Portrait of an Ascending Sovereign Credit
Banking sector profitability challenged by the pandemic
Ability to generate profits in the short-term subdued due to effects of COVID-19. According to preliminary data, in the first
eight months of 2020 banks' total profit decreased mostly due to COVID-19 related provisions and revaluations of securities
•
Largest lenders entered the COVID-19 crisis with sound profitability
Key Highlights
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 Q2 ROE slumped to 3.2% (in 2019 EU average was 5.7% and in 2020 Q2 - 0.5%)
However, as the ongoing pandemic impairs the financial situation of borrowers, banks are starting to face effects on their profitability. Decrease in banks' net
interest income (-2.2%) and net commission fee income (-7.5%)) has been moderate in the first half of 2020, while the largest part of impact on banks'
profitability resulted from COVID-19 related expenses on provisions and revaluation of securities portfolios
Largest domestic lenders publicly announced that they would refrain from dividend pay-out
ROE
ROA
8%
◆ ROE - EBA average ◆ ROA (rhs)
7%
14%
12%
1.4%
6%
1.2%
5%
10%
1.0%
4%
8%
0.8%
6%
0.6%
3%
4%
0.4%
2%
2%
0.2%
1%
%
0.0%
0%
2017*
2018
2019
2020 Q2
2017*
2018
2019
2020 Q2
Source: FKTK (FINREP, consolidated), EBA | Note: Excluding the insolvent PNB Banka AS
*One-off adjusted data
18
Interest Spread on Outstanding Loan Amounts
2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020
Interest rate on deposits
Source: Bank of Latvia
Interest rate on loansView entire presentation