Lithuanian banks perform better than expected

Lithuania’s banks have largely escaped the worst effects of the dual crises of the Covid-19 pandemic and the war in nearby Ukraine, at least so far, with banking sector fundamentals remaining strong and the emergence of fintech players further spurring marketplace development.

“The banking sector has performed better than expected – much better than we expected as a regulator, honestly speaking,” says Simonas Krėpšta, a board member at the Bank of Lithuania. “So far, we really don’t see any negative trends in the banking sector. We see some companies which are overdue on their payments, but that’s on a very individual level so far.”

Even so, commercial banks operating in Lithuania are being forced to deal with an increasingly challenging economic landscape, with the war in Ukraine leading to high rates of inflation, energy concerns and uncertain geopolitical realities. Financial institutions are also dealing with the implementation of international sanctions on Russia and growing cybersecurity concerns.

Despite all this, banks have remained active in lending to households and businesses, generating good levels of income, while sector capital adequacy ratios remain high and non-performing loans (NPLs) are still quite low, says Tomas Kairys, head of the Baltic states at the European Bank for Reconstruction and Development (EBRD).

He adds that Lithuanian banks have a very limited direct or even indirect exposure to Ukraine and Russia, but that the impact will likely be felt later on, with an economic lag coming through in areas like energy and fuel costs, as well as price shocks. “This adverse macroeconomic environment will have a significant effect on the growth of the banking sector,” he says.

Robust industry

There are currently 13 banks operating in Lithuania, alongside a further six doing business as foreign bank branches. This is up from seven banks and eight foreign bank branches in 2019, with the latest, Saldo Finance UAB, expected to launch activities in the second half of 2022, having been granted a specialised bank licence in October 2021.

Despite this, the three largest banks operating in the country – Swedbank Lithuania, SEB and Siauliu Bankas – continue to dominate the sector, having a combined two-thirds market share. All three are supervised directly by the European Central Bank (ECB), jointly with the Bank of Lithuania. Foreign branches, meanwhile, account for just over 21% of banking sector assets.

After seeing profits fall by 16% in 2020 due to the pandemic, in 2021 banking sector profits grew by 17.6% year on year to reach €329m, according to the central bank, almost a return to pre-pandemic levels.

“The past few years were mainly marked by pandemic challenges,” says Inga Skisaker, chief executive of Swedbank Lithuania, Lithuania’s largest lender. “The banking sector in Lithuania went through them well, as did the Lithuanian economy. There were no material credit losses. The way of working within the banks as well as with the clients changed, with the focus set on online meetings and pre-booked live meetings as the latter development was taken further after the pandemic.”

She adds that the sector has witnessed robust lending growth both on the private and corporate side in recent years. “There has also been a growing demand for solar energy loans, as well as energy efficiency solutions financing,” she says.

As of January 2022, the banking sector’s loan-to-deposit ratio stood at 64%, up 2.6% year on year, highlighting the available liquidity, while the sector’s capital adequacy ratio stood at 23.1%, down slightly year on year, with a liquidity coverage ratio of 392%. Banks’ net interest income increased by 24.3% year on year in the first half of 2022 to €61.4m, while net service and commission income rose by 10.6%.

The banking sector as a whole saw earnings of €183.9m in the first half of 2022, an increase of 16.7% compared with the same period of last year, while the total loan portfolio grew by 3.7% to €24.2bn, with the share of NPLs to businesses decreasing by 0.2% to 1.7%, and NPLs to households up 0.1% to 1%.

Mr Krėpšta observes that the balance sheets of Lithuania’s banking sector are relatively straightforward. “It’s mortgages, consumer loans, things like that. That means that banks are experiencing positive impacts in terms of profitability because of rising interest rates,” he says.

Loans to households comprise around 53.7% of the banking sector’s loan portfolio, which increased overall by 14.9% in 2021, to €2.9bn, with deposits up 10.2% year on year to €3.2bn. Meanwhile, the sector’s return on equity is around 10%.

“I wouldn’t be surprised if we see increasing numbers towards the end of this year and next year, compared to previous years,” Mr Krėpšta adds. “The banking sector is strong and resilient.”

Rise of the fintech

Although the banking sector in Lithuania remains concentrated, with Swedbank and SEB accounting for more than half of all assets, the situation has been changing in recent years, says the EBRD’s Mr Kairys.

In its banking sector review for 2021, Bank of Lithuania said that, in partnership with the ECB, it was examining seven applications for a specialised banking licences, having undertaken examinations of more than 20 potential market newcomers since 2017, of which nine were granted licences.

Mr Kairys highlights the growth of Revolut Group, which was granted a full banking licence in Lithuania in December 2021, having previously operated under a specialised banking licence.

Revolut has now consolidated its assets in Lithuania, and will complement its previous deposit and loan businesses with payment services like card payments, direct debit, credit transfers and remittances, which should have a notable impact on the domestic banking sector. “With consolidated assets of €8bn, Revolut Group has become the third-largest player in the Lithuanian market,” says Mr Kairys.

New banking sector players have also been growing in influence in Lithuania. Fintech firms currently hold 17.83% of market share in terms of all banking sector assets, says Gintarė Skaistė, Lithuania’s finance minister, up from 2.6% in 2021. Meanwhile, around 16% of small and medium-sized enterprises and 17% of individuals would be willing to try services provided by digital banks, according to surveys. “This result shows a lot of potential for digital banks to grow their market share in the near future,” adds Ms Skaistė.

Meanwhile, Bank of Lithuania’s Mr Krėpšta says that one or two new players enter the market every year. “Their share is growing, and it’s a positive sign because our banking sector remains very concentrated,” he says. “The general wish of the government and our institution is to have more competition in the market. The smaller players are starting to compete and they are increasing their market share. But we also see that though they have quite small effects on lending, they give a very positive boost, for example, [addressing] the application and digital problems of the banking sector.”

Digital developments

One of the main effects of the rise in fintech firms has been the widespread adoption of digital banking solutions, with legacy players also stepping up and accelerating their digital transformation. “At the moment, we are one of the countries where instant payments are considerable and among the largest share in the EU. More than 60% of all payments are instant payments,” says Mr Krėpšta, highlighting one of the changes.

Swedbank’s Ms Skisaker says that 76% of Swedbank clients in Lithuania are now active users of digital banking services, up 30% from the end of 2019. Lithuania is also moving towards a Nordic cashless model, with banks heavily focused on providing digital products and solutions, as well as tapping opportunities created by open finance through open application programming interfaces.

She says that the impact of new fintech players has been pronounced and that the major banks have been actively involved in this process.

In 2019, Swedbank, together with the EBRD, launched Rockit, now the biggest fintech and sustainable innovation hub in the Baltics. “This has allowed the bank to co-operate more closely with fintech start-ups, and increasingly with innovations in sustainable finance too,” says Ms Skisaker. “There is a strong co-operation and partnerships among financial ecosystem players. This year, more than 70% of fintechs were in partnerships with legacy financial institutions.”

Lax oversight?

However, it has not all been plain sailing. Some have accused the central bank of being too lax in its oversight of those being granted specialised banking licences. In June 2021 the Bank of Lithuania stripped fintech Finolita Unio of its licence, after accusing it of treating anti-money laundering (AML) and counter-terrorist financing (CTF) rules “irresponsibly”, and having failed to assess the risks of its customers.

“We’ve had a proliferation of specialised licences issued by the regulator. It started five years ago and was something that everyone was watching, in terms of these new challenger banks which were relying on digitalisation,” says Mr Kairys.

He adds that there was a feeling that the regulator was somewhat easy-going, though he is unsure where that came from. “Maybe it was simply the result of the number of those specialised licences issued. When I spoke to the regulators, my impression was that they were very alert to the potential risks,” he says. Even so, he adds: “I would say that they are really taking all of the criticism to heart and trying to follow up.”

In fact, despite the concerns, Lithuania ranks as one of the least risky jurisdictions globally with regard to money-laundering risks, according to the Basel AML Index.

In June, Lithuania adopted amendments to its AML and CTF legislation, aimed at strengthening the management of money laundering and fraud risks in the cryptocurrency sector.

Bank of Lithuania’s Mr Krėpšta, who is in charge of supervision at the central bank, says that it is currently working on a supervisory philosophy when it comes to new fintech companies. “The number of banks is relatively small, so some people can always sit on every bank and be very close to that,” he says. “When it comes to other sectors, where the numbers are much higher, we use this risk-based supervision, but we are moving towards some kind of hybrid approach. It’s a constant challenge for us, but we face that with open eyes and increased resources, and we try to do whatever we can to avoid difficult situations and misconduct.”

The government is also currently preparing fintech guidelines for the coming five-year period, encompassing different measures aimed at further strengthening the country’s position as a European fintech hub.

“This overarching goal will be reached by ensuring qualitative and quantitative growth of the sector, increasing maturity of companies and the ecosystem as a whole, attracting innovative solutions to operate in Lithuania, strengthening risk-management competences and introducing measures to ensure that the Lithuanian market is safe and secure,” says Ms Skaistė.

Looking ahead

Financial institutions are set to play a key role in the country’s green transition, with banks needing to actively provide financing and co-financing to both corporates and households.

This is especially the case now that the Lithuanian government has earmarked major investment into renewables and green energy as part of its recovery and resilience plan, part of the EU-wide post-pandemic recovery effort that will see more than €800bn invested across the bloc, with a particular focus on clean technology and digital initiatives. Lithuania is set to receive a total of €2.2bn in NextGenerationEU funding.

Banks in Lithuania are also hoping to benefit from efforts to establish a pan-Baltic capital market, covering Latvia, Lithuania and Estonia, which is currently under development and has the aim of making the region more visible and attractive to foreign investors.

Meanwhile, whether the emergence of digital-first rivals fundamentally alters the banking sector in the near future, leading to a wave of mergers, acquisitions and the arrival of new foreign players, remains to be seen.

“The Lithuanian banking market experienced both exits and consolidation actions during recent years, and now there is concentration of some segments in the market, albeit with a high level of competition in lending and persistent challenge from smaller players,” says Swedbank’s Ms Skisaker. “Most likely no sudden changes can be seen in the fundamental market structure in the coming years.”

Others disagree. “I wouldn’t be surprised to see some mergers because our market is quite active in that sense,” says Bank of Lithuania’s Mr Krėpšta. “Our financial sector is under-saturated. Loan levels to GDP and things like that are really lower than European average, so access to credit could be better.”