent

1 Apr 2003 -88 per cent

6. Profitability

During the first quarter, nine banks and one foreign bank branch earned a profit of LTL 61.8 million, while one bank (Sampo Bank) and three foreign bank branches (Kredyt Bank S.A. Vilnius Branch, Nordea Bank Finland Plc Lithuania Branch and VEREINS-UND WESTBANK AG Vilnius Branch) incurred a total loss of LTL 2.7 million.The total result of the banking system in Q1 2003 was a profit of LTL 59.1 million.In comparison, in Q1 2002 the banking system earned a profit of LTL 32.3 million.The results of individual operating banks are presented in the Table below.

Results of operating banks

The improved results were determined by the cutting of costs rather than increasing revenues.Bank earnings were similar to the same period last year, while expenses declined by as much as LTL 27 million, i.e. 9.5 per cent.With the decline of interest rates, interest expenses went down most (LTL 16 million, 20.7 %), as did operating expenses (LTL 4 million, 3.8 %) and expenses on specific provisions (LTL 4 million, 36 %).

While the level of income was similar to the same period last year, there were certain changes in income structure:the share of interest income decreased significantly, and fee and commission income as well as other income components increased accordingly.

The quarter under review was more successful to most banks compared to the same period last year.On the other hand, against the background of strengthening competition in the banking sector, opportunities for improving profitability indicators will be limited by the continuing decline of the real interest margin that was especially large during Q1, falling by 0.5 percentage points to 3.61 per cent.A positive factor in the context of the declining real interest margin was the fact that, with the growth of banking assets, the share of interest-earning assets increased in proportion.

7. Lithuanian Central Credit Union

The assets of the Lithuanian Central Credit Union (LCKU) went up over the first quarter by a factor of 2.3 and on 1 April 2003 amounted to LTL 14.4 million. 

On 1 April 2003, the LCKU held member deposits of LTL 8 million; its loans to member credit unions were LTL 2.9 million and the GS portfolio made up LTL 2.8 million.

Over Q1 the LCKU incurred a loss of LTL 49,000.In Q1 the LCKU complied with all prudential requirements set by the Bank of Lithuania.

8. Operations of Credit Unions

As on 1 April 2003 there were 54 credit unions in Lithuania.Financial statements were presented by 53 credit unions that had a total of 23605 members.One more credit union was established during the first quarter. Development of the main items of the consolidated balance sheet of credit unions

In Q1 2003, the activities of credit unions expanded.The assets of credit unions increased by 17.3 per cent and on 1 April 2003 made up 0.48 per cent of the total assets in the banking system (in comparison, on 1 April 2002 it was 0.26 per cent).The assets of each of the two largest credit unions (“Ukininku viltis” and Pakruojis farmers) exceeded LTL 8 million and together made up 19.8 per cent of the total credit union assets.Granted loans increased by 18.5 per cent and made up 65 per cent of total credit union assets.On 1 April 2002, credit unions held specific provisions on loans of LTL 338.1 thousand.Credit union investment in Government securities decreased over the review period by 20.6 per cent.Their deposits increased by 16.3 per cent, of which the largest share (91 per cent) were deposits of members.The share capital of credit unions grew by 15.7 per cent.

The financial result of credit unions in Q1 2003 was a profit of LTL 42.5 thousand.29 credit unions earned a profit of LTL 187.5 thousand, while 24 credit unions incurred a total loss of LTL 145 thousand. 

Similar to previous years, the main source of income was interest income (87.5 per cent of total income). Interest expenses and operational expenses accounted for the largest share of expenses, 44.9 and 39.5 per cent, respectively.

On 1 April 2003, all credit unions complied with the prudential requirements of the Bank of Lithuania.

9. Supervision of Credit Institutions in Q1 2003

At the beginning of 2003 the Board of the Bank of Lithuania issued a license to the 54^th credit union (Mažeikiai Credit Union) which granted it the right from the date of registration to accept deposits from its members and respective organisations, grant long-term and short-term mutual loans, invest available funds in Government securities, etc. (the credit union was registered in the Register of Enterprises in April 2003).

During the period from January to March 2003 two banks applied to the Bank of Lithuania with regard to subordinated loans.Sampo Bank asked for permission to include a subordinated loan of EUR 5.8 million in Tier 2 capital of the Bank.Having assessed the terms of the loan and its impact on the financial situation of the Bank, the Board of the Bank of Lithuania gave such permission.Vilniaus Bank was given permission to repay a subordinated loan of EUR 9.2 million to the European Bank for Reconstruction and Development before maturity.

In Q1 2002 the Bank of Lithuania continued performing ongoing supervision of credit institutions, which included assessment of the financial situation of banks and credit unions on the basis of presented statements, monitored compliance with prudential requirements and analysed bank performance and trends.Like each year, in March general shareholders’ meetings approved the performance of the banks during the past year and outlined operational goals for the future.The Bank of Lithuania analysed operational and strategic plans of the banks, analysed and generalised audit material and the audited bank financial statements for 2002.

The staff of the Bank of Lithuania continued on-site inspections of banks during the quarter.During this period, the inspections of Sampo Bank and PAREX BANKAS were completed.Participating in the latter inspection were experts of the Latvian Financial and Capital Market Commission.In addition, a full inspection of the Lithuanian Agricultural Bank was carried out and inspections of Ukio Bank and Kredyt Bank S.A. Vilnius Brach were started during this period.

Full inspections involve assessment of bank operations and financial standing (capital, asset quality, profitability, liquidity), effectiveness of asset and liability structure, market risk management and bank governance.The inspections of foreign bank branches focused on the correctness of the financial statements sent to the Bank of Lithuania and the information presented to the Loan Risk Database.During the recent inspections, more attention was focused on new operational aspects, especially the effectiveness of available information systems.With this aim, both partial and full on-site inspections have included an assessment of operational risks related to information systems and electronic banking.In addition, compliance with anti-money laundering legislation has been verified.

During the period under review 6 credit unions were subject to on-site inspections:Tauragė Credit union, Kupiškėnų Taupa, Sūduvos Parama, Biržai Credit Union, Academic Credit union and Zanavykų Bankelis.These full inspections focused on credit union asset quality and other key financial indicators such as capital adequacy, profitability and liquidity.In addition, the Board of the Bank of Lithuania reviewed the results of the eight credit union on-site inspections carried out from October to December 2002.It was established that all credit unions complied with the prudential requirements of the Bank of Lithuania.  

One of the major areas in banking supervision is drafting legislation regulating the operations of credit institutions. In Q1 the drafting of a major legal act establishing a new approach to the policy of assessing doubtful assets was completed. In March the Board approved the General Provisions for the Assessment and Classification of Doubtful Assets and Making Specific Provisions. The new Provisions establish a more flexible and liberal classification of doubtful assets that creates opportunities for a more precise assessment of asset risk; so, for instance, the risks related to an individual loan can be assessed both on the individual basis and according to general criteria applied to certain loan categories. The Bank of Lithuania will set only minimal requirements, while each bank will have to draw their own rules for the evaluation and classification of doubtful assets on the basis of these requirements. The new provisions will become effective as from 31 December 2003.

The Bank of Lithuania took active part in drafting amendments to the legal framework regulating operations of credit institutions to bring it in line with the requirements of the Law on Financial Institutions to become effective this year.In this area, amendments to the new Law on the Bank of Lithuania, Law on the Central Credit Union and Law on Credit Unions, draft laws on Mortgage Bonds and Mortgage Loans were discussed.

The Bank of Lithuania continued preparation for future implementation of the Basle New Capital Accord.A summary review of the New Capital Accord was presented to Lithuanian commercial banks and the Banking Association, who were asked to assess the possibilities for implementing the Accord and state their opinion about the acceptable risk assessment methods in establishing capital adequacy as proposed by the Basle Committee on Banking Supervision.The discussions concerning the document and exchange of opinions with foreign supervision experts have continued.At the request of the Secretariat of the Banking Supervisors of Central and East European Countries (BSCEE) the Bank of Lithuania presented its comments and proposals on the importance of the principles of market discipline and the transparency of banking operations in implementing the New Capital Accord. 

During the period under review, the Bank of Lithuania compiled information on its own activities and the development of the banking sector, summarised the key developments of the previous year and trends in the sector of credit institutions.  

Information was presented to the experts of the International Monetary Fund on the implementation of the World Bank and IMF recommendations under FSAP to ensure transparency in monetary and financial policies, recent practical changes in the field and intended actions in the future.

The Bank of Lithuania analysed information received from commercial banks on the stress testing involving major risks, such as credit, market, liquidity and operational risks.The stress testing was aimed at establishing the risks that would have the strongest negative impact on the performance of banks and to what extent unfavourable market conditions could dampen the ability of banks to meet their financial obligations and ensure compliance with the minimum capital adequacy requirements.

The Bank of Lithuania further continued preparatory work for EU membership and developed international co-operation in the area of supervision.