The lease market in the Baltic states has witnessed some significant changes over the last 18 months. Lessors in Estonia, Latvia and Lithuania will be hoping these changes have a positive impact on market conditions as the region absorbs the impact of Covid-19 and other challenges. Paul Golden reports


From an economic perspective, the Baltic states have a lot going for them with the most recent observations from the IMF noting that all three countries experienced growth last year.

In Estonia, GDP growth was described as being above potential for the third year in a row, supported by domestic private consumption. GDP was projected to reach 4% last year and 3.2% in 2020 before converging to its potential at around 2.8% in the medium term, constrained largely by the level of productivity and weak foreign demand. Inflation is expected to continue its downward path in line with low energy prices, but remain above the EU average.

Banks in Estonia are profitable, liquid and solvent although the IMF warned that international trade risks could weaken growth and slow export in Nordic countries with spillover effects onto Estonia’s banking system.

To the south, GDP growth in Latvia reached 4.8% in 2018, led by a pick-up of private investment along with a boom in EU funded construction and strong growth in IT and communications. Wage growth accelerated to 5.7% as the labour market continued to tighten, unemployment declined to an all-time low rate of 7.4% and core inflation fell to 2%.

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Growth was expected to decelerate in 2019 to just above 3% as a slower pace of EU funds absorption and wage growth moderated domestic demand. The IMF observed that Latvian banks remain well capitalised and liquid, with capital levels about 40% higher than the euro area average and average liquidity coverage four times the regulatory minimum.

In Lithuania, growth remained strong and balanced last year. According to the IMF, the tight labour market and strong wage growth supported private consumption while better utilisation of EU funds helped accelerate investment, particularly in construction and transport.

Credit continued to grow, albeit at a moderately slower pace than in 2018 due to a decline in credit to non-financial corporations using alternative funding sources such as issuing bonds. The banking sector remains well-capitalised, liquid and profitable.

But leasing has not universally benefitted from this upward economic trajectory. For example, the Estonian leasing market showed a decline last year with new leasing business carried out by members of the association down by 6% on the previous year at €1.164bn despite an increase of 1.5% in the total lease portfolio to €2.8bn.

In terms of new sales by assets, the vehicle and IT sectors were the only areas of the lease market to experience growth in 2019, although the 3% expansion in the former was more significant given that it accounted for 55% of total new sales.

The heavy vehicles sector was down by 16%, while the machinery and equipment sector retained its position as the second-largest source of new sales despite a fall of 14% compared to 2018.

Reet Hääl, managing director of the Estonian Leasing Association observes that last year’s decline in new sales was the first negative year for the industry since 2014 when sales were down by just 2%.

“Portfolio or residuals growth was at its lowest level since 2011 although the reasons lie more in the restructuring of financiers than other factors,” she explains. “A couple of the big players have merged (Nordea and DNB) while Danske Bank left the market in the second half of the year – taking over clients and adding new players takes time.”

In February 2019, the Estonian Financial Supervision Authority ordered Danske Bank to cease banking operations in Estonia following the case of suspicious transactions covering the period from 2007 to 2015. The bank also decided to close down its activities in Latvia, Lithuania and Russia.

Despite these challenges, Hääl adds that leasing is extremely popular in Estonia and that lease financing still plays a significant part in the economy. “The annual leasing volume of Estonia as a percentage of GDP has been the highest in the world for the last fifteen years – in 2018 it was 4.71%,” she says.

Last April, the Estonian leasing business Liisi gained a banking licence and rebranded as Holm Bank. The launch of Holm Bank represented the first financial institution in Estonia to be licensed by the European Central Bank and created a new entity with approximately 350,000 customers.

An even more significant development took place at the end of last year when in December, Latvia-based Citadele entered into a binding agreement to acquire UniCredit’s Baltic leasing operations through the acquisition of 100% of the shares in SIA UniCredit Leasing – including its Estonian and Lithuanian branches – along with its wholly-owned subsidiary SIA UniCredit Insurance Broker.

Citadele described SIA UniCredit Leasing as one of the best-established players in the region with a leading presence in all three Baltic countries, an innovative and user-friendly product proposition and robust operating and control systems.

The acquiring bank’s CEO, Guntis Beļavskis, said the leasing sector continues to be attractive thanks to a diversified customer base, strong underlying asset performance and the potential to reach new clients. The acquisition means Citadele’s aggregate net leasing loans will exceed €1.1bn and it becomes one of the three largest players in the Latvian leasing market as well as significantly strengthening its footprint across the Baltics.

UniCredit’s leasing operations in the Baltics were understood to have a lease portfolio of more than €850m.

“In our opinion, the overall health of the Estonian leasing market can be evaluated as good,” says Karin Saar, Swedbank private consumer finance and car finance support area manager. “Although recent problems with the Covid-19 virus have negatively affected demand, supply is still sufficient as there are enough leasing providers on the market.”

She suggests that the creation of Luminor from the merger of DNB and Nordea has influenced pricing and refers to private individual vehicle leasing as the most dynamic segment of the market.

“Swedbank is putting more focus on topics related to sustainability and environment friendliness and as a result we have introduced more favourable conditions for environmentally friendly cars (hybrid, plug-in electric or small engine car with a CO2 emissions level below or equal to 95 g/km),” says Saar.

“Additionally, we are constantly working on making the leasing process smoother and more digital both for our partners and vendors and our customers. For example, 99% of private car leasing contracts are now signed digitally,” she adds.

While demand for leasing has been supported by rising consumer confidence growth – mainly as a result of salary growth and low unemployment – Saar acknowledges that a rapid decrease in demand can be expected over at least the second quarter of this year.

“Over the longer term it is very hard to predict how potential leasing customers will act and if, for example, they decide to postpone taking on new financial obligations,” she says. “During the second half of the year and into next year we hope to see rapid demand growth if the virus outbreak can be controlled in a reasonable time frame.”

Taavi Tomson, head of sales at SEB leasing also offers an upbeat assessment of the leasing market in Estonia, noting that overdues in particular are at very low levels – just 0.06% in the case of SEB.

When asked to assess the most significant developments in the market over the last 18 months, he suggests that Luminor is finding it difficult to maintain the market share previously held by DNB and Nordea and refers to the initial impact of new market participant Coop Pank.

In February, Coop Pank released preliminary financial results for 2019 indicating that it increased its business by 40% compared to the same period last year. Its loan portfolio grew to €460m with car leasing being the main driver of this expansion, up by 60%.

The home loan portfolio grew by 29% and the consumer finance portfolio by 25%, giving the bank a market share of 2.3% at the end of 2019 and almost 64,000 customers.

Tomson agrees that there is an increased focus on CO2 emissions and electric cars, which will be important to the long-term growth of the market given the pressure the automotive industry is under.

“The agricultural sector experienced five poor years in a row from 2014-2018 as a result of a variety of factors including Russian sanctions, low milk prices, pig disease and unfavourable weather for grain growth,” he adds. “However, it seems to have turned and last year was pretty much okay.”

Tomson explains that SEB is actively promoting smart and efficient agriculture and will in the near future be coming out with a green/hybrid offer where low CO2 cars can get better pricing.

The leasing market in Latvia is still feeling the impact of the anti-money laundering scandals that rocked the Baltics in 2018 and 2019 and have made customer onboarding longer and more complicated.

That is the view of Jevgenijs Belezjaks, chairman of the Latvian Lessor Association, who adds that the changes introduced following the issues at Danske Bank and ABLV Bank have also made the customer onboarding process much more transparent and compliant from a KYC perspective.

In February 2018 the European Central Bank announced that ABLV was ‘failing or likely to fail in accordance with the Single Resolution Mechanism Regulation’ and that its liquidity position had deteriorated to the point where it had insufficient funds to meet stressed outflows.

“The main challenges facing lease firms in Latvia relate to stricter rules regarding compliance with KYC and AML as well as stricter regulation in the field of consumer financing,” explains Belezjaks.

In 2018, the leasing portfolio in Latvia increased by 7.3% according to data collected by the association. The most significant contribution was made by car leasing with new contracts amounting to €401m concluded during the year. The Latvian leasing portfolio at the conclusion of 2018 was €1.67bn of which just over 70% was financial leasing, while 23% was operational leasing.

There were no significant changes in terms of new volumes in 2018. The passenger car market grew by 4.7%; commercial transport was almost static with a small reduction of 0.7% and equipment financing grew by 7.4%. The overall market expanded by 3.7% compared to 2017.

However, Belezjaks says the market experienced a significant downturn during the first three quarters of last year compared to the same period in 2018. While the passenger car market was relatively unchanged with a drop of just 1.3%, equipment finance declined by 12.6% and commercial transportation volumes were down by more than 40%.

“The total decrease for the first nine months of 2019 amounted to 13%,” he adds. “The biggest factor in this decrease – especially for commercial transportation – is the fact that while implementing measures to improve AML compliance financing institutions have been concentrating on decreasing non-resident related business.”

Belezjaks concludes that the Latvian Lessor Association expects the market to recover to 2018 levels over the next 18 months.

There has also been co-operation between the regional leasing associations. In August 2019 we reported that members of the Latvian Leasing Association had introduced an online database of unregistered leasing objects.

Developed in conjunction with leasing companies from Estonia and Lithuania, the database was designed to eliminate double financing opportunities for unregistered leasing entities in the Baltic region. Before concluding a deal with a client, each leasing company can check online to see if the property in question has not already been funded by another leasing company in the Baltic States.

In 2018 the Estonian Leasing Association introduced a non-registered assets database to prevent double financing and uncover fraud – all assets financed by members that are not registered on any other Estonian register are inserted into that database.

Baltics: key data at a glance

IMF Revised Real GDP Growth Projections (due to coronavirus pandemic)

Estonia: 2020  -7.5%  |  2021  +7.9%

Latvia: 2020  -8.6%  |  2021  +8.3%

Lithuania: 2020 -8.1%  |  2021  +8.2%

IMF World Economic Outlook: The Great Lockdown, published April 2020

GDP per capita

Estonia: US$38,463

Latvia: US$32,097

Lithuania: US$38,176

(UK: US$48,092)

Source: OECD, 2019

Covid-19 Crisis Fiscal measures

Estonia: Government considering a support package of around €2bn (£1.74bn) = 7% of 2019 GDP

Latvia: Government support package of around €2bn (£1.74bn) = 6% of 2019 GDP

Lithuania: Government support package of around €2.5bn (£2.17bn) = 5% of 2019 GDP

Source: IMF: Policy Responses to Covid-19, 10 April