Nordea's has forecast an export-driven economic recovery for the three Baltic states. This prediction will be received optimistically by all the Scandinavian banks who remain heavily exposed to the region, which was one of the worst-hit areas of the recession in Europe. Given their significant loan books in the Baltics, the prospect of a recovery is particularly good news for SEB and Swedbank.
Nordea predicted an economic recovery in the Baltics in 2010 and 2011, although Latvia will lag behind until 2011. In 2010, GDP growth is forecast at 0.9% and 1.2% in Lithuania and Estonia respectively while Latvia's GDP will contract by 1.8%. Next year all three countries will see GDP growth. This recovery, according to the bank, will be driven by strong exports along with wage cuts which have increased competitiveness.
This expected recovery is good news for the Scandinavian banks, which are heavily invested in the Baltic region. SEB, for example, became a part-owner of Eesti Uhispank in Estonia, Latvijas Unibank in Latvia and Vilniaus Bankas in Lithuania in 1998, while in the same year Swedbank upped its stake in Hansabank to a strategic 20% before assuming complete control in 2005. Today SEB and Swedbank are the two largest banks in the region, with other Scandinavian banks like Nordea, DnB NOR and Danske Bank holding smaller market shares (as measured by loans).
These banks rode the Baltic boom that started in 2000 when the region's governments implemented various economic reforms. At the same time, the banks quickly built up their balance sheets, often in the form of loans in foreign currency such as euros. Loan-to-value mortgage ratios were high, and access to credit was easy.
In Latvia, the availability of easy credit fuelled its economic growth, with the Scandinavian banks at the forefront of this business. Lending peaked in 2008 (in fact, after the economy began its decline), and started to contract in 2009. By this time, however, it was too late for the banks because they already held enormous books of loans with counterparties struggling to make repayments.
Indeed, the business structure of the Scandinavian banks exacerbated the effects of the recession. Loans accounted for 83.3% of foreign banks' total assets in 2008, compared to local banks' loans accounting for 54.1% of their total assets. At the same time, deposits accounted for just 28.6% of foreign banks' liabilities, compared to local banks' deposits accounting for 61.3% of their liabilities. Such a lending-heavy business model fuelled wonderful profits for the foreign banks during the economic boom, but with non-performing loans more than tripling in 2008, it was a cash cow which then threatened their future as the crisis took hold.
It may be too soon to celebrate, but the region's strong exports are signaling that it may be time to at least buy the balloons and order the cake. No doubt SEB, Swedbank and Nordea are hoping that they'll soon be able to set the date and invite the guests.
For more information about this region, please refer to the Datamonitor report, Wealth Management in the Baltics 2009.