In November 2020, the Bank of Lithuania published its Q3 2020 data related to lending to individual business sectors. The figures reveal that Major Financial Institutions’ (MFIs) lending to businesses continues to decline.
Based on this information, it’s important to understand which industries have contributed the most to such trends and what are the main reasons for the significant decline in loan portfolios.
According to the Bank of Lithuania, loan portfolios of MFIs to private non-financial corporations amounted to EUR 7,82 billion at the end of Q3 2020. This was 10.7% less than a year ago. The value of these portfolios have been steadily decreasing since Q3 2019 and when compared to the maximum value in Q4 2008, there has been reduction in lending volumes amounting to almost 25%.
According to the data, there has been a decline in lending across almost all sectors of the economy, so the reduction in the overall loan portfolio cannot be laid at the feet of banks, who have reduced or in some cases stopped lending to specific types of business. However, figures reveal that there is an uneven impact across indivudual business sectors. This article will take a look at which sectors contributed most to the decline and why.
According to the Bank of Lithuania, loans granted to companies engaged in professional, scientific and technical activities has decreased by EUR 266.5 million. This was the largest annual reduction when compared with other industries. Although the importance of this sector is realtively small, fluctuations in its loan portfolio value tend to be particularly large.
First, it’s important to note that this sector usually includes a significant number of “holding companies”. These generally tend to be companies that manage different groups of corporate entities. Loans to holding companies are usually large and used for financial or other types of investments. Considering that the corporate loan portfolio in Lithuania is relatively small (MFI loans to this sector contains 6.1 % of total MFIs portfolio to private non-financial corporations.), a large loan can have a relatively significant impact on the size of the overall portfolio.
Secondly, it’s important to note that holding companies are usually granted short-term loans, which tend to depreciate rapidly. Therefore, it seems that the decline of the current loan portfolio can be attributed to the rapid amortization of existing loans. It is also likely that the growing tendency of holding companies to switch from banking to alternative financing, such as issuing bonds and borrowing from abroad has a significant impact too.
Lending to trading companies has also begun to decline sharply. During the year, loans to trading companies reduced by EUR 210 million. These types of companies are one of Lithuanian banks’ most important catagories of customers, accounting for 21% of the total loan portfolio granted to private non-financial corporations and coming second only to the real estate sector.
For a long time, lending to trading companies grew, but the trend began to change at the end of 2018. There were several factors for this. First of all, it should be noted that Lithuania is a small and extremely open economy, which means it is highly dependant on exports. Secondly, the economic downturn in the EU in recent years has had a negative impact on Lithuanian trading companies’ activities.
Additionally, COVID-19 has had an impact on both external and internal markets. Last but not least, there has been a recent trend which has seen many trading companies who previously relied on banks for credit, changing their funding models to trade finance.
Lending to companies involved in both the real estate and transportation industries also declined significantly. In the last year, their portfolios contracted by EUR 180.8 million and EUR 152.6 million, respectively.
Loans to real estate companies accounts for as much as 26.5% of the total loan portfolio granted to private non-financial corporations. The value of loan portfolios in this segment continues to decline despite the fact that real estate market in Lithuania is booming. Conversely, mortgage loan portfolios are growing extremely fast. For example, over the last three years, the annual growth rate of mortgage loan portfolios was 8-9.5% and this was one of the highest rates of growth throughout the entire EU. This increase demonstrates that real estate developers are successfully finding alternative sources of funding. The introduction of banks’ tighter lending standards for real estate project encouraged this trend.
Similar trends are observable in the transport sector. Over the last five years, transportation companies were one of the most preferable sectors for banks for commercial lending. However, the value loan portfolios related to this industry began to shrink around the middle of 2020.
Such a trend was primarily due to the slowing economic growth, which was experienced by many EU countries. However, the EU’s “Mobility Package” (an EU wide initiative to reduce carbon emissions) has also likely had a negative impact. It has been projected that due to the legislative package introduced by the EU, the transport market will shrink by around 20% and prices will increase by 10-15%. As a result, a significant number of carriers have suspended investment, and banks' willingness to finance transport companies has also declined.
The trends highlighted above are likely to continue in the short term. However, funding for some sectors (such as trade) can recover soon. The increase in trade over Christmas period should contribute to this. It should also be noted that the Lithuanian credit market is relatively small; therefore several large loans may have a substantial impact on the overall value of the loan portfolio.