FinanceEstonia Forum 2014

Madis Müller

19 November 2014

2

The decline in government bond yields driven by the accommodative monetary policy

0%

5%

10%

15%

20%

25%

30%

35%

40%

2010 2011 2012 2013 2014

Interest rates on ten-year government bonds

Portugal

Ireland

Italy

Greece

Spain

Germany

Differences in the cost of borrowing for corporates remain substantial

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Interest rates on long-term bank loans to the non-financial corporate sector

Cyprus

Germany

Spain

Greece (GR)

Ireland

Italy

Portugal

What has been driving the change in credit standards?

4

-10

-5

0

5

10

15

Q3Q2Q1Q4Q3Q2Q1Q4Q3

201420132012

Changes in credit standards applied to the approval of loans or credit lines to enterprises; diffusion index

Cost of funds Risk perceptions Competition Credit standards - actual

Source: ECB, Bank Lending Survey

Banks still struggling with bad loans, while the weak economy adds pressure on profitability

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-5%

0%

5%

10%

15%

20%

25%

2006 2007 2008 2009 2010 2011 2012 2013 1H 2014

Source: European Systemic Risk Board

Return on Equity of large EU banking groups

1-3 quartile median

European Single Supervisory Mechanism (SSM) operational from 4 November 2014

• new system of banking supervision for Europe

• comprises of the ECB and national supervisory authorities of euro area countries

• with an objective to ensure the safety and soundness of the European banking system and increase financial integration and stability

• one of the two pillars of the EU banking union, along with the Single Resolution Mechanism

„We think that with the SSM, we have the best of both worlds: the expertise of national supervisors and also some distance in the decision-making process that will allow us to avoid national bias.“

D. Nouy, Chair of the Supervisory Board of the SSM, interview with Äripäev(03/09/2014)

6

The Comprehensive Assessment by the ECB supporting the confidence in European banks

• The resilience of 130 of the biggest banks in the euro area as at the end of 2013 was analysed

• 25 banks had a shortfall in capitalisation of a total of 24,6billion euros– 15,2 billion euros of this

already built up this year

• Estonian banks (Swedbank, SEB Bank and DNB Bank) passed the assessment successfully

7

SSM median

-4%

-2%

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2%

4%

6%

8%

10%

12%

14%

16%

SI GR CY BE IE PT NL LU IT DE LT AT LV FI FR MT SK ES EE

Reduction in CET1 ratio by country of participating bank - adverse scenario

Source: ECB

Efforts to reinvigorate non-bank lending in Europe

• Securitisation:

– the initiatives by:

• the Association of Financial Markets in Europe/European SecuritisationForum (AFME/ESF)

• the European Commission

• the Bank of England’s and the ECB’s pro-securitisation report

• EU Commission’s initiative on the Capital Markets Union

– a proposal with details yet to be developed

• The asset-backed securities purchase program and the covered bond purchase program by the ECB

– potential positive spillover effects on all types of assets (incl. corporate bonds)

– the total of 400 billion EUR of ABS and 600 billion EUR of covered bonds qualify as purchasable assets

– the programs will last at least two years

8

Efforts to reinvigorate non-bank lending in Europe (cont.-d)

… while the growth in “shadow banking” has picked up already.

9

Estonian banking sector strong in terms of capital and profitability

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0% 10% 20% 30% 40%

ITSEESATPTNLSI

CYFRGR

euro areaEUPLUKHUDEFI

ROCZBGSKBELVLT

DKIE

HRLUEE

MT

Source: ECB

Banks' Tier1 ratio (2013)

-3,4%-8,0%

-1.0% -0.5% 0.0% 0.5% 1.0% 1.5% 2.0%

SICYIEIT

PTATGRHUDEHR

euro areaROUKEUDKNLFRESBEFI

LUSE

BGMTLVSKLTCZPLEE

Banks' return on assets (2013)

Increase in domestic savings in Estonia has continued

11

0

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1,000

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3,000

3,500

2007 2008 2009 2010 2011 2012 2013 2014

EUR

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Assets of investment and pension funds

third pillar pension fundssecond pillar pension fundsreal estate and hedge fundsinterest fundsstock funds

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2,000

4,000

6,000

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12,000

2007 2008 2009 2010 2011 2012 2013 2014

EUR

mill

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Bank deposits of corporates and households

other depositstime and saving depositsovernight and demand deposits

Source: Eesti Pank

Do Estonian businesses have sufficient access to funding?

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-20%

-10%

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2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

Corporate sector debt liabilities´ structure

domestic financial sector domestic non-financial enterprises

other domestic sectors foreign debt

annual growth of debt (right scale)

Source: Eesti Pank

Bank lending – no visible problems

13

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10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

Factors limiting production growth in industry

none demand labour equipment other financial

Source: European Commission

Capital markets – no visible progress

The last IPO on the stock exchange in 2010; bond market still dormant

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2007 2008 2009 2010 2011 2012 2013

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Market capitalisation and monthly turnover of shares listed on the Tallinn

Stock Exchange

other stocks (left scale)Tallinna Kaubamaja (left scale)Tallinna Vesi (left scale)Tallink Grupp (left scale)Olympic Entertainment (left scale)Eesti Telekom (left scale)

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2007 2008 2009 2010 2011 2012 2013 2014

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Total volume of bonds issued and new bonds issued quarterly

total volume of bonds issued (left scale)

issued new bonds (right scale)

But – early promising signs!

• The Baltic Innovation Fund (BIF):

– EUR 200 million invested in Baltic private equity and venture capital funds over 4 years

• Review of regulation on investment funds

– draft legislation proposed by the Ministry of Finance

• easier to start different types investment funds

• review of investment constraints on pension funds, allowing for more investment in local assets

15

• Do we need an active Estonian capital market or easy access to funding for Estonian companies?

– room for more regional cooperation?

• Do we know where is the demand for alternative sources of funding for businesses most pressing?

– access to equity and mezzanine probably more constrained than straight debt?

• Do we have local savings to meet that demand?

– seems to be the case…

• How to make the demand and supply meet?

– necessary to educate both sides?

• Role of the government

– focus on the regulatory framework rather than outright funds

16

Questions we still need to discuss: