The profitability of the banks operating in Estonia was on the rise in the third quarter of 2023 as they earned around 217 million euros in profit. The profitability of the banks in the first three quarters of this year, shown as profit as a share of assets, was around 60% higher than the long-term average. Eesti Pank underlines how profits have grown fast because the income earned on loans linked to Euribor has increased strongly as the rate has risen. Most housing loans, leases, and corporate loans in Estonia have contracts that are linked to Euribor.

Financial market participants are not forecasting any further rise in Euribor in the near future though. Their average estimate is rather that the six-month Euribor will have fallen in a year from now from its current 4.1% to around 3.5%. This assumption means that the interest income of the banks will also stop increasing within the next year and will fall instead.

In September the balance sheets of the banks stood at 39.7 billion euros. There was an increase over the year though of 1.4% or 546 million euros. At the same time, the volume of deposits in the banks totaled 28.4bn. Deposits were 200m less than in the previous month, but 785m more than a year earlier. Of the deposits of resident households and companies, 5.5bn were in-time deposits, which was an increase of 172% over the year. Non-resident deposits grew by 228m over the year and made up 14% of the stock of deposits.

The profitability of banks will diminish in the future as their interest expenses are believed to rise for some time yet in contrast to their interest income. The main interest expense of the banks operating in Estonia is the interest paid on deposits. Interest rates on demand deposits, which is the money held in everyday bank accounts, are very low, but the rates on term deposits have risen fast. If the gap between interest rates on term deposits and demand deposits remains, more money will move into term deposits. As this happens, the costs for the banks will rise.

There is a risk in the future of the volumes of non-performing loans and loan losses increasing. Although the economic circumstances are difficult, people and companies in Estonia have so far coped well with repaying their loans. Government expenses have temporarily helped people to cope with larger loan payments, while companies have been helped by the earlier rapid growth in sales revenues and the buffers they built up.

If the economy continues to struggle for a long time and unemployment rises though, the banks will need to be ready for additional loan write-downs and loan losses.