Operations of Credit Institutions in Q3 2003

Development of some asset and liability items in the banking system

LTL million

No.	Balance sheet item	1 Oct 2002	1 Jan 2003	1 Jul 2003	1 Oct 2003	Change over Q3 (%)	Change over nine months (%)	Change year-on-year (%)
1	Assets	16214.9	17221.2	17996.0	19816.9	10.1	15.1	22.2
2	GS	2893.7	2898.1	2618.8	2566.8	-2.0	-11.4	-11.3
3	Other debt securities	825.0	762.4	660.4	564.6	-14.5	-25.9	-31.6
4	Loans issued	7275.9	7933.2	8796.7	10201.7	16.0	28.6	40.2
5	Specific loan provisions	76.4	86.1	82.4	72.8	-11.6	-15.4	-4.7
	Specific loan provisions/granted loans, %	1.0	1.1	0.9	0.7	-	-	-
6	Deposits and letters of credit	11441.0	11677.4	12028.4	12874.3	7.0	10.2	12.5
	of private companies	3614.2	3753.9	3780.5	4124.2	9.1	9.9	14.1
	of natural persons	6615.6	6877.6	7057.4	7295.9	3.4	6.1	10.3
7	Shareholders’ equity	1641.7	1730.5	1853.7	1931.6	4.2	11.6	17.7
8	Profit (loss) for current year	142.3	146.8	125.0	182.6	-	-	-

Over nine months of 2003, the asset market share held by the three largest banks (Vilniaus Bankas, Hansabankas and NORD/LB Lietuva) contracted from 74 per cent to 71.3 per cent. The market share of larger banks was taken over by some smaller banks and branches of foreign banks. Amongst individual banks, VEREINS-UND WESTBANK Vilnius branch and Sampo Bank increased their market share most over nine months this year (from 0.8 to 3.1 per cent and from 0.9 to 3.0 per cent, respectively).

2. Compliance with Prudential Requirements

According to the data of statements submitted by banks as at 1 October 2003, the capital adequacy indicator of the banking system was 13.44 per cent to exceed the minimum 10 per cent capital adequacy ratio established by the Bank of Lithuania; the liquidity ratio stood at 41.72 per cent and also was above the 30 per cent minimum established by the Bank of Lithuania. In Q3 2003 all domestic commercial banks and branches of foreign banks operating in Lithuania complied with all prudential requirements established by the Bank of Lithuania.

3. Loans

The share of loans extended to customers over the year at net value increased by 6.8 percentage points to 50.9 per cent of bank assets.

By individual customer groups, the highest increase in loans was with private undertakings (LTL 1.1 billion) and individuals (LTL 347 million) in Q3 this year. The proportion of long-term loans in the loan portfolio of banks continued to grow during Q3 2003 to reach the highest level in the last few years, 79.4 per cent on 1 October this year.

The long-term loans issued to individuals during the reporting period rose by LTL 333 million or 21.8 per cent. Most of them were housing loans to individuals, the portfolio of which increased by LTL 565 million or 57 per cent from as early as the beginning of the year to amount to LTL 1.5 billion on October 1^st. Housing loans have remained among the most dynamically growing items of bank assets. Most of the housing loans were issued by Hansabankas (LTL 476 million), Vilniaus Bankas (LTL 363 million, and, together with the subsidiary VB Mortgage Bank, LTL 505 million), NORD/LB Lietuva (LTL 278 million) and Sampo Bankas (LTL 195 million). Other banks accounted for merely 6.4 per cent of the housing loan market of banks. Owing to the favourable terms in granting loans and continuing tax allowances, further rapid growth of this type of loans is likely.

In estimating the quality of the entire portfolio of bank loans it should be noted that the tendency of improvement of the loan portfolio quality indicators has been observed further for several consecutive years already. The improvement of quality indicators of the bank loan portfolio has been affected not only by renewing the loan portfolio with new loans (owing to the short time for their potential risks to occur so that they normally fall within the standard group) but also by the recovering national economy, the improvement of the financial standing of some borrowers, as well as by the systematic writing off of bad loans and their transfer to non-systemic accounting.

The development of loan portfolio quality indicators in the system of operating banks is presented in the table below.

Development of loan portfolio quality indicators in the system of operating banks

Date	Loan provisions/granted loans, %	Category loans III, IV, V/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
1 Apr 2003	1.07	4.84
1 Jul 2003	0.94	3.97
1 Oct 2003	0.71	3.25

4. Deposits

The amount of deposits with domestic banks, as was previously mentioned, stood at LTL 12.9 billion on 1 October 2003 to have increased by LTL 846 million or 7 per cent during the quarter, of which individual deposits made up LTL 7.3 billion to have grown by LTL 238 million or 3.4 per cent over the quarter. The growth of individual deposits with banks, in comparison with both the previous year and with the operating performance of some other banks, was limited by the depreciation of the exchange rate of the US dollar (9 per cent over nine months of this year), the increasing popularity of alternative saving instruments (Government securities, pension and life insurance products) and lowering interest rates reducing saving incentives.

Deposits in the national currency rose by LTL 506 million or 6 per cent over Q3 2003 and deposits in foreign currencies increased by LTL 339 million or 8.9 per cent over the quarter. The share of litas deposits in the composition of deposits that had been gradually expanding for a second consecutive year shrank by 0.5 per cent in Q3 2003 to stand at 67.8 per cent on 1 October 2003.

5. Capital

Shareholders’ equity increased by LTL 73.4 million over Q3 2003 to amount to LTL 1.9 billion on 1 October this year. This increase is related to the profitable operations of banks and their strengthening capital base.

The registered share capital of the banking system totalled LTL 1.1 billion on 1 October 2003. The share capital grew by LTL 16 million over the quarter when Sampo Bankas registered an increase of its share capital.

In Q3 2003 the Board of the Bank of Lithuania allowed two domestic banks to include into Tier II capital subordinated loans in the overall amount of LTL 103.6 million.

Domestic banks are largely controlled by foreign investors, whose holding of the equity capital of Lithuanian banks expanded by 1 percentage point over Q3 2003 to make up 89 per cent. The expansion occurred because Vilniaus Bankas sold 6.66 per cent of the shares of NORD/LB Lietuva to the Swedish investment fund management company East Capital Asset Management. Scandinavian investors have prevailed in the capital of Lithuanian banks.

6. Profitability

According to the financial statements as at 1 October 2003, the operations of ten banks and two foreign bank branches were profitable, they earned a profit of LTL 183.7 million, while two foreign bank branches (Kredyt Bank S.A. Vilnius Branch and Nordea Bank Finland Plc Lithuania Branch) incurred a loss of LTL 1.1 million over nine months this year. It should be noted that according to the data submitted by banks in Q3 this year the operations of all domestic banks and foreign bank branches were profitable.

The total unaudited result of the banking system over nine months of 2003 was a profit of LTL 182.6 million. For comparison, during the respective period of 2002 the Lithuanian banking system earned a profit of LTL 142.3 million.

Performance of operating banks

No.	Bank	Profit for current year (LTL million) 1 October 2002 1 October 2003
1.	NORD/LB Lietuva	-8.6	15.3
2.	Ūkio Bankas	4.4	3.4
3.	Vilniaus Bankas	96.9	85.3
4.	Siaulių Bankas	2.8	3.1
5.	Bank Snoras	10.3	6.2
6.	Medicinos Bankas	1.1	1.3
7.	PAREX Bankas	1.9	5.7
8.	Hansabankas	36.7	57.7
9.	VB Mortgage Bank	-0,01	1,0
10.	Sampo Bankas	-2.1	3.3
	TOTAL banks:	143.5	182.2
11.	Kredyt Bank S.A. Vilnius Branch	1.2	-0.02
12.	Norddeutsche Landesbank Girozentrale Vilnius Branch	0.4	0.9
13.	VEREINS-UND WESTBANK AG Vilnius Branch	-0,7	0,7
14.	Nordea Bank Finland Plc Lithuania Branch	-2.2	-1.1
	Total foreign bank branches	-1.3	0.5
	Total:	142.3	182.6

Compared to the same period last year, better performance of banks was mainly achieved as a result of the increase of net services and commissions by LTL 29.8 million or 16.4 per cent and the reduction of expenses on specific provisions by LTL 25.8 million or 52.6 per cent. Banks also received higher income from investment in equity securities (income from these rose by LTL 11.8 million) and traded equity securities (profit from equity securities transactions rose by LTL 7.2 million).

With increasing competition in the banking sector, possibilities for banks to improve their profitability indicators further will be very much limited by the gradually persisting decline of the real interest rate margin. The real interest rate margin that declined by 0.25 percentage points over 2002 went down further by 0.67 percentage points during nine months of 2003 to reach the lowest level in recent years (3.41 per cent).

The fact that with the growth of bank assets the share of interest-earning assets kept increasing in total assets should also be valued positively. Over the year from 1 July 2002 the ratio of interest-earning assets to total assets went up by 2.38 percentage points, and by 2.34 percentage points over Q3 2003 only, to reach 83.49 per cent, i.e. the highest level during the last few years.

7. The Central Credit Union of Lithuania

The assets of the Central Credit Union of Lithuania (CCUL) went up by 31.8 per cent in Q3 2003 amounting to LTL 25.5 million on 1 October 2003.

As at 1 October 2003, the CCUL held deposits in the amount of LTL 17.7 million, most of which were those of credit unions, had extended loans to credit unions members of the CCUL in the amount of LTL 11.5 million, and had purchased Government securities amounting to LTL 7.3 million.

The share capital of the CCUL consisted of the share of the Government of the Republic of Lithuania (LTL 4.6 million) and the shares of 46 credit unions members of the CCUL (LTL 0.7 million).

In Q3 2003, the CCUL earned LTL 49 thousand of profit and the operating performance of the CCUL for nine months was a profit of LTL 47 thousand.

In Q3 2003, the CCUL complied with all prudential requirements established by the Bank of Lithuania.

8. Performance of Credit Unions

On 1 October 2003, 57 credit unions were in operation in Lithuania. 55 credit unions, comprising nearly 30 thousand members, submitted financial statements.

Development of the main items of the consolidated balance sheet of credit unions

No. ser.	Balance sheet item	Amount (LTL thousand)					Change over Q3	Change over 9 months	Change year- on-year
		1 Oct 2002	1 Jan 2003	1 Jul 2003	1 Oct 2003		(%)	(%)	(%)
1.	Assets	56487.2	70119.6	95169.8	108316.3		13.8	54.5	91.8
2.	GS	2293.5	2636.3	2025.7	2008.3		-0.9	-23.8	-12.4
3.	Loans issued	38884.1	45885.9	72684.3	80048.2		10.1	74. 5	2.1 times
4.	Specific provisions on loans	271.5	255.7	363.6	501.0		37.8	95.9	84.5
5.	Deposits	44902.5	56514.6	69080.2	80903.2		17.1	43.2	80.2
	O/w of members and associated members of credit unions	38449.2	50090.4	66219.1	78201.6		18.1	56.1	2 times
6.	Share capital	6377.6	7550.5	10899.1	11982.1		9.9	58.7	87.9
7.	Profit (loss) for current year	290.0	414.2	305.6	607.2		-	-	-

In Q2 2003, the activities of credit unions expanded further.

Assets of the system of credit unions grew by 13.8 per cent and on 1 October 2003 made up LTL 108.3 million or 0.55 per cent of the assets of operating banks (for comparison, the figure for 1 October 2002 was 0.35 per cent). Loans issued during the reporting period increased by 10.1 per cent to make up 73 per cent of the assets of credit unions. In the composition of the loan portfolio, the proportion of long-term loans has been increasing for several years. As at 1 October 2003, credit unions held LTL 501 thousand of specific provisions on loans.

During Q3, investments of credit unions in Government securities declined by 0.9 per cent. Deposits with credit unions grew by 17.1 per cent; most of them (93.7 per cent) were deposits of individuals.

The share capital of credit unions rose by 9.9 per cent over Q3 2003.

During 9 months of 2003, credit unions earned LTL 607.2 thousand and in Q3, LTL 301.6 thousand of profit. 45 credit unions that operated profitably earned a profit of LTL 682.9 thousand and 10 credit unions incurred a loss of LTL 75.7 thousand during 9 months of 2003. Similar to previous years, interest income remained the main source of income for credit unions, making up 89 per cent of total income. Interest expenses and operating expenses accounted for the largest share of expenses, 46.5 and 38.5 per cent, respectively.

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

9. Activities of the Bank of Lithuania in Performing Credit Institution Supervision

In view of the constantly rising level of development of information technologies of banks and the related increase of operational risk, the Board of the Bank of Lithuania approved the General Provisions for Managing the Operational Risk in Banks in July-September 2003. The aim of this legal act is to encourage banks to devote more attention to the management of operational risk in order to identify potential sources of risk and to take appropriate actions to reduce the losses on potential failures in operation following the Bank’s approved operational risk management policy. The Provisions deal with the operational risk management environment, the procedures of identification, assessment, monitoring and control of this risk; they also provide that, in performing stress testing, every bank will have to include operational risk. Moreover, the enforcement of these provisions will be helpful in preparing for the implementation of the New Capital Accord of the Basle Committee on Banking Supervision in calculating the need of capital to cover operational risk.

In Q3 2003, General Provisions for the Accounting and Recording of Specific Provisions for Doubtful Assets in Financial Statements were approved. Major amendments extend the period for writing off Category 5 loss-bearing assets (i.e. not one but two quarters), as the duration of the legal processes related to writing off doubtful assets is usually longer than 3 months. In addition, taking into account the requirements of the International Accounting Standards, the procedure for calculating specific provisions was adjusted, when doubtful assets previously written off are returned in part or whole.

Considering the expanding volumes of credit institution activities and the fact that starting from 31 December 2003 banks and credit unions are going to follow different rules of doubtful asset classification, the Regulations on Classifying Doubtful Assets of Credit Unions and Making Specific Provisions for Their Doubtful Assets and Accounting Thereof were approved in Q3 2003. The Rules have established that a credit union, seeking to assess the borrower’s possibilities for timely and full repayment of a granted loan, must evaluate the borrower’s financial standing according to its own developed procedure for the comprehensive evaluation of the standing of the borrower. In order to avoid likely losses it has been established that credit unions will also have to make specific provisions for the overall portfolio of doubtful assets.

To increase the degree of information available in financial statements and considering the harmonisation requirements of EU directives and the International Accounting Standards, in July through September 2003the Bank of Lithuania drafted a few other legal acts. It is planned to adjust the forms of the balance sheet and profit (loss) accounts of banks, the forms of annual financial statements published by banks and minimum requirements for the explanatory letter, the Rules for Accounting and Reporting of Operations in Foreign Currency in Banks as well as the Rules of Consolidation of Financial Statements and Their Supervision on a Consolidated Basis. The aim of the suggested amendments is to enhance the efficiency of consolidated supervision of banks and to have more detailed information about the actual scope of operations of the whole bank group, i.e. to include into the consolidated financial statements of the bank group not only the credit and financial institutions under their control but also other undertakings, irrespective of the differences in their activity (this information would be submitted annually along with other statements submitted for banking supervisory purposes, and would be publicly disclosed in observance of the adjusted requirements for preparing statements to be published). Meanwhile, consolidated supervision requirements would again be applicable within the financial group only, i.e. for the parent bank and for the credit and financial institutions under its control.

In July through September 2003, the Bank of Lithuania, proceeding with the credit institutions inspection program, completed the inspection in Vilniaus Bankas and conducted full-scope inspections in 3 banks (VB Mortgage Bank, Siaulių Bankas and Medicinos Bankas) and the Central Credit Union of Lithuania.

During the full-scope inspections, the correctness of financial statements submitted to the Bank of Lithuania was checked, the activities and the financial standing of the banks, risk (credit, liquidity, market, operational) management and management efficiency were evaluated. Recently, bank inspections have concentrated on risks and more emphasis has been made on such activities as information technologies and e-banking, efficiency of internal control, and prevention of money laundering. A new area of inspection - valuation of mortgage real estate and related procedures - is to be introduced soon. Of late, improvements to the previously prepared Inspection Manual for Banks have been made taking into account new areas of inspection, newly adopted legal acts, and new products used in banks.

During the period under review, full-scope inspections of 5 credit unions (Ekraniečių, Kelmės Taupa, Medicinos Credit Union, Zemdirbio Gerovė and Ūkininkų Viltis) were conducted, in the course of which the compliance by the credit unions with the Law on Credit Unions and with other legal acts for the regulation of their operations was checked, the activities of the governing bodies of the credit institutions and their financial condition (asset quality, capital, profitability, liquidity) were assessed.