OREANDA-NEWS. On January 31, 2007 during the press conference at the Bank of Lithuania in Vilnius, Mr. Reinoldijus Sarkinas, Chairman of the Board of the Bank of Lithuania, presented the preliminary performance results of domestic commercial banks for the previous year, reported the press-centre of Bank of Lithuania.

“The year 2007 should be rated as very successful for banks, since it was characterized by a rapid development and growing profits”, said the Governor of the central bank of the Republic of Lithuania.

The total unaudited profit of domestic banks in 2007 was LTL 1,154 million, i.e. 73% larger than in 2006. The profit of the banking system of Lithuania has been growing consistently for the sixth consecutive year.

According to the unaudited financial statements (after closing balances) for 1 January 2008, total assets of domestic commercial banks and foreign bank branches made up LTL 81 billion, increasing over the year by 37,5 per cent. Total loans granted to customers amounted to LTL 56,7 billion, increasing in comparison with 1 January 2007 by 46,8 per cent. Deposits held with domestic banks totalled LTL 36,8 billion, increasing over the year by 21,5%, of which deposits of individuals made up LTL 22,7 billion, up by 26,8 % over the year.

In his review of the major development trends of the banking sector, Mr. Reinoldijus Sarkinas noted that the steady growth of the national economy for several consecutive years, increasing wages, improving future expectations of the population and growing consumption had an influence on the still large demand for crediting services both among businessmen and among the population. The annual growth of loans granted to customers last year was 2,1 percentage points lower than in 2006.

“Such a rapid development of the credit market has certainly increased the risk. However, compared to the GDP, the loan portfolio amounts to only 62 per cent. It is significantly lower than in the neighbouring countries”, said Mr. Reinoldijus Sarkinas.

He indicated that the Bank of Lithuania urged commercial banks more than once to manage risks more conservatively and to improve the capital base and expressed its concern about the rapid credit growth. “Taking it into consideration, domestic banks grant loans more cautiously and tighten the conditions for granting loans. They fund a smaller part of real estate projects than earlier. Banks require additional collateral and higher contributions for loans for the purchase of agricultural land, when there is no detailed plan”, indicated Mr. Reinoldijus Sarkinas.

He also noted that the measures tightening the assessment of the bank asset risk and the measures that provide for a stricter composition of the capital base were envisaged and implemented. The capital calculation requirements applied to domestic banks are stricter than in most European Union Member States: the capital includes mixed capital instruments, etc.

The Chairman of the Board of the Bank of Lithuania mentioned that loans granted to customers and loans to financial institutions comprised 74 per cent of bank assets. Such high comparative weight of loans in relation to assets had a positive influence on bank profitability, however, it also determines the prevailing role of the assumed credit risk.

In recent years, the funds attracted in the interbank market and mostly from the parent bank group became the largest source of funding of bank assets. It is also reflected by the liability structure, where debt to banks and other financial institutions reached almost 40 per cent, mentioned Mr. Reinoldijus Sarkinas.

According to him, although loan indicators remain quite good, the ratio of loans with regular payments delayed for 60 days and more to the loan portfolio went up slightly over the year from 0,97 per cent to 1,03 per cent. The consumer loan portfolio of banks includes the largest share of overdue loans (1,49 per cent). The situation of the housing loan portfolio is the best: here the share of overdue loans is the smallest (0,59%).

Mr. Sarkinas noted that, compared to other European Union Member States, certain premises for the further development of the credit market remain in Lithuania. The loan portfolio to GDP ratio still remains low. The growth of the economy continues, the amount of the European Union support funds increases, etc.

“However, an increasing number of signs emerge that allow assuming that the further development of the loan portfolio may be less rapid. The rates of growth of loans should be set back by increasing interest rates on loans, a potential slowdown of the growth of the national economy and stricter crediting policy”, indicated the Chairman of the Board of the Bank of Lithuania. According to him, such conclusions are also supported by the decline of crediting liabilities in the fourth quarter of the previous year (they declined by LTL 0,9 billion from LTL 14,5 billion on 1 October 2007 to LTL 13,6 billion on 1 January 2008).

In his assessment of the international context of bank operation, the Chairman of the Board of the Bank of Lithuania said: “At the end of 2007, concern about the deceleration of the growth of the global economy spilled over to financial markets. Such uncertainty determined the volatility of fluctuations and forecasts of increased prices. Due to the said changes, the importance of risk assessment and management also grew to the Lithuanian banks, especially those that engage in active trade and are susceptible to market fluctuations (interest rate change, fall of the US dollar exchange rate, stock exchange changes)”.

Mr. Reinoldijus Sarkinas mentioned that only a very small part of the banking system of Lithuania (2.4 per cent) remains sensitive to market risk.

When asked by journalists to forecast potential results of the banking system for this year, Mr. Sarkinas expressed the opinion that this year bank profits should not increase at such rates as last year. “If interest income declines, it will take a toll on profits. But, certainly, the profit of the sector will be considerable this year as well. Considerable development of banks is expected, the competition in this market will grow and, as you know, new banks prepare for opening”, said the Chairman of the Board of the Bank of Lithuania. He remarked that many foreign banks are also coming, which intend to provide financial services in Lithuania without establishing a branch. Up to 1 January 2008, 176 notifications about such intentions were received from foreign bank supervisory authorities. “Due to competition, banks will be forced to abandon certain services and lose income that they have been earning up to now, said Mr. Sarkinas.

He answered the questions of journalists about the economic development of Lithuania and financial stability, the real estate market, etc.