Estonian banks most effective in Europe


PHOTO: Arvo Meeks / Valgamaalane

At a FinanceEstonia forum last week, Eesti Pank vice president Madis Müller showed a slide where banks operating in Estonia were way more profitable than the rest in eurozone. What’s more, not in eurozone only – in the entire European Union.

According to European Central Bank, ROA or return on assets for banks operating in Estonia is 1.77 percent which is the EU top. Return on assets serves to show how effectively a bank uses the assets at its disposal i.e. the owner’s and client’s money. For each euro at the bank’s disposal, 1.77 cents of profit is earned. When it comes to ROE or return on owner’s equity – effectiveness while using the capital placed in a bank by owners thereof – our banks are only beaten by those in Czech Republic and Sweden. 

According to Eesti Pank financial stability department head Jaak Tõrs, there are three explanations to this.

«Firstly, in half of the eurozone banks have had to make significant discounts to cover losses on as resulting from the last crisis. Excluding that, in many countries the ROA of banks would have equalled those in Estonia,» said Mr Tõrs. «Secondly, Estonia was able to re-use as income the excessive discounts from loans during the crisis, resulting in exceptional income in 2013. Thirdly, Estonian banks are among the most cost-effective i.e. costs as related to income are among the lowest.»

Cost-effectiveness of the banks was also underlined by Danske Bank CEO Aivar Rehe.

By nature, banking is a client relationship where business is done in money, like in euros, and in that sense Estonian banks do not differ much from the majority of European banks. A vast difference, however, comes into play with bank service channels which largely determines the basis for effectiveness of local systems.

«Currently, Estonian banks offer their customers an electronic, mobile and comfortably digital service in view of contracts. In that, we are at least five years ahead of European banking,» underlined Mr Rehe.

Swedbank Eesti director-general Priit Perens said the local banks have constantly increased effectiveness, thus supporting profitability – such as the relatively low cost base. The latter is largely due to majority of Estonian bank users now in electronic channels, into which the Estonian banking sector has invested for years. Thus, 98 percent of payments are made via internet and mobile bank.

«We are way ahead of the rest of Europe even with the more complex bank operations thanks to the ID card as means of electronic authentication,» said Mr Perens. «The wide use of electronic channels helps banks keep the cost base rather low.»

«Estonian banking has seen a leap in digital services, helping to alter the bank branch service model,» confirmed Mr Rehe. Lion’s share of Estonian banking clients do not desire the eye-to eye service in daily settlements. «They only come to the branches for professional counselling in weighty economic and banking maters and regarding contracts. Today, bank cards come to people’s homes and they do not want to come get them at the branch,» he added.

According to LHV bank CEO Erki Kilu, essentially the Estonian statistics cover Swedbank and SEB indicators.

«At one time, the main shareholders at both banks were Estonian entrepreneurs and investors who lay a foundation for a high management culture and to a desire and motivation to show excellent financial results. Obviously, this has carried on till today. The banks operating in Estonia have not turned into so-called big ministries where earning profits to owners would have taken a back seat,» said Mr Kilu.

As added by SEB’s CEO Riho Unt, the profitability of Estonian banks is still being supported by the fact that the major banks have not yet entered into the normal credit loss cycle and provisions earned at earlier times are still being returned. «Therefore, the banks’ profitability is somewhat overestimated, wherefore it is important to assess bank profitability over a cycle including periods of loss during economic crises,» underlined Mr Unt.

Priit Perens added that, as compared to several other European states, Estonian banks emerged strong from the crisis that started in 2008, never at any point needing taxpayer support.

«The capitalisation of our banks is high – as largely supported by our tax system which lays no burden on profits not paid out. Meaning: the money made by banks here has for years been accumulating as a buffer in Estonia, serving to raise capitalisation,» stressed Mr Perens.

Estonian banking is highly concentrated. According to a fresh survey by Financial Supervision Authority, the four largest banks’ share on deposit market is 87 percent and a whopping 90 percent on loan market.

Bank managers fail to detect overmuch concentration – read: weak competition.

«Competition is tough on Estonian banking market; most clients ask for at least three to four competing offers to make financing decisions. Considering the size of the market, this is very strong competition,» said Riho Unt. «But Estonia does have much space for capital market development which would broaden the clients’ options regarding non-bank solutions,» he added.

As underlined by Erki Kilu, a profit-making bank is much stronger and is better able to increase owners’ equity that a bank not making a profit.

«Investors and depositors at such a bank feel much more secure regarding the sustainability of the bank,» he said. «Rather, one would view as problematic the low profitability of European banks.»