ESTONIAN BANKS' NEGATIVE CREDIT OUTLOOK REFLECTS WEAKENING ASSET QUALITY, POOR PROFITABILITY, AND INCREASED REFINANCING RISKS DUE TO ADVERSE EMERGING MARKETS SETIMENT
New York, November 19, 1998 -- Estonia's banking system faces a number of tough challenges in 1999 as a result of weakening financial fundamentals; the adverse liquidity effects of the Russian and Asian crises, most acute for lower rated borrowers; and uncertainty regarding the ability of banks to refinance their foreign borrowings.
Against this difficult background, it is some comfort that the Estonian financial authorities are more willing to support the banks in a crisis. In addition, there is a good possibility of more foreign banks taking significant stakes in domestic banks thereby bolstering their balance sheets. In late 1998, Swedbank bought a stake in Hansabank, which should enhance its equity base, ease refinancings and provide technical expertise. Uhispank announced on 17 November 1998 that it has reached a similar agreement with Skandinaviska Enskilda Banken the implementation of which is expected to take place before the year end.
However in the immediate term, the report says that the banking system must still grapple with the legacy of a very difficult 1998. The collapse of the country's stockmarket, and the Russian government's default in August 1998, led to asset quality deterioration since equities were in many cases used as loan collateral. Three small banks failed and the central bank is supporting a fourth. These problems are compounded by high interest rates, and worsening trading conditions, especially with Russia. As if this was not enough, the financial sector has been hit by a series of scandals that have undermined consumers' confidence in the market.
Moody's said that the outlook, although bleak, is not hopeless; it points to the fact that the system as a whole has strengthened as a result of a wave of consolidation which has led to three major banks having significant asset market shares of 47%, 34% and 10%. Furthermore the central bank has demonstrated its willingness to support viable banks that face short term difficulties. But the systems it has set up, to help it decide when to step in and the funds to be used in potential rescue operations, are not clear. The banking system is also benefiting from strict banking regulation and supervision which is expected to help manage future problems.
Moody's rates three Estonian banks as follows:
LT/ ST deposit ratings; BFSR
Hansabank; Baa3/P-3; D+
Uhispank; Baa3/P-3; D
Forekspank; Ba2*/NP; E
* on review with direction uncertain
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