Banks in Estonia: between a rock and a hard place

Tõnis Oja
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Illustration: Pm

Banks are busy cost-cutting: on the one hand, they are being squeezed by fresh regulations; on the other hand, income is down due to record low interest rates.

While ranking among top earners in the land, this year’s data reveals that bank profits have started to decline. The two biggies, Swedbank and SEB, have lost four per cent of their nine months’ profit; Estonian division of Danske Bank has lost more than a quarter. 

Even though interest rates dropped to record lows as early as two years ago, the bankers say they only begun to realise its actual meaning this summer – thereafter, more and more, they are thinking of ways to save costs. Last week, SEB announced changes, since New Year, in conditions of various products and services, as well as price list of cash transactions. Everything to cost more, of course.

In mid-November Postimees learnt that, at the end of the year and the beginning of next, Danske’s Estonian division will shed a couple of dozen employees. Its current staff amounting to 512, this will mean about four percent cut. Inside restructuring and staff-cutting had also been performed at Swedbank.

According to Swedbank CEO Priit Perens, the bank has taken product development unto Baltic level, creating corresponding divisions involving bank employees from all three states.

«The Baltic States are very small and, here, it is very difficult to achieve economies of scale,» said Mr Perens. «It’s quite logical that it makes no sense to develop three product or service solutions in three states, differing in details only, as the bank’s activities in Estonia, Latvia and Lithuania are rather similar,» added he.

According to SEB chief Riho Unt, it’s pretty similar in their camp i.e. they are offering joint product solutions for the Baltics; even so, they face no threat of lay-offs.

«We find our staff is at the optimal level; right now, about 1,100 people work at SEB Eesti,» said Mr Unt.

The banks aren’t overly eager to talk lay-offs. Those at Danske, Estonia, surfaced only as implicitly included in Danske Group third quarter report.

The banks are more eager and open about their desire to push people out of their branches.

«The transactions done in human channels i.e. branches are more expensive than the electronic ones – people want pay for their work,» said Priit Perens. «For bank and client alike, cash transactions in human channel are the most expensive, as dealing with cash requires extra security measures; and, also, we have to transport it [the cash] from the branches etc. Thus, it is natural that over time branch services, especially those linked to cash, are becoming more expensive,» said Mr Perens.

On the one hand, the shift to cashless transactions is caused by the inevitability of technological development; on the other hand, the pressure comes by need to cut costs and save.

Banks earn their income by various fees for services; even so, lion’s share of profit still comes through interests – loans interests minus interests on deposits. The lower the interests rates, the smaller the income banks pocket by interests.

Two years ago, European Central Bank suddenly lowered base interest into record lows, then proceeding to throw a trillion euros into the banking system, leading to a record low Euribor, the basis for long-term loans.

This has been clearly felt by our 150,000 plus home loan owners whose average interest payments have thereafter been decreasing by hundreds of euros a year. For banks, this means smaller profit. True, this is partly compensated by deposit interests also dropping ever so low.

Costs, for banks, will also be increased – or have already been increased – by fresh regulations soon to be imposed on them. Following the 2008 financial crisis and due to the European debt crisis, requirements will toughen up in both banking and financial sector at large. In a few years, a minimum of five new directives and other legislative acts will enter into force.