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19 Dec 2008
Moody's reports: Negative outlook for Latvian banking system
London, 19 December 2008 -- The fundamental credit outlook for the Latvian financial institutions
is negative, in particular reflecting the prospects of a decline
in economic growth and its effect on asset quality, says Moody's
Investors Service in its new Banking System Outlook on Latvia.
Moody's negative outlook for the Latvian banking system expresses
the rating agency's view on the likely future direction of fundamental
credit conditions in the industry over the next 12 to 18 months.
It does not represent a projection of rating upgrades versus downgrades.
"The economic downturn, which is already well underway,
is now likely to be more severe than previously anticipated and thus have
an adverse impact on the banking system's asset quality.
The rapid credit expansion of recent years is gradually revealing increased
asset quality problems as the banks' loan books start to season
in the context of more challenging economic conditions," says
Kimmo Rama, a Moody's Vice President-Senior Analyst
and author of this report.
Moody's recognises that the global credit and liquidity crisis has
not resulted in any direct losses for Latvian banks, which were
not directly exposed to the US sub-prime crisis and had negligible
investments in Lehman Brothers. However, the turmoil has
led to access to external liquidity becoming tighter and increased the
banking system's liquidity risk. These conditions eventually
led to the country's second-largest bank, Parex Bank,
being taken over by the government on 9 November.
A significant part of the Latvian banking system is under the control
of foreign banking groups. More than 50% of Latvia's
banking sector assets are controlled by Scandinavian-owned banks.
In Moody's opinion, foreign strategic involvement has been
beneficial for the Latvian banking system as a whole, particularly
in terms of improvements in credit risk, liquidity and risk management
capabilities, as well as organisational structure and efficiency.
On the other hand, we note that potential problems at the parent
bank level could put pressure on the Latvian subsidiary banks' liquidity
positions and thus affect the whole banking system.
Moody's believes that the tighter liquidity situation and ongoing
economic downturn will provide a boost to banking consolidation.
Latvia's banking system is still characterised by a large number
of financial institutions relative to the country's population and
GDP, and also in comparison with the neighbouring banking systems
of Estonia and Lithuania.
"One of Moody's primary concerns is that the very rapid historic
growth in lending (largely driven by commercial and residential real estate
lending) has led to less seasoned loan books. The rating agency
expects problem loans to stem from the real estate, wood processing,
transportation and consumer-lending segments, which are likely
to be hardest hit by the ongoing economic slowdown," says
Moody's notes that the Latvian banking system continues to exhibit
a high exposure to non-resident business. While Parex Bank
accounts for the majority of non-resident deposits, for some
smaller banks, non-resident deposits continue to form a significant
part of their funding. Moody's is concerned that, given
the weakening economic environment in Latvia, non-resident
deposits could now be more vulnerable to withdrawals.
The banking system's profitability is expected to weaken considerably
in 2008. For the first ten months of the year, the banks'
total profits were down by 28% from the respective period last
year. Meanwhile, capitalisation levels remain good,
although, in Moody's view, those of some smaller domestic
banks have become stretched, especially in light of the current
economic slowdown, the banks' high credit concentration risk
and concerns over asset quality development.
"In line with other European countries, Latvia has increased
deposit guarantees. Bank deposits are now guaranteed up to 50,000,
from the previous level of up to 20,000," adds
* * * * *
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