Portrait of an Ascending Sovereign Credit
Banking sector profitability remained resilient during the pandemic
In 2021, profitability in the banking sector has almost recovered to pre-pandemic levels
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Key Highlights
In the first half of 2021, profitability of banks recovered swiftly as there were smaller expenses on provisions and no significant losses due to hedging compared
to 2020
Uncertainty regarding the need for extra provisions remains, however outlook still seems favourable despite the new lockdown as ample fiscal support is
available for households and businesses hit by containment measures, and the largest lenders have some room for manoeuvring (retained profits)
Net interest income has increased by 10%, albeit as a result of synthetic growth of one credit institution that acquired a leasing portfolio from a non-bank.
Nevertheless, interest income has remained stable during the pandemic
Net fee and commission income also increased by 10%, mainly from servicing payments and credit cards
Administrative costs increased slightly (4%); however rising labour costs could increase pressure on banks' cost to income ratio over medium term
As both ECB's and ESRB's recommendation on restriction of distributions has lapsed, banks are allowed to pay out dividends. Notwithstanding, banks are asked
to maintain prudent approach to distributions
ROE
CI
Interest Spread on Outstanding Loan Amounts
8%
♦ ROE
EBA average
◆ CI
7%
12%
70%
6%
10%
65%
5%
8%
60%
4%
6%
55%
3%
4%
50%
2%
2%
45%
1%
%
40%
2017* 2018
2019
2020
2021
1HY
2017* 2018
2019
2020
2021
0%
1HY
2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021
― Interest rate on deposits
Source: FCMC (FINREP, consolidated), EBA | Note: Excluding the insolvent PNB Banka AS
*One-off adjusted data
Source: Bank of Latvia
17
― Interest rate on loansView entire presentation