Swedish banks have financed the Estonian banking system for years. Today they pay Estonian savers 5% interest rates, while receiving only 4% on some of the loans issued a couple of years ago. Credit-losses are building.
When bank lending was at its peak in Estonia in 2006-2007, private individuals and companies borrowed long-term, but at short-term adjustable interest rates. Rates were granted down to roughly EURIBOR 6-months + 0,5 percentage points. At today's EURIBOR-rates these loans cost the borrowers less than a 4% annual interest rate.
At the same time, e.g Swedbank today offer EUR-deposit rates of up to 5% (also six months). Add to this the increasing credit-losses, and banking profitability should be declining rapidly. Of course, a negative interest rate margin is a short-term anomaly that will have to disappear, and last week Swedbank lowered their Swedish deposit rates drastically.
The winners are the Estonians who are sitting on favourable loans and savings. The loans were seemingly favourable already when issued, but today they are probably more generous than the banks could ever envisage back then. Linking the loan rates to the EURIBORs at low additional margins was natural two years ago, but this year e.g Swedbank have had to finance themselves at high premiums to the interbank rates. As the bulk of Estonian loan contracts were signed when margins were low, banks' profitability should be under pressure right now.
A very profitable Estonian bank this autumn has been (the people's own) Bank of Estonia (BoE). The central bank's profit only for the month of November amounted to EEK 0,26 bln. BoE has obviously been able to make a good return from the nervousness on the financial markets as their low-risk assets have increased in value. Over time, the assets of BoE has grown as a result of Swedish banks expanding their Estonian subsidiaries' balance sheets, thereby also increasing also their reserves held with the central bank.
If we assume that the foreign owners implicitly themselves guarantee the deposits of their Estonian subsidiaries, Bank of Estonia should have little to worry about in this worldwide financial crisis. Only the smaller locally owned banks could theoretically need its help (this autumn's rise in the state depository guarantee of course raises the risk exposure of the BoE.)
Estonians have made money dealing with Swedish banks before. Hansabank was sold to Swedbank at a price of 5 times its book-value in 2005. Hundreds of Estonians were made millionaires as Hansabank's share-price soared. Hansabank, for sure, has stayed very profitable. Nonetheless, for comparison the Swedbank share now trades at 0,35 of its book-value.
Neither Swedbank nor SEB has paid out any dividends from Estonia during the last few years. Instead they have pumped huge amounts of credit into their Estonian banks. Thus, it has been a one-way direction of cash. (Cp my article "Swedbank has soon pumped EEK 200 bln into Hansabank, BBN 31.03.2008).
The Latvians are in a different situation than the Estonians. They have had their "own" large banks, e.g Parex which seems to become a costly experience. Latvians themselves will now have to take care of the restructuring and guarantee costs related to Parex. For instance BIGBANK could of course evolve into a similar case for the Estonians, but probably not during the next several years.
So, there is only one thing to do - congratulate the Estonians on the structure of their banking sector ! A long tradition of free markets, open borders and non-protectionist policies has paid off during this worldwide financial crisis. The Swedish banks are now taking the hit and are yet to see their Baltic strategies be vindicated.