Estonia’s banking sector: Facts & Figures

Updated September 2019 – For earlier editions of Facts & Figures click here

The Estonian banking sector consists of 17 banks of which nine are licensed credit institutions in Estonia and eight are operating as branches of foreign credit institutions. Banking sector assets totalled €25.2 billion, equivalent to 110% of Estonian GDP. The Estonian banking sector is dominated by foreign capital holding 90% of banking sector assets.

The market is chiefly divided between Swedbank, SEB Bank and Luminor Bank. LHV Bank, the largest bank based in local capital, holds around 6% of banking sector assets. Banks are serving two million private and 0.3 million corporate customers through 135 bank branches. Estonian customers are operating 1.8 active current accounts per inhabitant and 1.25 active internet bank accounts per inhabitant.

Money laundering concerns have been raised regarding transactions in the late 2000s and early 2010s and involve serving mostly non-resident high-risk customers allegedly without proper due diligence measures.

One small foreign-owned bank, Versobank, had its licence withdrawn by the ECB in 2018 and the Estonian FSA ordered Danske Bank’s Estonia branch to shut down operations before the end of 2019. Both banks specialised mainly in corporate finance in Estonia and had market shares of 1% (Versobank) and 6% (Danske Bank Estonia branch).

The share of deposits of non-resident customers has been decreasing significantly in recent years and continues to do so. At the beginning of 2013, the share of non-resident deposits in Estonian banks constituted almost 20%, by the end of 2018, their share had decreased to 9%. The share of deposits originated by non-resident customers registered in offshore territories has decreased ten 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 enforcing agreed financial sanctions and the Estonian Banking Association has submitted its proposals for using legislation to shore up anti-money laundering efforts to the newly elected parliament.

Estonian banks have issued 1.4 bank cards per inhabitant, 80% of which are debit cards, and 20% credit cards. Some 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 €17.7 billion worth of deposits and operate loan portfolios to the value of €19 billion. The rapid growth of the banks’ loan and lease portfolio continued in 2018. The banking sector is mainly funded through the deposits of resident clients, though financing from parent companies plays an important role in the funding of a number of banks. A similar amount of profit was earned as in the previous year, and most banks continued to have high levels of own funds. Changes to income tax law encourage the banks to pay out more in dividends, and so the capitalisation of the banks will fall in time as their assets increase.

Bank deposits continue to grow faster than debt liabilities – the bank deposits of households were 9% larger at the end of 2018 than they were at the end of 2019. 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 2018. The average rate for long-term corporate loans issued in December was 2% and the average interest rate for new housing loans was 2.4% by the end of the year.

The quality of the loan portfolio remained good: the value of loans overdue by more than 60 days was 0.2 percentage points lower than the year previously, at 0.5% of the loan portfolio.

Housing loans account for about 40% of the loans to the non-financial sector, 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 is the average for the EU. Credit growth continues to be supported by very low base interest rates and by relatively strong competition in the corporate loan market, which has kept interest margins low.

The profitability of the Estonian banking sector has been among the strongest in the countries of the EU. The Estonian banking sector is relatively cost efficient, which may be partly 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 2018 was €356 million, marking a 6% rise compared to the 2017.

Contributor: Enn Riisalu riisalu@pangaliit.ee