BNN IN FOCUS | banks, worried about excess profit tax, report on SMEs lending

Two of the largest credit institutions in Latvia – SEB Bank and Swedbank – released reports on their respective lending services provided to small and medium-sized enterprises (SMEs). At the same time, the Bank of Latvia sees some of its own accomplishments in that and hopes to accomplish even more.
This way allows the industry, though indirectly, continues opposing Latvian President Edgars Rinkēvičs, who previously accused banks of insufficient lending to the national economy. However, it is unlikely banks will admit the increase of the volume of loans is directly related to the pressure that was first put on them by Rinkēvičs’ predecessor Egils Levits, the ruling coalition and the management of the Bank of Latvia.
This is why BNN turned to the press-secretary of the Bank of Latvia Jānis Silakalns with a question – “Does the Bank of Latvia see the result of its pressure/encouragement in banks’ reports?”
The commentary provided by the Bank of Latvia stresses: “We can see that since the start of the year there has been progress in commercial banks becoming more customer-friendly”. The central bank also mentions that “steps are made in the right direction, but they are insufficient”.
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SEB Bank outlines in its report that the location of the loan taker is not the decisive factor when it comes to lending – 80% of financing provided to SMEs was provided to businesses registered in various Latvian regions.
“The bank focuses more on the financial situation, owners and their reputation. The bank also looks at businesses’ corporate structure, deal conditions, overall development of economic sectors and businesses’ ability to adapt to a sustainable economy in the future,” the bank’s SME Financing Office head Ģirts Priede mentioned in the report.
In the first half of the year commercial banks provided SMEs with 22% more funding than last year. The volume of funding provided to this segment this year reached EUR 143 million. The overall SME credit portfolio as of the end of June 2023 in SEB Bank was EUR 612 million. EUR 489 million of this amount was provided to various businesses outside of Riga region.

The feeling that bans finance businesses only in Riga is no more than a feeling

that is likely based on different experiences, stresses Priede.
Nearly half of the loans provided by SEB Bank are leasing loans. On top of that there was an increase for working capital loans. Demand for leasing is significantly up in the agriculture and transport sector – these sectors demonstrate positive growth quarter to quarter when compared with 2022. Certain real estate projects related to clients’ wish to change their current company’s premises also helped increase activity in the real estate sector.
Manufacturing companies have frozen their long-term investments due to high uncertainty caused by war, slower economic growth, fluctuations with energy resource prices and high interest rates.
SEB Bank’s lending trends are positive in the large businesses segment as well: the loan portfolio in the first half of the year has increased by 7% compared to the first half of 2022, and the amount of newly granted funding has reached EUR 382 million. This is nearly three times more when compared with the same period of last year.
The projects implemented in the large businesses segment are bigger and are concentrated around the capital city – 57% of the funding was provided to businesses registered in Riga. At the same time, funding was actively attracted by companies representing various sectors – telecommunications, energy, services, manufacturing, transport, real estate, and others. A major portion of funding is planned to be used to increase capacity and improve efficiency, the report from SEB Bank mentions.
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Swedbank issued funding worth EUR 33 million to small businesses – the turnover of which does not exceed EUR 2 million – in the first six months. This is 10% more than a year prior. 54% of allocated funding was provided to businesses whose addresses are registered outside of Riga.

Leasing remained the most popular form of lending,

reaching 76% of the total allocated funding amount.
The bank notes that in the leasing sector there is an increase in clients’ interest for electric cars – this year more than 50 businesses used help from Swedbank to purchase new electric cars. Tesla is the most popular manufacturer, followed by Volkswagen, Audi, Škoda and BMW.
Swedbank’s TOP 5 most financed sectors consists of agriculture, services, commerce, transport and manufacturing. Compared with 2022, this list remains largely unchanged. Agriculture (+17%) and the service sector (+16%) are two sectors with the most rapidly growing funding.
The high share of the agricultural sector, as well as the growth rate, is due to the availability of state aid to promote the renewal of farms. The reasons for the growth of service providers are not so obvious, however; perhaps this is due to the still perceptible inflationary pressure that is reflected in the price of each purchase. The growth in the number of issued credit cards also continues, which indicates the increasing popularity of this type of financing among entrepreneurs, Swedbank concluded.
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Commentary from the Bank of Latvia:
“During the period of rising interest rates, Latvian commercial banks are operating at a good profit. A rapid decrease in interest rates is not predicted, so the Bank of Latvia expects that commercial banks (especially those that concentrate the largest amount of household deposits) ensure better access to financial services and are actively involved in the economy, including carrying out preliminary work in the field of lending, in order to prepare for the period when interest rates will decrease and the attractiveness of lending increases.
At the end of March, we agreed with the financial sector on measures in a number of areas to remove barriers and promote lending. On “homework”, including measures taken by the Bank of Latvia for its part,” as the central bank’s governor Mārtiņš Kazāks wrote at the beginning of summer.

These measures – on lending, deposit rates, customer cost reduction – are in force.

We see that since the beginning of this year, progress has been made – to become more customer-friendly – on the side of commercial banks. Whether this is sufficient will be discussed in the context of the work of the Tax Policy Improvement Coordination Group, chaired by the Ministry of Finance, which is developing the Guidelines for the State Tax Policy for 2024-2027, including the assessment of various solutions regarding the profits of commercial banks and their involvement in the economy.
As the Minister of Finance Arvils Ašeradens reported, conclusions of the work-group are planned to be presented to the government in August.
The assessment performed a couple of months ago showed that commercial banks still have a number of important tasks to implement important improvements finance availability-wise and make sure Latvia does not fall back from other Baltic States. It was found that

these steps are made in the correct direction, but they are not sufficient.

On top of that, decisions are short-term, but the balance state needs corrections. It is especially important to reduce commission fees for loan refinancing and to prepare for a new economic cycle. In the near future, all involved sides will have to look if commercial banks managed to achieve progress in recent months.
The Bank of Latvia carefully evaluates indexes of commercial banks. At a time when commercial banks are making very good profits, the Macro Supervisory Board has decided to increase the counter-cyclical capital buffer by 1%. Commercial banks will have to do this in two steps by June 2025. This is a safety buffer for crisis situations that is currently in good condition. This currently does not have a negative impact on lending, as commercial banks already have sufficient voluntary capital reserves and large profits are expected.
The goal of the Bank of Latvia, which was stressed during talks with commercial banks, is the improvement of the accessibility of financial services. Right now, there are ideal conditions to move from a freezing point. Commercial banks earn very well without additional risk-taking, so part of the profits should be directed to improving the availability of financial services and creating conditions that contribute to improving credit scores as soon as possible.
The issue of an additional tax on the commercial banking sector is on the agenda of politicians. If the Government and the Saeima come to such a decision, it is necessary to assess what side effects it will bring. At present, it is clear that this will certainly not contribute to the already insufficient competition of commercial banks, which is a big challenge, especially in the current geopolitical circumstances.
Therefore, it is high time for commercial banks to demonstrate a change of direction, to make business decisions (now and in the future), which is interest of Latvia’s economy and society. This is largely in the hands of commercial banks.
Also read: Latvian ministries submit funding requests worth EUR 2 billion to the 2024 state budget project