Estonia’s biggest lenders, under scrutiny as part of the European Central Bank’s asset review, face no threat from the upheaval in Ukraine, the Baltic country’s top regulator said.
“Events in Ukraine don’t threaten Estonia’s financial stability, far from it,” Kilvar Kessler, appointed the chairman of the Estonian Financial Supervision Authority’s management board from Jan. 16, said in an interview in Tallinn yesterday.
“There are exposures to Ukraine, but systemically these aren’t significant,” he said. “We are closely monitoring the developments in Ukraine and Russia, and if needed we’ll react in case of those very few banks which could be affected by these events.” Estonia, a former Soviet republic, shares a border with Russia.
Estonian banking is dominated by Nordic lenders including Stockholm-based Swedbank AB and SEB AB, whose local units are covered by the ECB’s Comprehensive Assessment, which the Frankfurt-based central bank is conducting in preparation for assuming full oversight of euro-area banks in November. A unit of Oslo-based DNB ASA is also being reviewed.
Daniele Nouy, the head of the ECB’s new Supervisory Board, said on March 3 that she had “no worries” about euro-area banks operating in Ukraine as the “amounts involved are very moderate.”
U.S. President Barack Obama called Russia’s incursion into Crimea a violation of international law and told Ukrainian Prime Minister Arseniy Yatsenyuk that the U.S. stands with Ukraine to protect its sovereignty and territory.
Kessler, 40, said Estonia’s biggest banks should have no trouble in passing the ECB’s review, reiterating the assessment of his predecessor, Raul Malmstein.
“There likely won’t be any need to use backstops by asking for new capital injections or restructuring banks,” said Kessler, who has a law degree from Georgetown University.
“Banks are very well capitalized here and their assets have been well managed,” he said. “What happened here was that during the crisis, banks very conservatively provisioned their loans, even too conservatively, and now it’s emerged that parts of those provisions still work. This has given a rather positive effect on the financials of the banks.”
Loan losses at Swedbank and SEB soared in the Baltic region in 2009 as Estonia, Latvia and Lithuania suffered the steepest recessions in the European Union following credit-fueled housing booms. Swedbank posted total credit impairments of 18.1 billion kronor ($2.8 billion) at its Baltic unit in 2009 and the first two quarters of 2010.
Estonian banks earned a net profit of 444 million euros ($619 million) last year, up from 350 million euros in 2012, with 28 percent made up by dividends from subsidiaries, while 9 percent came from converting loan provisions to profits, the central bank said on Jan. 24.
Across the Estonian banking industry, the reserves held to protect depositors were 24.4 percent of total assets at the end of 2013, compared with the required minimum of 10 percent, according to central bank data.
The ongoing Asset Quality Review is the second stage in the ECB’s assessment, involving external auditors. The first phase identified which bank assets should be studied, and the third and final stage will be a stress test to see how lenders would fare in an economic or financial downturn.
Under a public procurement process conducted by Estonia’s financial watchdog and the central bank, PricewaterhouseCoopers was awarded the AQR contracts for local units of Swedbank and DNB, at 238,876 euros and 168,876 euros, respectively, according to March 11 statements on the public procurements’ website. A unit of Deloitte won the public tender to review SEB’s local unit for 373,976 euros.
“To make a cruel joke, the more conservative the stress test would be, the better for us,” Kessler said. “We don’t really have much to be afraid of.”