Lithuania’s banking sector: Facts & Figures
The Lithuanian economy has gathered momentum: real GDP grew by 2.1% in the three first quarters of 2016, compared to 1.6% last year. Economic growth is expected to continue at a moderate pace in the fourth quarter, as continued strong private consumption growth is being offset by stagnating exports and a slump in capital investment. The latter is expected to resume next year, as EU-funded projects gather pace. The tightening labour market resulted in a wage growth. However, higher energy and service prices are pushing inflation up. Rising inflation together with decelerating employment growth will weigh on domestic consumption growth. Exports are expected to rise, however they are not expected to contribute to GDP growth, as imports will pick up on the back of rising investments. Overall, the economy is expected to grow faster in 2017, though risks to the outlook are tilted to the downside due to the uncertain external environment.
The number of participants in the Lithuanian banking sector remained unchanged as of November 2016. In total, six banks and eight foreign bank branches are operating in Lithuania. However de facto, the Lithuanian branch of TeliaSonera Finance AB is not operating yet. The Lithuanian banking sector is dominated by the subsidiaries of large Scandinavian banks. The three largest banks – SEB, Swedbank and DNB – are fully owned by their parent legal structures in Sweden and Norway. The other three banks: AB Šiaulių bankas, UAB Medicinos bankas and AB Citadele bankas are considerably smaller and are owned by groups of investors of local and foreign capital. Among the foreign banks’ branches Scandinavian capital also dominates. In Lithuania 73 credit unions operate united by the Lithuanian Central Credit Union. The Lithuanian government currently has no stake in the banking sector. However the agrarian party Peasant and Greens Union, which won the Lithuanian parliament elections in October 2016, is considering creating a state-owned development bank to spur economic growth in the regions.
Banks in Lithuania are seeking to achieve better operational efficiency through further consolidation. After the transaction between Danske Bank A/S Lithuania Branch and Swedbank was sealed in June 2016, another two banks announced their plans to merge in August. Norway’s DNB ASA and Sweden’s Nordea Bank AB are seeking to combine operations in Estonia, Latvia and Lithuania to build up scale and participate in the merger in equal parts. The deal needs regulatory approval and is expected to be completed by mid-2017. Nordea’s and DNB’s combined Baltic unit would be registered in Estonia, and operate the Latvian and Lithuanian businesses as branches.
The branch network of the banks in Lithuania is shrinking: banks continue to close branches and customer service centres, as the customers’ movement to digital banking gathers pace. The number of credit institutions’ offices has diminished over a year by 48 to 511, as of the third quarter 2016. The number of ATMs grew by 13% over the same period. The number of cashless payments rose by 11.5% year-on-year. Also, DNB has opened a first cashless customer service office, while Swedbank and Nordea have introduced contactless payment cards. Notwithstanding closure of the branches, the number of bank employees increased by 4.3% to 9,274, as parent banks expand their outsourced operations in Lithuania.
Credit growth in Lithuania is picking up. Funding conditions remain very supportive, as final interest rates on loans for both non-financial enterprises and households remain one of the lowest in the euro area. Favourable economic situation contributed to a rising credit portfolio, which resumed growth in mid-2015. The annual increase in loan portfolio for non-financial companies in September 2016 soared by almost 10%, while households credits rose by 3.7%. After a long period of deleveraging, which was characterised by a contraction of the loan portfolio, positive credit growth is suggesting optimism, as funding starts reaching small- and medium-sized companies that were previously cut off due to higher risks. The household loan portfolio consists predominantly of housing credits. Rising housing affordability also supports private sector lending. Lithuanian banking system has room for credit expansion, as the ratio of private sector debt to GDP remains low at about 43%. Moreover, loan quality keeps improving, with non-performing debt dropping to 4.7% of the overall loan portfolio. Despite low interest rates, deposits remain a quite popular product of banks and are continuously growing. However, most customers prefer current accounts over term deposits.
As of 1 February 2017, banks and credit unions will be required to provide the possibility for residents to receive all key payment services for the affordable price of no more than €1.50 per month (and €0.75 per month for low-income residents). The basket includes a wide range of daily payment services, the price cap will be valid until the end of 2017 and reviewed each year.