Moody's boosts Baltic banking outlook to stable

Moody's Investors Service has changed the outlook on the Baltic banking systems to stable from the previously negative outlook. Moody's anticipates that solid economic fundamentals will support credit growth, asset quality and profitability over the next 12 to 18 months, Baiba Melnace of the Association of Latvian Commercial Banks told LETA Friday.

The outlook for banking system in Estonia is now rated at A1 (stable), Latvia at A3 (stable) and Lithuania at A3 (stable).

"We expect the Baltic operating environment to remain favorable for banks on the back of consistently strong economic growth, solid fiscal health and stability resulting from the successful adoption of the euro", said Efthymia Tsotsani, an analyst at Moody's.

The ratings agency anticipates real gross domestic product growth of 2.9 percent in Estonia and 3.2 percent in both Latvia and Lithuania in 2016. This will be driven by export growth to Europe and strong domestic demand, helped by low interest rates supporting debt affordability and credit growth.

Moody's comments further that this stable operating environment is also supported by prudently managed public finances in all three countries, forecasting 2016 general government debt-to-GDP in Estonia at 9.8 percent, Latvia at 40.4 percent and Lithuania at 38.8 percent.

"Improved asset quality combined with strong profitability will allow banks to further strengthen their capital ratios, even if significant dividend payments to Nordic banking groups continue to be likely", added Tsotsani.

The rating agency notes that overall problem loan levels have followed an improving trend since their 2010 peak. However, increased tensions with Russia, a key trading partner to the region could disrupt some corporates' financial conditions, and raise delinquencies on related bank loans.

The credit implications of the European Banking Recovery and Resolution Directive, which places an emphasis on creditor bail-in, have now been factored into the banks' ratings and no longer create negative ratings pressure, which is reflected in Moody's stable outlook on government support.

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