Latvia's banking sector is stable and demonstrates resistance to economic Covid-19 shock

Overall, the Latvian banking sector proves resistance to the shock caused to the economy by Covid-19. The negative impact of Covid-19 is not yet fully observed because of the State aid measures (moratorium and guarantee programmes), but uncertainty remains high and the deterioration in the loan portfolio quality in the future cannot be excluded. At the end of the second quarter of 2020, the moratorium applied to 11 554 loans for a total amount of EUR 1168 million, i.e. 8.87% of total credit institution loan portfolio. Of all loans, 67% are loans of legal entities (by the volume of loans) and 33% are loans of natural persons. As well, 33 loans by the end of Q2 2020 had received Altum guarantee as part of the Covid-19 crisis support for businesses. Their total amount was EUR 43 million. Operating income in the Latvian banks decreased by 11% in the first half of the year compared to the respective period of the previous year. This was mainly influenced by asset price adjustments in financial markets, as well as the decline in business volumes due to uncertainty caused by Covid-19. As a result, gains from financial instrument transactions and exchange rate fluctuations decreased significantly (EUR 30 million or 88%). Overall in the first half of 2020, the Latvian banking sector operated with EUR 40.3 million in profit, i.e. down 70% from the respective period of the previous year, with return on equity (ROE) shrinking from 9.5% in 2019 to 3.2%. The profit was substantially reduced by the first-half provisions, assessing the potential adverse effects of Covid-19 pandemic on further economic development, as well as the expected deterioration in credit quality in subsequent quarters of the year. Domestic loan portfolio decreased by 0.5% in the second quarter, where similar rates of loan reduction were observed for both domestic households (by 0.3%) and domestic non-financial corporations (by 0.4%). In Q2, lending developments were largely characterised by material difference among market participants, where the amount of loans granted to domestic customers in certain credit institutions did not change significantly or even increased, while other banks saw a comparatively swift drop in the amount of loans issued to domestic customers. In Q1 2020, in view of the European Central Bank and FCMC's recommendations that the banks should refrain from dividend payment a number of banks decided to include retained earnings in equity, thereby significantly improving capital ratios and strengthening loss absorption capacity. In Q1 2020, the overall average capital ratio climbed up from 23.4% to 25.0%, accordingly. In Q2 2020, capital ratios overall decreased slightly, but remained at high levels (total capital ratio from 25.0% to 24.5%). The amount of deposits held by non-bank customers remains stable. In Q2 2020, total deposits increased by EUR 335.6 million or 1.9%. With the growing uncertainty about the economic prospects and cautiousness resulting therefrom, domestic household deposits continued to grow (+276.5 million euro or 3.6%), while domestic deposits of non-financial corporations and central governments shrank by EUR 163 million or 3.3% and EUR 56.7 million of 10.6%, respectively. Performance indicators of the Latvian banking sector for the first half of 2020, please see infographics. Further information: Communications Division Financial and Capital Market Commission Phone: +371 67774808 dace.jansone@fktk.lv