Estonian financial sector is well capitalised

15/02/2018

The undertakings in the financial sector that are subject to state supervision are well capitalised. The banks, fund management companies, investment firms, payment institutions and life and non-life insurance companies comply with capital standards by a wide margin according to the data of Q3 2017 just published by the Financial Supervision Authority.

Main risk of banks related to Swedish real estate sector

The annual increase in the loan portfolio of the banks operating in Estonia slowed down considerably in Q3 2017, from 5.5% to 1.4%. This exceptional slowdown was the result of one-off reasons related to the intragroup transactions resulting from the rearrangements that took place in the consolidation group of market participants. The actual increase in loans without the impact of said rearrangements accelerated and reached 6.5% on a year-over-year basis.

The loan portfolio of commercial undertakings decreased by 4.2% as a result of intragroup transactions on a year-over-year basis, mainly due to the decrease in loans in the real estate sector. The growth of the loans of private individuals accelerated somewhat and their annual increase was 6.7%.

Banks and branches earned 210.5 million euros of income and 85.1 million euros of profit in Q3. The total income of banks decreased by 1% in the quarter, mostly due to the decrease in financial transactions and other income. Although the return on equity of banks has decreased somewhat in recent quarters, their main types of income, which are interest income and income from service fees, have increased.

The profitability of Estonian banks remains good and the capital and liquidity buffers of the banks are still strong. Should the risks related to the Swedish real estate sector materialise, the impact of this may carry over to the Estonian banking market as well. It’s therefore important that Estonian banks maintain adequate capital buffers as cover for risks.

Volume of assets managed by fund management companies exceeds 6 billion

The volume of assets managed by the fund management companies operating in Estonia increased by 7% in Q3 and exceeded 6 billion euros. The remarkable increase is mainly based on the management of own funds as well as the provision of investment management services to foreign funds by way of outsourcing.
The pre-tax profit and net profit of fund management companies grew to 5 million euros in Q3. Among others, the growth was supported by the profit earned from financial investments.

The profitability and return on capital of the fund management sector are good and liquid assets comprise a large part of the aggregated balance sheet. The biggest risk, market risk, arises from investments made in the companies’ own funds and the second significant risk is operational risk.

Market risk level of investment firms remains high

The volume of customer assets managed by local investment firms decreased by 6% in Q3 and comprised 947 million euros. The profitability of the sector improved in Q3 due to the good result of the trading portfolio and smaller losses from differences in exchange rates and risk management.

The market risk of investment firms is high and taking it has a significant impact on their profitability and capitalisation. Extensive cross-border activities and serving non-residents may be considered a risk factor equal to market risk. Compliance risks are associated with the safekeeping of the assets of non-resident customers and the intermediation of complex and highly frequent transactions.

Number of retail payments increases in sector of payment institutions

The volume of payments made via payment institutions operating in Estonia in Q3 was 74 million euros, which is 13% less than in Q2. The number of payments remained close to a million in Q3. The average amount of a payment transaction decreased somewhat and was 75 euros.

Payment institutions earned profits of ca million euros in the first nine months of the year, 0.42 of this in Q3. Only half of the payment institutions operating on the Estonian market make a profit.

Number of life insurers drops to three, Mandatum continues as branch in Estonia

The insurance premiums received by Estonian life insurance companies in Q3 amounted to 54.6 million euros, which is 7% less than in the previous quarter. The reason of the decrease in the volume of insurance premiums is the decrease in the sales of unit-linked life insurance. However, the volume of insurance premiums for the first nine months of the year has increased by 11%.

The claims submitted to life insurance companies amounted to 30.1 million euros. The most claims were submitted in unit-linked life insurance - they amounted to 16.2 million euros and comprised 53.7% of all claims, followed by products with profit-sharing and insurance of medical expenses.

The volume of assets of life insurance companies in Q3 did not change much, increasing by 3% or to 1.2 billion euros. There were also no significant changes in the structure of assets and liabilities.

The merger of Mandatum Life Insurance Baltic SE with its parent company was completed on 27 November 2017 and the company will continue operating in the Baltic States via the branches of the Finnish parent company. Three local life insurers instead of the former three are now registered in Estonia and two foreign branches also operate here.

Motor insurance tariffs have increased in all Baltic States

The insurance premiums received by Estonian non-life insurance companies and their branches in Q3 amounted to 122 million euros, which is one per cent less than in Q2. However, the volume of premiums has increased over the first three quarters of the year, totalling 363 million euros or 13.8% more than in the same period in 2016. Such a rapid increase in volumes was supported by the growth of consumption caused by the economic upturn as well as the increase in tariffs. Tariffs in insurance classes related to vehicles have increased in all Baltic States.

Non-life insurance companies earned profits in the amount of 32.2 million euros in the first nine months of the year. The majority of profit is still earned from insurance activities and property insurance is the most important source of profit.

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