In its new "Banking System Outlook: Baltics" report, Moody's said that the outlook remains negative due to "the likelihood of continued asset-quality weakness amidst persistently high problem loans, funding concentrations that leave smaller domestic banks vulnerable to deposit sensitivity and larger institutions dependent on parental-funding support, and high unemployment and elevated household debt, which is a long-term constraint on economic growth."
"Additionally, many domestically owned banks (especially in Latvia) depend on non-domestic, confidence-sensitive business," the international credit rating agency said.
Banks' operating environment in all three countries will remain adversely affected by a GDP growth slowdown this year and economic problems in the euro area that may lead to a decline in exports. In addition, the domestic sector will remain negatively affected by high unemployment and debt levels, and low credit growth, it said.
"Despite the strong economic growth during 2011, over the next 12-18 months the pressure on households' financial positions is likely to increase as the region's economic recovery slows. As such, Moody's expects little improvement in the very high problem loans in Latvia and Lithuania," the agency said.
The Baltic banking systems are dominated by Nordic banking groups' subsidiaries, which are largely dependent on funding from their parents "and are therefore exposed to any funding challenges at the parent level and to the risk of reduced parental support," it said.
"Many of the domestically owned banks are almost entirely deposit-funded. Moody's says that this exposes these banks to depositor confidence, which has been particularly volatile in Latvia in recent years. Several of the domestically owned Latvian banks have a high percentage of deposits from non-domestic residents, which Moody's views as less stable than domestic deposits," according to the report.
