Latvia Commercial Banking Report Q2 2008

In March 2008, we updated all data for the 59 countries surveyed with official figures, sourced from central banks and regulators. In most cases, we were able to find data that pertained to the end of 2007: in almost all other cases, the data pertains to September 30 2007. As a result, the insights that we derive on particular countries are based on consistently sourced information that is far more current than it had been previously.

Although we gather data for countries such as the US, Japan, Australia and the eurozone, the vast majority of the 59 countries whose banking industries we survey are, or are generally seen as being, emerging markets. For all the widely publicised problems of large banks in developed countries, in the wake of the subprime banking crisis in the US, 2007 was an extremely good year for the banking sectors of the emerging markets. In local currency terms, the median growth in assets was 21% (in Brazil). The median rates of growth in loans to non-bank customers and in deposits were 22% (in India) and 18% (in Morocco). In some countries - and not just those enjoying oil booms - the figures were spectacular. In Ukraine, for instance, assets and deposits rose by 76% and 62% respectively. Loans grew by more than one-third in Bulgaria, Estonia, Latvia, Lithuania, Romania, Russia, Serbia, Slovenia, Peru, Bahrain, Iran and Nigeria. Deposits also rose by more than one-third in most of these countries.

In absolute terms, Latvia's banking sector enjoyed reasonable growth through the year to December 31 2007. In local currency terms, total assets, total loans and total deposits increased by 29%, 39% and 17% respectively. The loan/deposit, loan/asset and loan/GDP ratios all rose.

Relative to other countries surveyed by BMI, these achievements are quite impressive. Of the 59 countries surveyed, Latvia ranks 12th in terms of local currency asset growth, 10th in terms of local currency loan growth and 31st in terms of local currency deposit growth. All three of the ratios are rising from fairly high levels. Latvia's rankings in terms of its loan/deposit, loan/asset and loan/GDP ratios are 1st, 28th and 16th, respectively. In a country with per capita GDP of US$12,132, deposits per capita are an impressive US$5,050.

In Q108, we envisaged that total assets, total loans and total deposits would rise by 35%, 10% and 10% annually through the 2007-2012 forecast period. Now, and using an improved forecasting method, we are looking for growth rates of 20%, 22% and 14%, respectively.

Since Q108, we have calculated, on a consistent basis, a Commercial Bank Business Environment Rating (CBBER) for each of the 59 countries surveyed. The CBBER includes an assessment of the limits of potential returns: it does this by taking into account the size, growth potential and bancassurance potential of the banking sector, as well as aspects of the economy in 2007. The CBBER also depends on an assessment of the risks to the realisation of potential returns: this reflects BMI's assessments of overall country risk, together with the regulatory and competitive environment.

Latvia's CBBER is 56.2. In the context of Central and Eastern European region, this means that it is no more than a moderately attractive country, given that the CBBERs are higher in each of Greece, Hungary, Poland and Romania. The major problem is the underdevelopment of the banking sector, which is reflected in the small relative size and the small potential for growth. The ratings score for the market structure - the most important component of the assessment of the limits to potential returns - is just 42.5.

By Central European standards, the ratings score for the economy - at 64.6 - is also on the low side.