Photographer: Jason Alden/Bloomberg

Swedbank Sees Latvia Lending Recovery as Firms’ Demand Rises

Swedbank AB expects Latvia’s credit market to join a recovery seen in neighboring Estonia and Lithuania as company loan demand has revived.

“In Latvia, it seems companies are now following consumers who have gradually returned to the market,” Priit Perens, head of Swedbank’s Baltic unit, said in an interview in Tallinn on April 6. Estonia’s credit market has been “lively” and while it slowed in Lithuania following the country’s January euro adoption, it should pick up this spring, he said.

The Baltics experienced years of credit contraction and the world’s deepest recessions in 2008 and 2009 as a property boom went bust in the wake of the global financial crisis. A turnaround in lending may rekindle worries of excessive borrowing in the region, which accounted for almost 20 percent of Swedbank’s operating profit last year.

Swedbank’s total lending in the Baltics rose 5.9 percent to 126 billion kronor ($14.6 billion) last year, following growth of 3.5 percent in 2013 and a 3.4 contraction in 2012. In Latvia, its portfolio shrank 6 percent as amortization outpaced new credit. Lending volumes grew 1.5 percent in Estonia and rose 2 percent in Lithuania.

Local Competition

The recovery could be slowed by the fallout from the conflict between Russia and Ukraine. Swedbank in January cut its 2015 economic forecasts for the region, citing a “weaker external economic environment and its negative impact on exports and business sector investments.” The bank expects the Estonian economy to grow 2 percent this year while Latvia and Lithuania will expand 1.9 percent and 2.3 percent, respectively.

Perens said he isn’t worried about trailing some local Latvian banks in deposit growth as the bank targets an expansion with a balanced loan-to-deposit ratio. Swedbank’s deposits grew 9.4 percent in the 12 months ending Sept. 30, compared with 11.4 percent at ABLV Bank AS and 21.2 percent at Rietumu Banka AS, according to local banking lobby.

As of November, Swedbank had a Latvian market share of 28 percent in private deposits and 12 percent in corporate deposits, down from 29 percent and 14 percent, respectively, at the start of the year, according to its fourth-quarter report. It had a loan-to-deposit ratio of 82 percent in Latvia, compared with 97 percent in Estonia and 80 percent in Lithuania.

Swedbank shares were little changed at 209.40 kronor as of 1:29 p.m. in Stockholm, bringing this year’s gain to 7.1 percent.

Russia Impact

Russia’s food import restrictions have hurt the Baltic agriculture industry through “clearly” lower prices of dairy and meat products, Perens said. While the overall impact on the region has been “relatively weak,” the crisis may also affect the wood processing industry in the Baltic countries, he said.

“The effect may emerge in sectors where ruble weakness will hamper competition through cheaper raw materials from Russia or Russian product prices, foremost in the wood industry,” he said. “There’s talk of Russia’s cheap timber looking for market. That’s were problems may arise next.”

Perens, who succeeded Birgitte Bonnesen as the head of the bank’s Baltic unit in January, also warned the region’s governments that the European Central Bank’s asset purchases may create “borrowing traps” they should seek to avoid.

While Estonia, Latvia and Lithuania “don’t really have the problems that the ECB’s quantitative easing is trying to solve” as their economies, property prices and wages are growing, the asset-purchasing program “is clearly pushing down the prices for governments to borrow,” Perens said.

“If this will raise the temptation to issue debt where it otherwise wouldn’t have happened, it may temporarily boost the economy,” said Perens. “I’d be cautious. One mustn’t become addicted to loans.”

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