Financial Sector Transformation
DBRS Confirms Republic of Latvia at A (low), Stable Trend
DBRS Ratings Limited has confirmed the Republic of Latvia’s Long-Term Foreign and Local Currency – Issuer Ratings at A (low) and Short-Term Foreign and Local Currency – Issuer Ratings at R-1 (low). The trends on all ratings are Stable.
The ratings are underpinned by Latvia’s political consensus on the benefits of stable macroeconomic policy-making, including judicious fiscal management and a low level of public debt, and its institutional benefits derived from membership in the European Union (EU) and the Euro area. DBRS considers Latvia well-positioned in its current rating range. Continued efforts by the Latvian government to strengthen the country’s financial system and reduce domestic economic vulnerabilities could place upward pressure on the ratings. Over the medium-term, effective execution of a reform agenda to bring Latvia’s income and productivity levels toward the European average could also be credit positive.
FCMC is finalising the implementation of new business models in the banking sector
The FCMC instructed banks earlier in the year to reduce their foreign deposits. Latvian banks have delivered a dramatic decrease in foreign customer deposits, with domestic deposits (80%) and deposits from European Union member states (10%) dominating.
The Latvian banking sector is now focusing on attracting the EU and EEA customers and ending service to customers outside this economic area. Latvian banks are concentrating on traditional banking services, and developing new channels to reach customers, including through new financial technologies. The banks are looking to expand their business with Latvian SMEs that would need credit, and are also hoping to expand in the Baltic States and wider EU.
FCMC reports that banks have been taking active measures to implement these new business approaches and integrating these new models into their business strategies. The future performance of the banks will indicate whether or not they have the capacity to execute the transition to these new business models.
Change management in the banking sector
Latvian banks have also voluntarily reduced their interests in the high-risk customer segment. In less than a year the share of foreign deposits has fallen from 39.9% in September 2017 to 20.5% in September 2018. The level of foreign deposits is now stabilizing around 20%. Non-EU deposits have decreased from 25% in September 2017 to 10% in September 2018.
Foreign customer payments have also shrunken substantially with the enforcement of measures to disrupt financial crime. Payments in US dollars in Latvian banks have declined more than 10 times in Q3 2018 compared to Q3 2015. The euro has strengthened its dominance as a payment currency in the Latvian financial sector.
Latvian domestic deposits have continued to grow, irrespective of the changes in the foreign customer segment.