Some time ago, the Bank of Latvia came out with its annual Financial Report, in which it has calculated both the number of companies that may be creditable – there are 25 thousand, and the possible level of financing – 2 billion euros. An incredible amount of funding, which would apparently give the Latvian economy a much needed boost.
These decisions from the Bank of Latvia provoked reflection, so together with the analysts of “SEB banka” we looked at the data available to us about the financial creators of Latvian companies to understand if and where the potential is loan that is hidden and why it has not been used until now? This analysis combined with daily observations in the bank, both here in Latvia and also with colleagues in Lithuania and Estonia, allowed us to reach an interesting insight into both the Latvian business and lending environment, which I will share in this article.
How many loan companies are there in Latvia?
Annual reports for the year 2022 have been submitted by less than 109 thousand companies (excluding property companies and companies in the financial sector), which we can consider as economically active companies and have we will examine in more detail in this study.
Out of the total number of companies, the annual turnover of 40% or 43 thousand companies does not reach 50 thousand euros. Such companies may be able to pay the average salary of Latvia for one employee, paying taxes as well, but their ability to obtain and repay loans is very low. limited. Almost 29,000 other companies have negative equity, which shows that the existing liabilities are higher than the value of the company’s assets, and here too there are no opportunities to take new loans.
But to be able to take on and repay credit obligations, it is not enough to achieve a certain turnover and equity above zero – the company must also be able to generate income generate regular free cash flow to repay loans and ensure an adequate equity ratio. and borrowed capital. We will assume that the criterion of a company that qualifies for credit is EBITDA (or the company’s profit before interest payments, taxes and depreciation allowances) of at least 10 thousand euros (on average over the last 3 years ), which would allow you to get a loan of up to 30 thousand euros. Almost 11 thousand other companies do not meet this criterion. In addition, the share of equity capital of another 3 thousand companies does not reach 30%, which already shows a high level of liabilities and limits the ability to borrow.
21 thousand companies meet the basic financial criteria and only a quarter of them, or 4.5 thousand, have already received loans from one of the commercial banks. It should be noted here that approximately 8,000 companies have received bank loans in Latvia – that is, 4,500 companies that meet the minimum financial criteria, and another 3,500 companies that have the financial condition to a weaker level. There are almost 17 thousand companies with good financing potential, but they didn’t want or couldn’t get loans. Looking for connections, we took a closer look at the data describing the size of the companies and the activity sectors.
Where to look for additional funding capacity?
Comparing the intensity of borrowing by sector, loans are actively used in the agriculture and forestry sector – more than half. There is also a high share of funded companies in the energy and various resources sectors, which are capital intensive and where state and municipal corporations are widely represented, but the total number of companies in these sectors is relatively small.
The least amount of credit is used by companies in the service sector, which rarely receive bank financing, regardless of their size. The details of the business should be taken into account here – usually small investments are needed in the long term and the circulation of money is very fast, which reduces the demand for loans.
From the traditionally capital-intensive industries with a large number of companies and employees, the construction industry should be highlighted, where 84% of companies, including large companies, are uncredited. About 1,600 companies with assets exceeding a billion euros and a turnover of almost 2 billion euros. The weak loan may be influenced by the high presence of the shadow economy (34,5%, A. Sauka, SSE Riga). The reputation of the business may have been damaged and creditors have been hampered by several scandals and legal proceedings in large procurements, as well as breaches of competition law.
A common feature in all sectors is weak credit, especially in the sector of smaller companies with a turnover of up to 1 million euros. There are also the most companies here – 15.5 thousand or 73% of the number of companies that deserve credit. There is no shortage of challenges here – local business models that limit growth, insufficient profitability for investments, shadow economy, tax debt, etc. grow The investment and lending potential in this sector of companies is certainly not exhausted.
And how big is the funding potential?
In order to estimate the unused financing potential, we made calculations, taking as an example the most active financed sector in Latvia – agriculture and forestry, where about half of the all bank financing companies. Assuming that only half of the companies eligible for credit in all sectors would be financed with equal intensity, about 6 thousand additional companies could be additionally financed – approx. twice as much as now. However, the majority of unfunded companies are relatively small and the level of funding would not increase so quickly – it would be around 1.5 billion euros.
Of course, this is a very theoretical calculation, so we looked at the intensity of the loan also in terms of productivity, i.e. by evaluating the amount of loans granted in each sector against the added value created by the sector and comparing it with the other. Baltic countries.
It is interesting that the intensity of lending in most regions is similar in the Baltics and compared to Lithuania we even lend here and there, but we are very different in one share. The real estate sector in Estonia is financed in the level of 125%, in Lithuania – 72%, and in Latvia it is only 47% of the total added value of the sector. By financing this sector only with the same intensity as Estonia, the loan portfolio of Latvian banks would be almost 3 billion more. In recent years, the development of new buildings in Latvia has been up to two times slower than its neighbors, a disorganized construction industry and lower purchasing power of the population have forced investors look more often towards Tallinn and Vilnius. We are also late with the implementation of building energy efficiency projects, especially in Riga.
On the other hand, comparing the Baltic countries with an economy like Germany, it is interesting to note that in Germany the total intensity of loans against the added value of the entire economy is 53% (in Latvia 19%), and in such regions. such as agriculture, real estate and energy the intensity of loans is even higher than the annual added value of the industry.
Loans are important, but they are only one of many sources of capital funding for business development. Equity capital, venture capital and institutional investment funds, capital raised on the stock exchange or acquired in merger transactions can also be a tool to achieve the company’s development goals.
2024-05-08 12:18:16
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