The banking system in the Republic of Lithuania is characterized by greater stability and improving creditworthiness, Standard & Poor's Ratings Services said in a report published today. "The economic and industry risks of the system are still higher than average, but have reduced in the past five years," said Standard & Poor's credit analyst Alwin Greder. Since the Russian default of 1998 and economic recession in 1999, macroeconomic growth, structural reforms--particularly privatization--and higher foreign investment, all driven mostly by EU accession requirements, together with improved regulation and supervision, have strengthened the banks' commercial and financial profiles. "Lingering risks are rapid credit growth and the impact of external shocks on the small economy, although resilience has hardened," she added.
Recuperation from insolvency problems of some individual banks and consequent bank restructuring in the mid-1990s was affected by the recession at the end of the decade, which depressed credit and deposit growth in 1999. Sound economic growth--averaging 7.4% in 2001-2003, despite the global economic slowdown in recent years--underpinned banks' recovery. Increasing, albeit still low, prosperity, together with falling interest rates and a wider range of lending products, are driving up financial intermediation sharply. Nevertheless, domestic credit-to-GDP at 21% in 2003 is the lowest among peer group countries (Estonia, Latvia, and new EU member central European countries). Credit growth is expected to continue at a high pace due to sound medium-term economic growth prospects and a sustained lowering of interest rates.
The banking sector is wholly privatized, and more competitive. Foreign (predominantly Nordic) strategic owners raised their shareholdings to 89% by year-end 2003. They have transferred managerial and operational skills; modernized, restructured, and recapitalized banks; improved corporate governance and transparency; introduced wider ranges of products and services; and are building up insurance and asset management operations. The sector is somewhat concentrated, with the largest three banks--all foreign owned--accounting for about 70% of total assets.
EU membership requirements were the main drivers of legislative reforms, which are almost fully harmonized with EU directives. The introduction of IFRS will achieve greater transparency and assist international comparability. Banking supervision, which falls within the Bank of Lithuania (the central bank), is better, and transparency, particularly vis-à-vis statistical reporting, is improving, but lags that of some peer countries. In 2003, closer cooperation between financial and insurance sector supervisors was initiated, which could raise the quality of oversight.
The report entitled "Bank Industry Risk Analysis: Lithuania (Republic of)" was published on Jan. 27, 2005, and is available to subscribers of RatingsDirect, Standard & Poor's Web-based credit analysis system, at www.ratingsdirect.com. Ratings information can be found on Standard & Poor's public Web site at www.standardandpoors.com; under Credit Ratings in the left navigation bar, select Find Ratings, then Credit Ratings Search. Alternatively, call one of the following Standard & Poor's numbers: London Ratings Desk (44) 20-7176-7400; London Press Office Hotline (44) 20-7176-3605; Paris (33) 1-4420-6708; Frankfurt (49) 69-33-999-225; Stockholm (46) 8-440-5916; or Moscow (7) 095-783-4017. Members of the media may also contact the European Press Office via e-mail on: media_europe@standardandpoors.com.