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Finland’s banking sector: Facts & Figures

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

The Finnish gross domestic product (GDP) fell 2.9% in 2020 as a result of the coronavirus induced financial crisis. The GDP in the euro area fell 6.6%, so in comparison, Finland managed relatively well. GDPs were affected especially by the fact that the services sector’s value added fell as a result of the economic restrictions and cautious behaviour of consumers. In the early weeks of the coronavirus crisis, consumer confidence crashed, which was reflected in private consumption as a decrease of 5%. It will take time until Finland’s key export partners recover from the coronavirus crisis, so the outlook of Finnish industrial trends and the growth of private investments depend on the recovery of international economy. According to latest forecasts and indicator data, economic growth may recover already during 2021.

According to preliminary data, the value of Finnish exports totalled €85 billion in 2020. Exports decreased by 11% and imports decreased by 12% compared to the previous year at current prices. The volumes of export and import both decreased 7%. The coronavirus pandemic was reflected especially in diminished export and import of service. Travel restrictions were globally imposed on all continents, which reduced the import and export of travel and transport services. Partial recovery of product exports towards the end of the year was due to an international shipbuilding order worth nearly one billion euros. The value of investments decreased by 3% to €55 billion. Their volume sank by 5%, but public investment accelerated 3% compared to the previous year.

The long positive trend in the employment rate took a turn in the opposite direction in the second quarter of the year. According to Statistics Finland, the number of employed people decreased with 37,000 persons in 2020. The number of available jobs dropped the most in social and health care services, hotel and restaurant business, and in transport and storage services. The employment rate was on average 71.6%, which is one percentage point less than the previous year.

When the coronavirus crisis broke out, the number of temporary lay-offs soared, rising the highest in April 2020 with 164,000 persons. After April, the number of lay-offs began to fall rapidly and levelled out at 60,000 persons at the end of the year. The wages and salaries received by households fell in nominal terms by 0.4% to €92.8 billion. Unemployment benefits paid in Finland increased by 38% to a total of €5 billion.

In addition to central banks’ monetary policy stimulus, many countries around the world resorted to lending to finance their economies during the global coronavirus-induced financial crisis. Finnish public sector entities’ deficit was €12.9 billlon when a year earlier it was €2.4 billion. General government deficit was even bigger with €13.4 billion (€2.7 billion the year before). The aggregate deficit-to-GDP ratio of public sector entities was 5.4%. This deficit exceeds the 3% limit defined the EU Stability and Growth Pact. General government EDP debt, or consolidated gross debt, was 69.2% relative to gross domestic product at the end of 2020. This is above the 60% debt-to-GDP limit set in Stability and Growth Pact. The public deficit was increased by expenses related to the coronavirus pandemic, other additional public costs, and the smaller accumulation of tax income and social security payments.

The effects of the coronavirus pandemic were also reflected in the housing market. When the crisis broke out, construction trends slumped but recovered fast and even surpassed precrisis levels in late 2020. According to Statistics Finland, construction was started on 40,900 new dwelling units, which is 8% more than in 2019. Slightly over 32,200 housing start permits were granted in 2020, which is 4% more than the previous year. A total of 39,600 building permits were granted in 2020. This is 6% more than the previous year. The highest number of new building permits was granted in 2017 with close to 49,100 permits. The number of completed dwelling units was 10% smaller in 2020 with 39,000 units.

The Finnish banking market is dominated by four major banks, who together hold 80% of the market shares. Nordea Bank, OP Financial Group and Municipality Finance are deemed domestically significant institutions (O-SII) and are directly supervised by the ECB. Smaller domestic retail groups, like Savings Banks group, POP Bank group and other small domestic banks, are under the supervision of the Finnish Supervisory Authority.

The biggest group by market share (34.6%) is OP Financial Group. The group is made up of 141 independent member cooperative banks and the OP Cooperative, which they own. Second largest is Nordea Bank with a 25.1% market share. Danske Bank and Municipality Finance are nearly equal in terms of their market shares, 10.8% and 9.6%, respectively. Danske Bank turned its Finnish subsidiary into a branch at the end of 2017.

Finnish households’ loan debts totalled €163 billion at the end of 2020, which is €6 billion more than in 2019. Housing loans comprised the majority of this debt with €104 billion. Households were liable for approximately €19 billion in limited-liability housing company loans.

Households’ liability for consumer credits has not continued to rise after the first quarter of 2020. Households had €23.7 billion in consumer credits at the end of 2020. The growth rate of consumer credits granted by credit institutions has slowed down. Especially the use of credit cards has decreased. In July 2020, the Ministry of Justice imposed a temporary interest rate ceiling for the rest of the year in response to the coronavirus crisis. The 10% interest rate ceiling and the direct marketing ban of consumer credits have affected the operation of payday loan companies, who have charged the highest interest rates in the unsecured consumer credit market. The temporary interest rate ceiling did not apply to instalment purchases or credit card debt.

In 2018, the Ministry of Finance appointed a working group to examine ways in which the excessive indebtedness of individuals and households could better be controlled and macroprudential risks thus reduced. The working group published its report in October 2019. Legislative proposals are expected later in 2021.

Once the coronavirus-induced financial crisis broke out, Finnish banks reacted quickly to the changed operating environment by granting grace periods (payment moratoria) and other flexible arrangements for their household and corporate customers. The number of repayment holidays, in particular, swiftly increased in early 2020. In the course of the year, households and businesses applied for a total of more than 300,000 loan grace periods. Corporate customers were also offered e.g. lower service fees and financial consultancy.

The number of temporary lay-offs and the fast growth of unemployment were reflected in the number of applications. Unlike in some other EU countries, Finland has not had moratoria required by legislation or mutually agreed by the entire sector, and the granting of loan payment extensions has been left at each bank’s own discretion. The average length of a repayment holiday was six months. Nearly all applications were accepted.

During the second wave of the pandemic in the second half of 2020, the demand for new repayment holidays was significantly lower and returned to nearly normal levels. Extension applications to existing moratoria were also relatively few. The proportion of forborne corporate loans grew 0.3 percentage points and comprised 2.0% of total loans at the end of 2020. The proportion of forborne loans to households grew 0.8 percentage points and comprised 2.1% of total loans at the end of 2020. Compared to the European average, Finnish banks have proportionately less outstanding corporate loans to the sectors and industries most impacted by the coronavirus crisis, such as travel and hospitality industry.

The financial crisis caused by the coronavirus pandemic was also reflected in Finnish banks’ operating environment, although less than predicted. Despite economic uncertainty, the banking sector’s capital ratios changed little, and the Common Equity Tier 1 (CET1) ratio and leverage ratio even improved in 2020. The overall capital adequacy ratio of the sector stood at 21.2% at the end of year, down 0.1 percentage points from 2019. The sector’s Common Equity Tier 1 (CET1) ratio strengthened 0.5 percentage points to 18.1%. The leverage ratio increased 0.3 percentage points to 6.2%. The capital adequacy of the Finnish banking sector remains well above the EU average.

The aggregate operating profits of the Finnish banking sector grew by €0.9 billion, totalling €4.3 billion in 2020. Because the comparison year 2019 involved many non-recurring costs that weakened banks’ operating profits, the growth of the operating profits in 2020 was mainly related to smaller costs.

Net interest income increased 4% to €6.7 billion. Commission income stayed at €3.9 billion, the same as in 2019. Despite the coronavirus crisis, the banking sector’s income remained level. Growth in net interest income was primarily due to smaller interest expenses. Banks’ operating environment was characterised by historically low interest rate level and interest margins lowered by competition.

Contributor: Mariia Somerla