Finantsinspektsioon has published a short review of the developments in the Estonian financial sector in the first quarter of 2018 and of the main risks to the sector. The review finds that business volumes and profits are increasing for financial companies operating in the Estonian market.
The member of the management board of Finantsinspektsioon with responsibility for capital supervision, Andres Kurgpõld, said that companies in the Estonian financial sector are well capitalised and generally profitable. He emphasised though that with growth faster, it is important for companies to pay attention to the operation of their internal control systems and the quality of their risk management.
Yearly growth in the loan portfolio of banks operating in Estonia increased in the first quarter of 2018 from 2.1% to 2.6%. This is still low compared to the rates of growth in recent years because of the one-off reorganisation in the third quarter of 2017 of market participants within a consolidation group. If the effect of the reorganisation is removed, actual loan growth picked up to reach 7.3% in the first quarter.
The share of bank loans overdue more than 90 days declined, and such the overdue loans are fully covered by provisions. Banks and branches earned 81.3 million euros in profit in the first quarter, which is 4% more than in the fourth quarter of 2017. The operating income of the banking sector as a whole increased by 18% to 249 million euros. Among the main sources of income, interest income was down 2% over the quarter and service fee income was down 9%. Return on equity of 10.1% in the first quarter indicates that banks are managing to maintain their profitability even with interest rates low. The share of non-resident deposits fell by the end of the first quarter to 10.9%.
Estonian non-life insurance companies together with their branches received insurance premiums of 151 million euros in the first quarter of 2018, which is one fifth more than in the final quarter of 2017. This was 28% more than a year earlier, which partly reflects bookkeeping changes in how premiums are recorded. All the insurance companies saw premium volumes increase.
Claims incurred amounted to 74 million euros in the first quarter, which is 15% more than in the fourth quarter of 2017. The size of the Estonian non-life insurance market, together with branches of foreign insurers, was 102 million euros by the end of the first quarter. Non-life insurers earned 8.7 million euros in profit in the first quarter, and the main source of profit was property insurance.
The results for motor third-party liability insurance also improved in the first quarter as a rise in tariffs reduced the loss on motor third-party liability insurance throughout the Baltic region. The loss made by Estonian non-life insurance companies on motor third-party liability insurance in the Baltic region was 360,000 euros for the quarter, which is the lowest level of recent years. The loss in Estonia on motor third-party liability insurance in the first quarter was 1.1 million euros, which is comparable to the amount in the first quarter of last year.
Estonian life insurers received 58.9 million euros in insurance premiums in the first quarter of 2018, which was 10% less than in the last quarter of 2017. The volume of premiums written in the first quarter was 11% more than in the first quarter of last year.
Unit-linked life insurance products, insurance with profit participation and other life insurance continue to account for the largest part of life insurance premiums. The claims incurred amounted to 28.2 million euros in the first quarter. As with premiums written, unit-linked life insurance continues to provide the largest share of claims at 14.1 million euros, or half of all claims, followed by insurance with profit participation and medical expense insurance. A general trend that is apparent is the movement of life insurers in the direction of cross-border consolidation.
There were 44 public investment and pension funds operating in Estonia in the first quarter of 2018, of which 32, or more than half, were pension funds.
The value of the assets of public funds grew by 1% in the first quarter over the previous quarter to 4.43 billion euros. Mandatory pension funds are still by far the largest type of fund, accounting for 83% of the total assets of the fund sector. They are followed by equity funds with 10% of the total assets, public real estate funds with 4%, and voluntary pension funds with 3%.
The largest investments by mandatory pension funds in equity and bonds were maintained in the first quarter of 2018, suggesting a change in the current investment strategy and more active fund management by fund managers. Investments in securities issued in Estonia made up 7.8% of the consolidated portfolio of mandatory pension funds, up from only 2.3% a year earlier.
The volume of assets managed by fund managers operating in Estonia increased by 1.8% in the first quarter of 2018 to 6.23 billion euros. The growth came mainly from management of their own investment and pension funds by Estonian fund managers, and also from providing investment management services to foreign investment funds as subcontractors.
Investment funds made up some 75% of the assets managed by fund managers, and 22% were in funds managed as subcontractors. The net profit of the fund managers was smaller than usual at 3.4 million euros in the first quarter. The sector remains profitable and both profits and return on equity have increased in the past couple of years.
The profit and gross income earned by investment firms were significantly larger than in the previous quarter. Profit for the quarter was 2.4 million euros and net income was 7.1 million. Profitability was aided by increased trading income.
The volume of client assets of the local investment firms declined by 4% in the first quarter to 886 million euros. As investment firms mostly operate internationally, the majority of client assets belonged to non-resident clients.
The main risks to investment firms stem from their business models, which are often based on taking high levels of market risk.
At the end of the first quarter of 2018, 52 companies were licensed as creditors and eight companies were licensed as credit intermediaries. A further 12 creditors associated with credit institutions were also operating based on the exemption stipulated in the legal act. The stock of the loan portfolio of creditors operating based on the exemption grew by 4.5% in the first quarter, or 39 million euros, to stand at 907 million euros at the end of the quarter. A large majority of 80% of this was the 725 million euros that had been issued by creditors associated with credit institutions. The remaining 20% of the market was held by creditors that are not associated with credit institutions.
The quality of the loan portfolio of creditors varies widely and depends on the type of consumer credit provided. The quality of unsecured consumer credit loans without known intended use, or instant loans, is notably worse than that of other types of consumer credit loan like mortgages, leases and instalment loans.
The biggest risk in the creditor sector is the ability of companies to meet requirements for responsible lending.
Payment institutions operating in Estonia mediated payments of 120.4 million euros in the first quarter of 2018, which is 6% less than in the final quarter of last year. Payment institutions earned profit of 0.8 million euros in the first quarter. Payment institutions are showing sufficient interest in coming to market. Providers of payment services focusing on the non-resident segment are particularly exposed to money-laundering risk.