In June, the corporate and household loan and leasing stock declined by 1.7 billion kroons, i.e., 0.6%. At end-June the volume of the loan and leasing portfolio amounted to 261 billion kroons, being nearly 2% smaller year-on-year. The drop in the loan volume this year has been mainly caused by the anticipated waning of corporate credit demand. The volume of loans issued to business services and trade companies has contracted more than average over the first six months of the year, by 10% and 8%, respectively.

The effect of decreasing Euribor on banks’ loan interest rates has abated in recent months. Average interest rates on housing loans and long-term corporate credit have slightly lowered, being 3.8% and 4.3%, respectively, in June.

The deposit volume of Estonian households and non-financial enterprises decreased by an approximate 800 million kroons, i.e., 0.7% in June. Household deposits exceeded 500 million kroons, partly owing to seasonal factors, but the increase was unable to offset the 1.3 billion drop in corporate deposits. The past half-year’s deposit volume has been on the level comparable to end-2008.

Similarly to May, growth in the volume of overdue loans in June continued at a slower pace. The share of loans overdue by more than 60 days in the loan portfolio rose from 5.5% in May to 5.8% in June. However, the volume of loans with lower defaults has declined. The current economic outlook allows presuming that the volume of problem loans will increase this year and it may reach to 9% of the banks loan portfolio as expected in Eesti Pank’s spring forecast.

The loan quality of enterprises active in the construction sector is worse than average: nearly a fifth of the loan portfolio faces repayment difficulties. The volume of housing loans overdue by more than 60 days is below 4% of the total housing loan volume.

The banks operating in Estonia suffered losses of 1.9 billion kroons in the second quarter of 2009. The unprofitability of foreign banks’ branches has hiked – the losses of the branches accounted for 30% of the total banking sector losses.

Loan write-downs, which amounted to some 2.3 billion kroons, had the strongest impact on the results of the banks. Loan write-downs made in the first half of the year make up 1.6% of the banks’ loan portfolio. According to the base scenario of Eesti Pank’s spring forecast, loan losses may increase to form up to 4% of the loan portfolio in 2009. In addition to larger loan losses, the banks’ profitability was adversely affected by net interest income, which was almost 25% smaller quarter-on-quarter.

The capitalisation of the banking sector continues to be high. Due to increased losses borne by banks, the aggregate capital adequacy ratio lowered by 0.5pp in June to 21.8%, exceeding the 10% minimum requirement by a sufficient margin.

Figure 1. Monthly growth of household and corporate loans and leases in Estonia

Figure 2. The volume of corporate and household deposits in Estonia (EEK m) and the annual deposit growth rate

The weighted average interest rate on housing loans and long-term corporate loans issued within a month and 6-month EURIBOR