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03 Feb 2006
MOODY'S REPORTS: LATVIAN BANKS' STABLE OUTLOOK REFLECTS IMPROVING CREDIT QUALITY, GROWING MARKET SHARE, BUT CHALLENGED BY COSTS AND NEED FOR FRANCHISE INVESTMENTS
London, 03 February 2006 -- The stable outlook and ratings of Latvian banking institutions reflect
the improvement in the quality of Latvian banks' credit portfolios
partly aided by foreign strategic involvement. However, efforts
to grow market share have been counterbalanced by the challenge of having
to control costs and the need for further franchise investments.
In general, Moody's recognises that banks are in a good position
to take further advantage of positive future developments in Latvia;
however, the ratings are ultimately constrained by Latvia's
A2 sovereign ceiling.
"Foreign strategic involvement has proved beneficial to the Latvian
banking system, particularly in terms of improvements in their commercial,
liquidity- and risk-management capabilities as well as organisational
structure and efficiency. The privatisation of Latvian banks since
1992 has also resulted in foreign banking groups gaining considerable
control (almost 60% of capital) of the banking sector. In
contrast to Estonian banks (which are largely influenced by Nordic investors),
Latvia's banking system has attracted foreign capital from a broader
array of countries," says Fidelma Mannion, a London-based
Moody's Analyst and author of this report.
Moody's observes that in recent years there has been a visible improvement
in the quality of Latvian banks' credit portfolios, as evidenced
by the reduction in the proportion of non-performing loans (NPLs)
to total loans outstanding. NPLs amounted to a modest 1%
as at 30 September 2005 compared with 4.6% as at year-end
2000. "The overall improvement is partly attributable to
the expansion of loan volumes as well as the introduction of more stringent
credit underwriting standards, particularly in the case of foreign-owned
institutions. Nonetheless, the rapid growth in lending (in
particular real estate lending) could potentially lead to less seasoned
bank loan portfolios whilst rising real estate prices could also limit
affordability," says Ms Mannion.
The Latvian banking system is quite highly concentrated, with the
four largest banking institutions together controlling approximately 64%
of the market share by total assets. Despite sector consolidation,
Latvia's banking system is still characterised by a large number
of financial institutions relative to the country's population and
gross domestic product (though remaining below the EU average),
and also in comparison to the neighbouring banking systems of Estonia
and Lithuania. Moody's indicated that the profitability of
Latvian banks has undergone a steady improvement since the end of the
1990s. "Indeed, consolidated profits before tax of
Latvian banking groups amounted to LVL144.1 million (EUR205 million)
for the first nine months of 2005, representing a 23% increase
on year-end 2004 results, supported by a strengthening economic
environment, sector consolidation, a growing demand for financial
services and improved credit quality. However, these improvements
are offset by intensifying competition, rising business development
costs, wage pressure and infrastructural improvements -- all
of which will continue to weigh on efficiency," Ms Mannion
Moody's notes that capital injections have aided Latvian banks in
strengthening their franchise reach. Indirectly, foreign-owned
institutions are also in a position to draw on the brand strength and
expertise (technological or otherwise) of the respective parent.
EU accession is also expected to continue benefiting Latvia in a number
of ways, not least in terms of structural funding, foreign
direct investment into this region and broader export opportunities as
well as the reduction and eventual elimination of foreign currency transfer
risk. Nevertheless, Latvia continues to be susceptible to
external shocks reflected by the widening current account deficit which
in turn has been met by external debt financing. These concerns
are somewhat mitigated by the fact that a sizable proportion of external
debt is accounted for by Latvian banks, which are substantially
foreign-owned and borrow heavily from their respective parents.
At present there are 22 licensed banking institutions and a branch operating
in Latvia, four of which are rated by Moody's: Baltic
International Bank (rated B1/NP/E+), Baltic Trust Bank (rated
Ba3/NP/D), Mortgage and Land Bank of Latvia (rated A2/P-1/D-)
and Parex Bank (rated Ba1/NP/D+).
The issuance of this credit report by Moody's Investors Service
is an annual update to the markets and is not a formal action to alter
the credit rating of the issuer.
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