MOODY'S REPORTS: LATVIAN BANKS' STABLE OUTLOOK REFLECTS IMPROVING FINANCIAL FUNDAMENTALS AND INFLUENCE OF FOREIGN INVESTORS
The overall stable rating outlook for Latvian banks reflects the sector's improving financial fundamentals and the positive impact of the presence of foreign strategic investors on the institutions' credit practices, reports Moody's Investors Service in its new Banking System Outlook for Latvia. However, it also takes account of the relatively high proportion of non-resident deposits - a potential source of instability - and the country's economic vulnerability to external shocks, Moody's notes.
"For Latvian banks, 2001 was characterised by healthy asset growth and improved profitability that strengthened financial fundamentals and underpinned the sector. These trends have continued into 2002, as the economy has continued to perform strongly," explains Edward Vincent, Assistant Vice President - Analyst and author of the report.
A notable feature of the Latvian economy in recent years, since its recovery from the 1998 Russian crisis, has been the increasing ability and willingness of Latvians to purchase or invest in their own homes. This has led to strong growth in commercial banks' mortgage lending volumes, which Moody's expects to continue.
"In the context of an emerging economy environment, Moody's views the overall credit quality of the Latvian banking sector as satisfactory, despite the strong asset growth. In particular, we note the positive influence of foreign strategic investors, which has helped the banks improve their credit practices," Vincent says.
Although Latvia's economic reliance on Russia and the CIS has diminished significantly since the 1998 crisis and as the nation has become increasingly oriented towards EU states, Moody's believes it remains vulnerable to the economic fortunes of its trading partners, pending closer political and economic integration with the EU. Any such economic shock would have obvious negative implications for the banking system, the report observes, in particular given the relatively high proportion of non-resident deposits, which may be withdrawn in a shock scenario.
However, Moody's notes positively the strong growth in demand for banking products in Latvia - a move encouraged by the government - and the expected surge in take-up of more sophisticated and electronic products, in particular. Such growth will have the beneficial effect of boosting the proportion of resident deposits, the report explains.
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