While foreign ownership has played a major role in the development of the Lithuanian banking system, rapid loan growth and economic overheating are raising concerns, Moody’s Investors Service said in its new Banking System Outlook for
There were nine commercial banks and four foreign bank branches operating in
“We view the increasing presence of foreign banks and their subsidiaries in the Lithuanian banking system positively since they benefit from the more advanced risk management practices, easier access to wholesale funding and technology of their parent banks,” said Virginie Merlin, a Moody’s Vice President/Senior Analyst and author of the report.
“Thus foreign ownership has played a major role in the evolution of the Lithuanian banking system towards international standards. In contrast, many of the smaller standalone players are at a structural disadvantage, with potentially negative repercussions in terms of operating efficiencies,” Merlin added.
Private-sector lending has been expanding rapidly, the Moody’s report noted. While managing the credit growth does not seem problematic for the time being for foreign-owned banks, since liquidity is available from parent institutions and they intend to reduce the pace of lending growth. In contrast, smaller banks, mainly funded by their deposit base, are not expected to significantly reduce lending and could even try to further increase their market shares.
“Our primary concern is that rapid loan growth is putting negative pressure on the banks’ liquidity since the growth of deposits is slower than that of loans. The banks will therefore become increasingly dependent on wholesale funding access, which is expected to be more difficult as well as more expensive — taking into consideration the current global deterioration of funding conditions and repricing of risks,” Ms Merlin warned.
Moreover, the Lithuanian economy is constrained by its small size, significant current account deficit and increasing inflation, according to Moody’s. Similar, albeit to a lesser extent, to other countries in the Baltic region, the rapid growth of prices, wages, credit, asset prices and the current account deficit are indicative of an overheating economy. The current account deficit continues to expand and is likely to exceed 14% of GDP in 2007, more than double its level two years ago.
“Although the size of the current account deficit obviously raises concerns and is not expected to decrease in the short term, we consider the risk of a major crisis to be limited — first, because the most important source of inflows is from the parent banks of the largest banks and second, because Lithuania should also benefit from a higher inflow of EU funds.”
“While weak banking sectors have caused or worsened economic downturns in other developing economies, in
