Credit growth picked up to 2.2% y/y in November, but still remained tangibly below the levels observed in Jan-Aug, when the average credit growth came in at 6.7% y/y, according to data of the central bank. Loans increased by 1.3% in monthly terms, which was above the average monthly growth for November in the last five years – 0.4% m/m. The main contribution to the acceleration of the annual growth came from lending to financial institutions, which rose by 11.3% y/y compared to 8.4% y/y in October. Moreover, the expansion of loans to the general government steepened further to 9.4% y/y. Considering that data of the finance ministry showed that the accrual-based general government deficit narrowed tangibly in Jan-Oct, we believe that the increase of lending to the state institutions reflects some fiscal loosening. Commercial undertakings declined by 5.4% y/y, implying further moderation of the investment activity. At the same time, the credit quality remained unchanged as the NPL ratio remained at 2.6%. Looking ahead, we do not expect to see tangible steepening of the credit growth as the Nordic parents of domestic banks will likely be reluctant to make significant liquidity injections in their Estonian units, given the falling real estate prices in Sweden and the easing GDP growth in Estonia. Considering that wage growth should remain strong and no tangible deterioration of corporate profitability is expected, we deem that credit quality will remain largely unchanged in the months to come.
As far as deposits are concerned, the expansion of deposits quickened to 4.6% y/y. The increase of residents’ deposits steepened to 7.4% y/y. The growth of general government deposits accelerated to 9.4% y/y, after slowing down tangibly in October. Moreover, household deposits continued to rise strongly, underpinned by the solid real wage growth. In contrast, the decline of non-residents’ deposits remained in the double-digits due to significant contraction of deposits of foreign corporations.
In regard to the cost of borrowing, interest rates on loans to non-financial corporation dropped by 36bps m/m, following 57bps m/m increase in the month before. In the meantime, interest rates on household loans fell by 10bps m/m. On the other hand, interest rates on deposits of both non-financial corporations and households increased somewhat.