Estonia’s banking sector: Facts & Figures

Updated December 2021 – For earlier editions of Facts & Figures click here

The Estonian banking sector consists of 14 banks of which nine are licensed credit institutions in Estonia and five are operating as branches of foreign credit institutions. Banking sector assets constitute €30 billion equivalent to 110% of Estonian GDP. The Estonian banking sector is dominated by foreign capital holding 85% of banking sector assets.

The market is chiefly divided between Swedbank, SEB Bank, LHV Bank and Luminor Bank. Banks are serving two million private and 0.3 million corporate customers through 77 bank branches. Estonian customers are operating 1.8 active current accounts per inhabitant and 1.25 active internet bank accounts per inhabitant.

Unfortunately, the topic of money-laundering has been mentioned in connection to Estonian banking sector during recent years. The suspicions mainly concern transactions of late 2000’s and early 2010’s and are to do with serving mostly non-resident high-risk customers allegedly without proper due diligence measures.

Though no court proceedings have been held, one small foreign-owned bank, Versobank, had its licence withdrawn by ECB in 2018 and Estonian FSA ordered to shut down the operations of Danske Bank’s Estonia branch before the end of 2019. Both banks specialized mainly on corporate finance in Estonia and had a market shares of 1% (Versobank) and 6% (Danske Bank Estonia branch).

The share of deposits of non-resident customers has been decreasing remarkably in recent years. At the beginning of 2013, the share of non-resident deposits in Estonian banks constituted almost 20%, currently non-residents hold 9% of deposits in banks operating in Estonia. The share of deposits originated by non-resident customers registered in offshore territories has decreased 10 times, currently making up less than 1% of the whole deposit portfolio.

The Estonian banking sector has zero tolerance when it comes to money laundering or terrorist financing. Local banks are also enforcing agreed financial sanctions. Estonian Banking Association has submitted its proposals for using legislation to shore up anti-money laundering efforts.

Estonian banks have issued 1.46 bank cards per inhabitant, 80% of issued cards are debit cards, and 20% credit cards. 65% of retail payments are initiated by bank cards and more than 99% of payment orders have been initiated electronically since 2009. Only 4% of the population receives income entirely or partially in cash.

Banks hold almost €20 billion worth of deposits and operate loan portfolios of the same value. The banking sector is mainly funded through the deposits of resident clients, though financing from equity market and parent companies plays an important role in the funding of some banks.

Bank deposits continue to grow faster than debt liabilities – the bank deposits of households were 12% larger at the end of 2019 than they were at the end of 2018. The annual growth of loan portfolio was less than 4%. The rise in incomes and in employment has meant the saving rate of Estonian households has been quite high in recent years.

The average interest rates on new loans did not change substantially in 2019. The average rate for long-term corporate loans issued in December was 2.6%. Average interest rate for new housing loans was 2.4% by the end of the year.

Quality of the loan portfolio remained good. Value of loans overdue by more than 60 days has remained at 0,5% of the loan portfolio since 3Q 2018.

Housing loans account for about 40% of the loans to the non-financial sector and 80% of the loans granted to households, which is slightly above the average for the countries in the EU, but as a share of total assets, the volume of these loans is one of the largest in the EU. This reflects the universal banking model used by banks in Estonia, the concentration of the domestic market and the preference of households for homeownership over renting. It also indicates that the operations of banks in Estonia are less diversified than the average for the EU. Credit growth in housing loans continues to be supported by very low base interest rates and growing prices on the housing market.

The profitability of the Estonian banking sector has been among the strongest in the EU countries. The Estonian banking sector is relatively cost-efficient, which may partly be because the expenses of the local units of foreign banking groups can be reflected at group level rather than local level. Profitability is also aided by smaller loan losses than in other countries and quite large spreads between interest income and interest expenses. Net profit earned in 2019 was €285 million representing 20% decline compared to the 2018.

Contributor: Enn Riisalu riisalu@pangaliit.ee