Latvia's Economic Response to Covid-19
Banking sector profitability still challenged by the pandemic
Ability to generate profits in the short-term subdued due to effects of COVID-19. In 2020, banks' total profit decreased mostly
due to COVID-19 related provisions and hedging
Key Highlights
Largest lenders entered the COVID-19 crisis with sound profitability
Before the pandemic, the average Return on Equity (ROE) of the Latvian credit institutions was relatively high and exceeded the EU average. In 2019, the
average ROE was 9.6% and in 2020 ROE decreased to 5.3% (EU average was 5.7% in 2019 and 2.5% in 2020 Q3)
Credit institutions increased their provisions as the pandemic unraveled, as a result net expenses on provisions increased by 44% in 2020. Second largest
negative impact came from drop in net trading income (by 52%) due to revaluation of securities and hedging. As a result, profit before tax decreased by 36%.
However, net interest income and net commission and fee income decreased moderately as a result of loan moratoria and public support measures.
Risks to credit institutions' profitability remain elevated due to still heightened uncertainty regarding ability to return to growth after the pandemic.
ROE
CI
Interest Spread on Outstanding Loan Amounts
8%
ā ROE
EBA average
ā CI
7%
12%
70%
6%
10%
65%
5%
8%
60%
4%
6%
55%
3%
4%
50%
2%
2%
45%
1%
%
40%
0%
2017*
2018
2019
2020
2017*
2018
2019
2020
Source: FKTK (FINREP, consolidated), EBA | Note: Excluding the insolvent PNB Banka AS
*One-off adjusted data
Note: 2020 EBA refers to Q3 2020
18
2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021
Interest rate on deposits
Source: Bank of Latvia
Interest rate on loansView entire presentation