MOODY’S REPORTS: LATVIAN BANKS’ STABLE OUTLOOK REFLECTS IMPROVED CREDIT FUNDAMENTALS, AS WELL AS IMPACT OF EU ACCESSION; CAUTIONS HOWEVER ON FAST LOAN GROWTH
London, 11 May 2004 -- The overall stable credit outlook for Latvian banks reflects the supportive economic environment in Latvia, the expectation of a generally positive impact from the country’s EU accession and the progress in strengthening sustainable profitability, Moody’s Investors Service says in its new Banking System Outlook report for Latvia. Furthermore, foreign ownership of some of the largest financial institutions exerts a positive influence on the stability and performance of the Latvian banking sector. However, Moody’s also notes the challenges posed by the buoyant expansion of the loan books, Latvia’s economic vulnerability to external shocks and, for the smaller banks, potential competitive disadvantages unless these banks successfully develop sustainable niche strategies.
The consolidation of Latvia’s banking system over the past decade has had positive implications for the strength of the sector as a whole, as well as for individual banks and the domestic economy. Over time, and reinforced by the stringent regulatory framework, this has led to greater customer confidence in Latvia’s banks, resulting in growing transaction volumes and account balances, says Guido Versondert, a Moody’s Vice President-Senior Analyst and author of the report.
At present, there are still 23 banks active in Latvia, comprising domestic institutions as well as subsidiaries and branches of large foreign banking groups, down from 63 banks at the end of 1993. However, the sector is already fairly highly concentrated the three largest banks accounted for 61% of customer loans and 50% of deposits and no bank outside the top four has a market share of more than 5%. Moody’s cautions that, in light of the scale-sensitive nature of banking and their growing investment needs, the smaller banks will need to develop successful niche businesses or be backed by strong and committed owners if they are to avoid being at a severe competitive disadvantage.
We expect Latvia’s accession to the European Union in May 2004 to have overall positive implications for the political stability and economic performance of the country. In terms of real economic growth, investments and employment levels, macroeconomic conditions should remain conducive to the banks’ business and performance in 2004, Versondert notes. Nonetheless, Moody’s remains cautious with respect to Latvia’s vulnerability to external shocks, which could primarily result from the large current account deficits and the comparatively high proportion of short-term foreign borrowings.
The Latvian banking system has typically mirrored domestic economic developments. Rapid balance sheet growth for most banks was initially driven by strong deposit collection and, more recently, by the expansion of their loan portfolios. In particular, buoyant demand for, and strong supply of, mortgage loans has created significant momentum. Although Moody’s expects the current trends to remain intact for the foreseeable future with only a gradual abatement in growth rates, a property market-related crisis remains a potential risk to the banking sector.
On a positive note, Moody’s derives comfort from the ongoing improvements in banks’ underwriting practices and supervisory standards. The influence of foreign owners has proven particularly beneficial in this regard.
To date, Moody’s has assigned credit ratings to the following banks in Latvia: Baltic International Bank (B1/NP/E+),Baltijas Tranzitu banka (Baltic Transit Bank, Ba3/NP/D), Latvijas Hipoteku un zemes banka (Mortgage and Land Bank of Latvia, A2/P-1/D-), Latvijas Unibanka (A2/P-1/C-) and Parex Bank (Ba1/NP/D+). In addition, Moody’s also rates Hansapank (A1/P-1/C), the Estonian parent of Latvian institution Hansabank.
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Samuel S. Theodore
Financial Institutions Group
Moody's Investors Service Ltd.
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Vice President - Senior Analyst
Financial Institutions Group
Moody's Investors Service Ltd.
JOURNALISTS: 44 20 7772 5456
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