Estonia’s banking sector is showing signs of dynamism and confidence as several banks have recently issued bonds to raise funds from the market. The bond issues have been met with high demand and have allowed the banks to diversify their funding sources and extend their maturity profiles.
Why are banks issuing bonds?
One of the main reasons why banks are issuing bonds is to raise money over longer periods of time than through deposits, with redemption periods ranging from three to seven years. This helps the banks to match their assets and liabilities better and reduce their liquidity risk.
Another reason is to take advantage of the low interest rate environment and the favorable credit ratings of Estonia and its banks. Estonia has a sovereign rating of A+ from Standard & Poor’s and A1 from Moody’s, reflecting its strong fiscal position and economic resilience. The banks also enjoy high ratings from the international agencies, as well as from the local rating agency Creditinfo Eesti.
A third reason is to diversify their investor base and increase their visibility in the international markets. By issuing bonds, the banks can attract new investors who may not have access to their deposits or loans, such as institutional investors, pension funds, and foreign investors. The bond issues also help the banks to showcase their performance and strategy to a wider audience.
Which banks have issued bonds?
Several banks operating in Estonia have issued bonds in the past year, both in the local and the international markets. Some of the notable bond issues are:
- LHV Group, the largest domestic financial group in Estonia, issued a 7-year subordinated bond worth 25 million euros in November 2023. The bond has a fixed annual interest rate of 6.25% and is callable after five years. The bond was oversubscribed by more than four times and attracted investors from Estonia, Latvia, Lithuania, Finland, Sweden, and Germany.
- Swedbank, the largest bank in Estonia by assets and deposits, issued a 5-year senior unsecured bond worth 250 million euros in October 2023. The bond has a fixed annual interest rate of 0.125% and is eligible as minimum requirement for own funds and eligible liabilities (MREL). The bond was oversubscribed by more than three times and attracted investors from 20 countries, mainly from the Nordic and Baltic regions, as well as from Germany, France, and the UK.
- SEB, the second largest bank in Estonia by assets and deposits, issued a 3-year covered bond worth 500 million euros in September 2023. The bond has a fixed annual interest rate of 0.01% and is backed by a pool of residential mortgages originated by SEB in Estonia. The bond was oversubscribed by more than six times and attracted investors from 25 countries, mainly from the Nordic and Baltic regions, as well as from Germany, France, and the UK.
- Coop Pank, a cooperative bank with a focus on rural areas and small businesses, issued a 5-year subordinated bond worth 10 million euros in June 2023. The bond has a fixed annual interest rate of 6.5% and is callable after three years. The bond was oversubscribed by more than two times and attracted investors from Estonia, Latvia, Lithuania, Finland, and Sweden.
What are the benefits and challenges of bond issues?
The bond issues have brought several benefits to the Estonian banking sector, such as:
- Enhancing the financial stability and resilience of the banks by strengthening their capital and liquidity positions
- Supporting the growth and development of the banks by providing them with additional resources to expand their lending and offer new products and services to their customers
- Boosting the confidence and trust of the investors, regulators, and the public in the banks by demonstrating their soundness and transparency
- Developing the Estonian bond market and increasing its liquidity and depth by offering more investment opportunities and benchmarks to the market participants
However, the bond issues also pose some challenges and risks to the banks, such as:
- Increasing the cost and complexity of the banks’ funding and risk management by adding new instruments and obligations to their balance sheets
- Exposing the banks to market and credit risks by making them more sensitive to the changes in the interest rates, exchange rates, and the credit quality of the borrowers and the guarantors
- Facing the competition and regulation from the other banks and the authorities by entering new markets and segments and complying with new rules and standards
How will the bond market evolve in the future?
The Estonian bond market is expected to remain active and attractive in the future, as the banks and other issuers will continue to seek funding and diversification from the market. The demand for the bonds will also remain strong, as the investors will look for yield and safety in the low interest rate environment.
However, the bond market will also face some uncertainties and challenges, such as:
- The impact of the COVID-19 pandemic and its variants on the economic recovery and the financial stability of the region and the world
- The direction and timing of the monetary policy and the fiscal policy of the European Central Bank and the European Union
- The development and integration of the European banking union and the capital markets union and their implications for the Estonian banking sector and bond market
The Estonian bond market will need to adapt and innovate to cope with these changes and opportunities, and to contribute to the sustainable and inclusive growth of the Estonian economy and society.
