Latvia's Economic and Financial Outlook

Banking Sector Profitability Remains Healthy Banking sector profitability is supported by stable interest spread and economic growth. Key Highlights 20% . Profitability of domestically active banks is sound and returns gradually increase as a result of a favorable macrofinancial conditions. The profitability of banks servicing foreigners is volatile due to ongoing de- risking that resulted in a decline in their business volume. Although banks servicing foreigners posted a profit in 2018, a further deterioration in their profitability is expected. Average Return on Equity (ROE) of the Latvian credit institutions is relatively high and still exceeds the EU average. In 2018, average RoE was 10.2% (9.1% in 2017); EU average - 6.5% (EBA Risk Dashboard Q4 2018). 10% ROE 40% 30% 20% 10% 0% -10% 0% -20% 2017* 2018 2019 V** Domestically active banks -Weighted average 2018 2017* 2019 V** Banks servicing foreign clients ◆ Median Source: Bank of Latvia | Noted: *One-off adjusted data, **Annualised Interest Spread on Outstanding Loan Amounts • 17 8% As a result of record-low loan and deposit rates, interest rate spread on outstanding amounts remains stable at around 3 pp. 7% 6% 5% 4% 3% 2% 1% 0% 2008 2009 2010 2011 2012 2013 2014 Interest rate on deposits 2015 2016 2017 2018 2019 ― Interest rate on loans Source: Bank of Latvia

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