Increased competition would do little to reduce banks’ large profits, Swedbank Estonia head Olavi Lepp said on Wednesday.
Swedbank’s Estonian subsidiary made €279 million in net profit in the first nine months of this year, while the bank’s profit per customer is higher in Estonia than it is in its home country, or in Latvia or Lithuania.
Lepp told “Aktuaalne kaamera” that banks’ profits depend on each bank’s business model, meaning not all enjoy very high profits.
“There are also banks with smaller profits depending on how they fund themselves,” Lepp told “Aktuaalne kaamera.”
“But perhaps it’s worth mentioning alongside that €279 million that, over the same period, we paid about €150 million to depositors, plus nearly €200 million to the state, so in that sense, both customers, owners, and the state have benefited. I would say there’s balance there,” Lepp went on.
More competition would not alter the situation, Lepp added.
“I think more competition wouldn’t help much in this case because banks set very clear rules about how they must run their businesses, and if the rules remain the same, you just get more of the same types of banks. There won’t be any significant difference,” he said.
Some political parties in Estonia have proposed a windfall tax on banks’ profits, but nothing has come to fruition so far. Lithuania already has a tax of that kind in place, while Latvia is planning to introduce one too. Lepp said, however, that these have not proven effective in either of the other two Baltic states.
He said: “I think the impact that Latvia and Lithuania have seen is already noticeable to foreign investors, as their interest has fallen.”
“Lithuania has actively sought to attract a new bank to its market, but no one is going there anymore. So, it is the same issue we have talked about: Of competition being greater. I think that market will face a lot of problems [in that case],” he went on.
“Latvia has taken a completely different approach, essentially giving money back to some of its customers. I’m not sure they were the right customers, though. … The banks’ profits have mainly derived from the fact that deposit portfolios have not been converted to term deposits as quickly, so if you’re distributing that about, it should be given to depositors, not to borrowers,” Lepp added.
According to the banks, their profits will decline in line with falling interest rates. Lepp noted that this could indeed spell a significant drop in profits.
He said: “Net interest income is determined by how much we pay on deposits and how much we earn from the loan portfolio. The latter is clearly going down, as it has been priced to fall in line with the Euribor. How the deposit portfolio moves is another matter, though. In any case, the margin between the two is shrinking, and banks will certainly earn less.”
“I was a little surprised when someone said they thought that this wouldn’t happen. The only way for banks to recoup their profits is to lend more, meaning taking on a larger loan portfolio to earn from. But the margins — how much we earn from the portfolio — will definitely fall,” Lepp concluded.
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Source:
‘Aktuaalne kaamera,’ interviewer Veronika Uibo.