LATVIAN BANKS LESS CAUTIOUS AS INDICATORS IMPROVE.

Ever since a massive bailout of the banking sector in 1995, Latvian banks have been viewed with skepticism by Westerners and Latvians alike. In fact, the failure of a recent attempt to privatize the shipping company LASCO has been blamed on the banking sector, one of the bidders having refused to transfer the deposit to a Latvian bank. In fact, the health of Latvia’s banks has been improving for several years. In its first annual Banking System Outlook on Latvia, Moody’s credit rating agency noted that its stable ratings outlook for Latvian banks reflected banking consolidation and the presence of foreign strategic investors (BNS, August 23). The three largest of Latvia’s twenty-two commercial banks by assets Parex Bank, Latvijas Unibanka (owned by Sweden’s SEB), and Hansabanka (owned by Sweden’s Swedbank) together accounted for 51 percent of seven-month aggregate banking assets and 53 percent of deposits. Moody’s has upgraded Parex Bank’s long-term deposit rating from Ba2 to Ba1. The agency said that the upgrade reflects Parex Bank’s strengthening corporate governance, improving financial fundamentals, and sound asset quality (BNS, August 14). Parex Bank reported a profit of 6.502 million lats (US$10 million) through July (BNS, August 15).

Moody’s also noted the banking sector’s solid financial fundamentals and satisfactory credit quality. In the first seven months of 2001, Latvia’s commercial banks recorded asset growth of 14.7 percent from the beginning of the year, to 3.095 billion lats ($4.975 billion) (BNS, August 21). At the same time, total deposits grew 12.2 percent, to 2.117 billion lats (US$3.403 billion). Reflecting a departure from the banks’ cautious stance over the past two years a result of the economic slowdown caused by the Russian financial crisis credit growth is increasing more quickly than asset and deposit growth. Loans issued by Latvian commercial banks grew 20.9 percent through July, to 1.314 billion lats (US$2.112 billion). Loans now represent 43 percent of assets, up from 28 percent in July 1998 and closer to ratios in other countries. Latvian banks also recorded rapid rates of loan growth in 1997. That growth was more worrisome, however, because 81 percent of lats deposits were demand deposits that could have been withdrawn at any time. In May 2001, that ratio was down to 57 percent.

The improvement in banking indicators is reflected in popular perceptions. A recent survey reported that faith in the lat has increased to 83 percent of the population, from 75 percent in 1997 (BNS, August 7). Thirty-five percent of the population now hold a personal banking account, up from 28 percent just one year ago, indicating an increase in trust in the financial system in addition to improving living standards. Still, the rapid credit growth in 1997 contributed to an excessive expansion of Latvia’s current account deficit in 1998. Latvian policymakers will need to take care this year and next to keep fiscal policy tight in order to counter the current trend in credit growth.

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