Negative outlook for Lithuanian banking

The fundamental credit outlook for the Lithuanian financial institutions is negative, in particular reflecting the prospects of a decline in economic growth and its effect on asset quality and profitability, Moody's Investors Service said in its new Banking System Outlook on Lithuania.
"After several years of above-trend growth, the economy appears poised to slow significantly in 2009, which is expected to have an adverse impact on banks' profitability and asset quality. We expect an increase in problem loans in the real estate and consumer-lending segments, which are likely to be hardest hit by the economic slowdown," said Kimmo Rama, a Moody's Vice President-Senior Analyst and author of the report.
The global credit and liquidity crisis has not resulted in any direct losses for Lithuanian banks, which were not directly exposed to the sub-prime crisis and their investments in Lehman Brothers amounted to less than 3 million. However, Moody's cautions that turmoil in the global financial markets has led to access to external liquidity becoming tighter and increased the banking system's liquidity risk.
Moody's recognises that the largest Lithuanian banks are fully owned by Nordic banking groups, which have also been relatively unaffected by the global market turmoil. The access of these foreign-owned banks to their parents for funding and liquidity undoubtedly brings stability to the Lithuanian system. However, the rating agency notes that, at the same time, potential problems at the parent bank level could put pressure on liquidity positions of the subsidiaries and thus adversely affect the whole Lithuanian banking system. Meanwhile, the locally owned smaller and mid-tier banks have largely funded their activities with customer deposits, which have continued to develop favourably.
Given the ongoing economic slowdown, Moody's expects the asset quality of Lithuanian banks to weaken. Increased loan loss provisioning needs are also likely to exert pressure on banks' profitability. These concerns are partly mitigated by Lithuanian banks continuing to report relatively good capital adequacy and sufficient liquidity. While credit growth has somewhat reduced in 2008, the banking system continues to report strong double-digit growth, especially on the retail-lending side, and corporate lending has also remained relatively brisk.
After reporting record-high profits in 2007, the growth in profitability of Lithuanian banks has halted in 2008, due mainly to slower net interest income growth and higher funding costs. The domestic banks appear to have performed worst, while the three largest-foreign owned banks still reported a slight increase in pre-tax profits for the first nine months of 2008.
Overall, the capitalisation of Lithuanian banks remains good. Internal capital growth has remained strong as the banks have invested the majority of their profits in their capital bases. On average, the capital adequacy of Lithuanian banks was 12% in September 2008, well above the 8% regulatory minimum.
"In line with other European countries, the Lithuanian government has recently passed a resolution providing for temporary measures to boost the liquidity of the banking system, if necessary. In accordance with the new bill, which came into effect on 6 November 2008, the government will be able to provide guarantees and make capital injections into banks should they face serious financial problems. In another positive move, deposit guarantees have been enhanced, with bank deposits now guaranteed up to 100,000, compared with the previous figure of 22,000," added Rama.