As reported by Eesti Pank, the profitability of Estonian banks has declined from its high level. Falling interest rates, including Euribor, are causing the banks’ interest income to drop (-11M euros) faster than the interest expenses (+26M) they bear on deposits and other sources of funding, and so net interest income, which is the main component of profit for the banks, has declined.

The banks signed an extraordinarily large number of lease contracts in the final months of the year as new tax measures gave a powerful boost to sales of cars before the end of the year. Households and companies signed lease contracts for around 300M euros in the fourth quarter, almost double the amount in a typical quarter. All of the biggest leasing companies operating in Estonia are owned by banks and their growth in the portfolio of leases climbed to 9%, which is close to its long-term average.

The volume of household deposits was 12% larger in December (400M) than a year earlier, but this seems like a mere one-off phenomenon due to seasonal benefits payout. The only previous occasion when household deposits increased so much in one go was in September 2021, when the first payouts were made from the second pension pillar.

In this scenario, interest rates on loans and deposits fell substantially over the year, from 4.13% to 3.28%. The same pattern is observed for the average interest rate on housing loans from banks to households with a mortgage (from 5.73% to 4.58%) and on the consumer loans of households (from 13.73% to 11.28%).

From companies’ perspective, the average interest rate on the term deposit of companies dropped from 3.95% to 3.22%, followed by the one on long-term loans of companies (6.85% to 5.72%) and leases to companies (5.75% to 4.66%). Term deposits of up to one year made up 97% of the deposits held by households and companies, and 63% of those at savings and loan associations.

In the current fiat currency system, the deterioration of bank margins and possible failures won’t stand alone.