Reduced bank profitability due to Estonia's central bank lowering interest rates.
Estonian Banks' Profitability Returns to Pre-Interest Rate Rise Levels
The profitability of commercial banks in Estonia has returned to pre-interest rate rise levels, according to the latest financial reports. The net profit of Estonian commercial banks was 146 million euros in Q2 2025, slightly higher than in Q2 2024, despite a 23% drop in profit before income tax.
The primary reason for the reduced profitability was the fall in Euribor, which reduced banks' interest income faster than funding costs decreased. This led to a decrease in interest income earned on loans, which was more than the reduction in banks' funding costs.
Despite the reduced profitability, the sector profit in Q2 2025 was about a quarter smaller than last year, mainly due to the large dividends paid out last year and the related income tax payments. The profit-to-asset ratio dropped to 1.3% in Q2 2025, aligning with the average over the past decade and roughly where it was before the rapid rise in interest rates began.
The growth in corporate borrowing in Estonia was led by long-term investment loans, particularly in real estate and infrastructure. The stock of corporate loans in Estonia increased by 8.5 percent by the end of June 2025 compared to the previous year. Similarly, the stock of housing loans in Estonia increased by 10 percent by the end of June 2025 compared to the previous year.
However, the growth in shorter-term loans and consumer loans in Estonia has remained quite moderate compared to the growth in housing loans. There was a small decline in short-term operating loans with maturity of less than one year in Estonia.
The rise in VAT at the start of July gave a temporary boost to the growth in housing loans in Estonia. Other contextual factors include the large dividends paid out previously, which reduced this year’s apparent profits, and the decline in Euribor, which lowered banks' interest income on loans.
In conclusion, the decline in Euribor negatively impacted interest income, but the overall net profitability, accounting for dividends and taxes, returned to levels seen before the interest rate rise period. This shows that the Estonian banking sector has adapted to the changing economic conditions and continues to support the growth of the Estonian economy.
[1] Source: Estonian Financial Supervision Authority [2] Source: Bigbank's Q2 2025 financial report
The Estonian banking sector's net profit, despite a 23% drop in profit before income tax in Q2 2025, returned to pre-interest rate rise levels, contributing significantly to the overall finance of the sector. This return in profitability is a testament to the businesses' ability to adapt to the changing economic conditions and continue supporting the growth of the Estonian economy.
The growth in the Estonian corporate sector has been notable, particularly in sectors such as real estate and infrastructure, as evidenced by the rise in long-term investment loans. These loan increases have been a significant factor in the ongoing business activities within the country.
