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OVERVIEW OF

FINANCIAL AND

CAPITAL

MARKET

Quarter 2 2019

OVERVIEW OF FINANCIAL AND CAPITAL MARKET

Quarter 2 2019

2

CONTENT

CONTENT ........................................................................................................................................................... 2

BANKS ................................................................................................................................................................ 3

COOPERATIVE CREDIT UNIONS ......................................................................................................................... 9

INSURERS ......................................................................................................................................................... 12

PAYMENT INSTITUTIONS AND ELECTRONIC MONEY INSTITUTIONS ............................................................... 15

STATE FUNDED PENSION SCHEME .................................................................................................................. 16

PRIVATE PENSION FUNDS ................................................................................................................................ 18

INVESTMENT FUNDS ....................................................................................................................................... 20

ALTERNATIVE INVESTMENT FUNDS ................................................................................................................ 22


Quarter 2 2019

3

BANKS

Key performance indicators

Q2 2018 Q1 2019 Q2 2019

Changes in the

reporting period

Number of market participants (banks and branches of EU banks)

15+6 14+6 14+6 -

Assets (billion euro) 24.3 22.2 21.9 ↓ Non-bank deposits (billion euro) 18.3 17.0 16.9 ↓ Non-bank gross loan portfolio (billion euro) 14.5 13.8 13.9 ↑ Non-performing loans (NPLs)1/total loan portfolio2;3, % 6.4 7.1 7.4 ↑ Loans past due more than 90 days/non-bank loan portfolio, %

4.3 4.0 4.0 -

Provisions/NPLs;3, % 32.1 33.3 32.0 ↓ Domestic loan portfolio/domestic deposits, % (household and non-financial corporations)

112.4 94.4 97.5 ↑

Return on Equity (ROE)2, % 9.7 11.5 9.9 ↓ Cost-to-income ratio (CIR)2, % 67.8 61.2 63.4 ↑ Common Equity Tier 1 capital ratio (CET1)2, % 20.1 21.2 20.2 ↓ Total Capital Ratio (TCR)2, % 22.4 23.6 22.6 ↓ Liquidity Coverage Ratio (LCR)2, % 270.5 307.2 308.1 ↑

For the second consecutive quarter, the total assets in the Latvian banking sector declined insignificantly. It was mainly influenced by a slight reduction in deposits (by 1.5%) in the banks focused on domestic customer service4. On the other hand, the banks that had previously focused on foreign customer service continued the transformation of their business models, and following a long-term decline in their loan portfolio, the amount of their loans increased slightly in the reporting quarter, with total assets remaining unchanged. This was mainly driven by an increase in lending directly to domestic and the EU customers, indicating that banks have been gradually putting the focus on lending domestic and EU customers.

In the reporting quarter, the amount of non-bank clients’ deposits of the banking sector slightly declined (by 82 million euro or 0.5%). The domestic deposits decreased by 95 million euro or 0.7%, as determined by a reduction in deposits of non-financial corporations (by 256 million euro or 5.6%), while household deposits continued to grow steadily (by 138 million euro or 1.9%). While the deposits of foreign customers remained practically unchanged (grew by 0.3% or 13 million euro), there was a significant increase in deposits of EU customers (by 159 million euro), while non-EU customers' deposits continued shrinking (by 146 million euro) and their share in total deposits during the quarter, also decreased (from 9.3% to 8.4%).

In the reporting quarter, a moderate trend of growth in the domestic non-bank clients’ loan portfolio was observed (0.8%), reaching 86.9% of the total non-bank clients’ loans at the end of June. The loan portfolio increased in the domestic non-financial corporations (by 1.2%) and domestic households' segment (by 0.6%), where growth was observed in housing lending (supported by the State aid programme for housing purchase), as well as activation of the consumer lending (increase by 3.8%). Sector-wise, the real estate and construction operations were the main contributors to the growth of the loan portfolio. The loan portfolio of foreign non-bank clients’ increased by 0.6% at the same time, driven

1 Loans which are more than 90 days past due or unlikely to be repaid in full 2 Ratios calculated according to The EBA methodological guide (www.eba.europa.eu) 3 Claims on the central bank and other credit institutions not included 4 Banks that over the last three years have allocated more than 50% of their loan portfolio to domestic customers and attracted more than 50% of their deposits from domestic customers


Quarter 2 2019

4

by the faster increase in lending to the other EU countries' clients (by 3.5%), while continued to fall (by 5.0%) for the ones from non-EU countries.

The share of NPLs in the non-bank clients’ loan portfolio increased slightly, reaching 7.4% at the end of June. In the loan portfolio of domestic non-financial corporations, the share of NPLs increased to 6.7% compared to 5.8% at the end of the previous quarter, along with the inclusion of individual large credit liabilities in the category of loans that are past due more than 90 days or with an indication of a borrower's inability to fully cover their liabilities. On the other hand, the improvement in the quality of the loan portfolio was observed in the segments of domestic household housing loans and consumer credit, with the share of NPLs in these portfolios falling to 3.9% and 3.3%, respectively. A slight decrease in the size and share of NPLs was also observed in the loan portfolio of foreign customers, reaching 392 million euro at the end of the quarter, or 21.1% of the respective portfolio (previously 400 million euro or 21.7%).

With the increase of NPLs in the domestic non-financial corporations’ segment, the coverage ratio declined slightly and at the end of June was 32.0%. Although the coverage ratio was below the EU average (45.1%), it remained at the level of risk corresponding to our region (EE – 25.8%, LT – 33.4%, FI – 27.0%, SE – 33.7%, NO – 29.9% and DK – 33.4% respectively), as confirmed by banks' historical loss margins and internal provisioning models (taking into account both - the existence and value of loan collateral and banking practices in taking over collateral and its realization).

In the first six months of 2019, the banking sector earned a total of 121.5 million euro, or 10.1% less than in the respective period of previous year and the ROE reached 9.9% at the end of June (EU average 6.8%). Most of the banks generated profits, including for 11 banks ROE ranged from 2.5% to 19.7%, while three banks focusing on foreign customers ended up the first half of the year with losses.

Operating income of domestic customer-focused banks did not change significantly in the first half of the year. Although during the first half of the year, with an upturn in loans to non-bank customers, net interest income increased by 0.6%, it did not offset the fall in net commission income (by 3.8%). Consequently, the operating income of these banks in general was 0.9% lower in the first half of the year than in the respective period of the previous year. At the same time, the administrative expenses of these banks continued to increase (by 1.6%) and CIR reached 57.4% at the end of June.

Whereas business volumes for other banks that are currently switching their business models continued to shrink, with a significant decline in operating income (38.6% compared to the respective period in the previous year). Until now, a drop in the banking income has been compensated by substantial cost-optimization measures, thus allowing the banks to significantly reduce their expenses (by 45.9%) during the year, but cost-optimization measures did not offset the decrease in operating income and the CIR of these banks continued to deteriorate reaching 82.8% at the end of reporting period, thus still significantly exceeding both the Latvian banking sector (63.4%) and the EU (66.3%) average.

Bank's capital and liquidity ratios remained high. As a result of the decision of some banks on the payment of dividends in the reporting quarter, Common Equity Tier 1 (CET1) capital reduced by 127 million euro or 6.3%. While risk-weighted assets (by 155 million euro or 1.6%) fell slightly at the same time, it did not compensate above capital reduction, which led to a slight decline in the capital ratios of the banking sector, i.e. the CET1 indicator – from 21.2% to 20.2%, while the total capital ratio (TCR) – ranged from 23.6% to 22.6%. Overall, the capital ratios of the Latvian banking sector remained at high levels, exceeding the EU average (CET1 – 14.5%, TCR – 18.9%) and providing sufficient buffers to cover losses. The average EU harmonized Liquidity Coverage Ratio (LCR) for the banking sector also remained consistently high, reaching 308% at the end of June, i.e. more than three times above the minimum requirement (since 1 January 2018 the minimum LCR requirement has been set at 100%).


Quarter 2 2019

5

Balance sheet structure

Asset structure, billion euro

Structure of non-bank clients’ loan portfolio at the end of

reporting period (%)

Non-bank clients’ loan portfolio (billion, euro)

Liability structure, billion euro

Structure of non-bank clients’ deposits at the end of

reporting period (%)

Non-bank clients’ deposits (billion, euro)

*General government and financial corporations

0

5

10

15

20

25

06-2018 09-2018 12-2018 03-2019 06-2019

Cash and claims to CB Claims to MFIs

Securities Loans

Other assets

45%

37%

13% Domestic non-financial corporations

Domestic households

Other domesticclients*

Foreign clients

01234567

06-2018 09-2018 12-2018 03-2019 06-2019

0

5

10

15

20

25

06-2018 09-2018 12-2018 03-2019 06-2019

Other liabilities Equity

Issued debt securities Non-bank clients deposits

Liabilities to MFIs

77%

14%

9%

Latvia

Other EU countries

Other countries

12.4 12.3 13.0 13.2 13.1

2.6 2.1 2.3 2.2 2.43.2

1.8 1.7 1.6 1.4

0

5

10

15

20

06-2018 09-2018 12-2018 03-2019 06-2019


Quarter 2 2019

6

Profitability

Profit structure, million euro

Cost-to-income ratio (CIR), %

ROE dispersion, % ROE, %

135122

-400

-300

-200

-100

0

100

200

300

400

500

06-2018 06-2019

Net otherincome/expenses

Impairment andprovisions

Administrativeexpenses

Net gains/losses fromFI

Net fees andcommissions

Net interest income

Profit/loss

67.8

63.4

50

55

60

65

70

75

-400

-300

-200

-100

0

100

200

300

400

500

06-2018 06-2019

Operating expenses

Operating income

Cost to income ratio (%; RHS)

-50

-40

-30

-20

-10

0

10

20

30

40

MAX

3rd quartile

Weighted average

1st quartile

MIN

9.9

0

2

4

6

8

10

12

06-2018 09-2018 12-2018 03-2019 06-2019

EU average


Quarter 2 2019

7

Capital adequacy and liquidity

Capital ratios, % LCR, %

CET1 ratio dispersion, % LCR dispersion, %

22.6

20.2

0

5

10

15

20

25

06-2018 09-2018 12-2018 03-2019 06-2019

Total Capital ratio (%) CET 1 ratio

CET 1 ratio (EU average)

308.1

0

100

200

300

400

06-2018 09-2018 12-2018 03-2019 06-2019

Minimum requirement

EU average

0

20

40

60

80

MAX

3rd quartile

Weighted average

1st quartile

MIN

0

200

400

600

800

1000

1200

1400

1600

1800

MAX

3rd quartile

Weighted average

1st quartile

MIN


Quarter 2 2019

8

Non-bank clients’ loan portfolio quality

NPLs structure, % NPLs (respective segment, %)

Dispersion of NPLs, % NPLs, collateral and provisions for NPLs, million euro

* Provisions for non-performing loans **Calculated for the entire portfolio in accordance with the EBA methodological guide, including claims on the central bank and credit institutions

2.3 2.6 2.5 2.8 2.7

1.01.2

0.80.8 0.8

1.0 0.50.7 0.4 0.5

4.3 4.03.5 3.1 3.4

0

2

4

6

8

10

06-2018 09-2018 12-2018 03-2019 06-2019

Over 1 year overdue 180 days - 1 year ovedue

90-180 days ovedue Unlikely to pay

21.1

6.7

3.9

5.1

0

5

10

15

20

25

06-2018 09-2018 12-2018 03-2019 06-2019

Foreign clients

Domestic NFCs

Domestic households' mortgage loans

Domestic households' other

0

10

20

30

40

50

60

70

80

Weightedaverage

20

25

30

35

40

45

50

0

200

400

600

800

1000

1200

1400

06-2018 09-2018 12-2018 03-2019 06-2019

Provisions*CollateralNPLsCoverage ratio (%, RHS)Coverage ratio EU average** (%, RHS)

MAX 3rd quartile 1st quartile MIN


Quarter 2 2019

9

COOPERATIVE CREDIT UNIONS


H1 2018 H2 2018 H1 2019

Changes in the reporting period

Number of market participants 33 34 35 ↑

Market concentration5, % 84.7 84.4 84.2 ↓

Assets (million euro) 30.4 31.6 32.8 ↑

Deposits (million euro) 21.6 22.3 23.8 ↑

Loans (million euro) 23.5 23.6 24.3 ↑

Non-performing loans (NPLs)6/total loans, % 4.4 13.5 14.9 ↑

Provisions/total loans, % 5.4 6.3 6.7 ↑ Return on Equity (ROE), % 20.2 11.7 3.8 ↓ Capital Adequacy Ratio, % 22.6 22.7 20.6 ↓

In the first half of 2019, one credit union operating licence was issued – to the cooperative credit union "Ziemeļvidzeme", which was founded according to territorial principle and had not yet commenced its activity by the end of June.

The total increase in assets of cooperative credit unions continued to grow steadily – by 3.7%, or 1.2 million euro in the first half of the year, reaching 32.8 million euro at the end of June. The increase in assets was mainly due to members' deposits, which grew by 6.6% during the first half of the year and reached 23.8 million euro, with the majority or 89% of household deposits. Members' deposits were the largest source of funds raised by credit unions (99%).

The amount of loans to the members continued to increase – growing by 0.7 million euro, or 2.9% in the first six months of the year, and reaching 24.3 million euro at the end of June. The increase in the loan portfolio was driven by consumer lending and lending for house purchase, i.e. the main types of loans in loan portfolio (42.7% and 47.4%, respectively). Approximately 99% of loan portfolio was granted to households.

The quality of loan portfolio did not show any positive trends during the reporting period. Though the share of standard loans in the total loan portfolio continued to rise (from 76.8% to 81.6%), the share of non-performing loans (NPL) also increased (from 13.5% to 14.9%), following a transfer of part of the close-watch loans to the non-performing loan category (sub-standard) mainly affected by the deterioration in the quality of consumer loan portfolio of one cooperative credit union. The amount of loan loss provisions for cooperative credit unions increased slightly overall and at the end of June made up 6.7% of the total loan portfolio (or 45% of NPLs).

The profitability of cooperative credit unions declined – the amount of income generated in the first half of the year (compared to the corresponding period of the previous year) shrank by almost 40%, including income from a decrease in provisions – by nearly 71%, interest income – by 18% and commission income – by 48%. At the same time, expenses dwindled to a considerably lesser extent (by 20%), resulting in a deterioration in the profitability of cooperative credit unions, with ROE reaching 3.8% at the end of June. Since the beginning of the year cooperative credit unions earned a total of 129 thousand euro, most of them profiting, i.e. 22 (of a total of 34) in total earning 140.2 thousand euro.

All operating cooperative credit unions had capital adequacy ratio above the required minimum capital adequacy requirement (10%) and the cooperative credit unions' total own funds ratio to the total assets and off-balance sheet items, i.e. capital adequacy ratio at the end of June was 20.6%.

5 Three largest cooperative credit unions in terms of assets 6 Total substandard, doubtful and lost credits


Quarter 2 2019

10

Balance sheet structure

Asset structure, million euro

Structure of loan portfolio at the end of reporting period (%)

Loan portfolio (million euro)

Liability structure, million euro

Deposit structure at the end of reporting period (%)

Deposits (million euro)

0

5

10

15

20

25

30

35

06-2018 12-2018 06-2019

Loans Claims to MFIs

Debt securities Other assets

Cash and claims to CB

42.7

47.4

12.5 Consumer loans

Loans for housepurchase

Other loans

0

5

10

15

06-2018 09-2018 12-2018 03-2019 06-2019

0

5

10

15

20

25

30

35

06-2018 12-2018 06-2019

Deposits Equity

Provisions Liabilities to MFIs

Other liabilities

2%

89%

9%Private non - financialcorporations

Households

Non-profit institutionsserving households

19 20 21

2 22

0

5

10

15

20

25

06-2019 12-2018 06-2019


Quarter 2 2019

11

Profitability

Profit structure, thousand euro

Return on Equity (ROE), %

Loan portfolio quality

Credit quality, million euro Loans past due more than 90 days

(in respective segment)**, %

*Total substandard, doubtful and lost loans **Data source: Credit Register of the Bank of Latvia

665

129

- 600

- 300

0

300

600

900

1 200

1 500

06-2018 06-2019

Other income

Net gains/losses fromfinancial instruments

Net expenses for loanloss provisions

Administrativeexpenses

Net fees andcommissions

Net interest income

Profit/ Loss

20.2

3.8

0

3

6

9

12

15

18

21

24

06-2018 06-2019

6.7

0.0

3.0

6.0

9.0

12.0

15.0

0

5

10

15

20

25

06-2018 12-2018 06-2019

Tho

usa

nd

s

Non-performing loans*

Close-watch loans

Standart loans

Provisions / loans (%; RHS)

0

5

10

15

20

25

30

35

06-2018 09-2018 12-2018 03-2019 06-2019

Consumer loans

Loans for house purchase

Other loans


Quarter 2 2019

12

INSURERS


Q2 2018 Q1 2019 Q2 2019 Changes in the

reporting period

Number of market participants (companies and EU insurers branches)

6+11 6+12 6+12 -

Gross premiums written since the beginning of the year (million euro)

385.8 208.0 393.3 ↑

Gross claims paid since the beginning of the year (million euro)

199.6 120.7 267.4 ↑

Loss ratio, % 62.8 66.2 65.7 ↓ Expenses ratio, % 35.0 30.4 29.6 ↓ Combined ratio7, % 97.8 96.7 95.2 ↓ Return on investment, % 0.3 0.4 2.3 ↑ Solvency ratio8, % 131.9 129 136 ↑

In the first half of 2019, the total gross premiums written by insurers increased by 2% compared to the corresponding period of the previous year, reaching 393.3 million euro. The premiums written in Latvia made up a major part - 70.4% (increasing by 7.5%), while insurers' activity in other European Economic Area (EEA) member states (mainly Lithuania, Poland and Estonia) shrank (by 9.3%), falling below the level of premiums written in the two quarters of the previous year.

In the overall portfolio of premiums written, the largest share was for transport insurance (land vehicle insurance, motor vehicle liability insurance and motor vehicle liability compulsory insurance (MVLCI)) amounting to 47.6%, or 187.1 million euro, where almost all civil liability insurance premiums for land vehicle owners were signed in other EEA member states. In Latvia, the most important classes of insurance were health insurance (20.3%), MVLCI (19.3%) and life insurance (19.7%).

The profitability of insurance companies improved and since the beginning of the year they earned a total of 15.4 million euro. In particular, successful investment activity contributed to the profits of life insurance companies (1.9 million euro), as opposed to last year's losses (-1.3 million euro). At the same time, the profits of non-life insurance companies amounted to 13.4 million euro (mainly operating income).

The combined ratio improved slightly during the reporting period and reached 95.2%, including the figure below 100% for all non-life insurance companies (except one company). A decrease in customer attracting costs (including insurance commissions) mainly resulted in an improvement in the combined ratio.

For all insurance companies, the return on investment was positive (ranging from 0.5% to 7.3%). The positive trends in financial markets since the beginning of the year had a positive effect on all insurance companies. The high-risk investment policy pursued by life insurance companies (more than a half of contributions made in investment funds and shares) resulted in higher yields (6.4%), while the conservative investment policies of non-life insurance companies (more than half of investment in debt securities) resulted in a lower yield (1.0%).

The average solvency ratio of insurance companies (136.1%) remained stable above the minimum requirement in the reporting quarter (the lowest permitted margin is 100%), including for life insurance companies – 130.3% and non-life insurance companies – 136.9%.

7 A combined ratio above 100% indicates losses from the non-life insurance activities (excluding investment income) 8 Solvency capital requirement ratio (%) = Eligible own funds for the solvency capital requirement/Solvency capital requirement


Quarter 2 2019

13

Premiums written

Gross premiums written by insurers, million euro Gross premiums written by insurers by type of insurance, million euro

*Motor vehicle liability compulsory insurance

Profitability and solvency

Combined ratio of non-life insurance companies, % Solvency ratio of insurance companies, %

258277

0

50

100

150

200

250

300

350

400

450

6m 2018 6m 2019

Life insurers' premiums

Non - life insurers' premiums

Latvian premiums 0 20 40 60 80

Other

Suretyship

Assistance

Accident

General liability

Life

MVLCI*

Property

Land vehicle

Health

Motor vehicle liability

Thousands

6m 2019

6m 2018

96.0 95.2

0

20

40

60

80

100

120

0

20

40

60

80

100

120

06-2018 06-2019

Loss ratio, net Expenses ratio, net

Combined ratio

132 136

0

50

100

150

200

250

300

0

20

40

60

80

100

120

140

160

180

200

06-2018 06-2019

Eligible own funds for the solvency capital requirement,mln. euroSolvency capital requirement, mln. euro

Average solvency capital requirement ratio (%; RHS)


Quarter 2 2019

14

Insurance companies – Return on investments, %

Insurance companies – Profit/loss, thousand euro

Non-life insurance companies – Combined ratio, %

Insurance companies – Solvency ratio, %

-2

-1

0

1

2

3

4

5

MAX

3rd quartile

1st quartile

MIN

Weightedaverage

-6 000

-4 000

-2 000

0

2 000

4 000

6 000

8 000

10 000

MAX

3rd quartile

1st quartile

MIN

80

85

90

95

100

105

110

115

MAX

3rd quartile

1st quartile

MIN

Weightedaverage

100

110

120

130

140

150

160

170

MAX

3rd quartile

1st quartile

MIN

Weightedaverage


Quarter 2 2019

15

PAYMENT INSTITUTIONS AND ELECTRONIC MONEY INSTITUTIONS


H1 2018 H2 2018 H1 2019 Changes in the

reporting period

Number of market participants Payment institutions Electronic money institutions

20 13

15 13

12 11

↓ ↓

Amount of payments since the beginning of the year (million euro):

Payment institutions Electronic money institutions

62.1 58.1

121.9 104.2

67.2 27.2

↑ ↓

Amount of electronic money repurchased since the beginning of the year (million euro)

16.6 29.3 9.6 ↓

Changes to the regulatory framework for the licensing of payment institutions and electronic money institutions defined in the previous year9 continued to have an impact on the reduction in the number of payment institutions and electronic money institutions. At the end of June 2019, 12 payment institutions were operating in Latvia (including 9 registered and 3 licensed) and 11 electronic money institutions (including 9 registered and 2 licensed).

The sector of payment institutions and electronic money institutions continued to narrow. The total volume of liquid assets in the sector (funds for execution of customer payments) shrank, reaching 10.9 million euro at the end of June (including claims for the provision of payment services – 7.1 million euro), but it still covered liabilities to customers (10.5 million euro), including obligations towards payment service users (6.8 million euro).

During the first half of the year, the total amount of electronic money repurchased by electronic money institutions (i.e. the exchange of issued electronic money to cash) also decreased significantly, reaching 9.6 million euro at the end of June, or by 42% less than in the corresponding period of previous year.

Gross revenues generated during the first six months of the year, related to the provision of services by payment institutions and electronic money institutions10 totalled 4.8 million euro, representing the majority or 68% of income from payment services.

Activities of payment institutions and electronic money institutions

Amount of payments, million euro Amount of electronic money repurchased, million euro

9 Changes to the licensing and registration regime provided for stricter requirements for the registration of institutions, at the same time requiring the re-registration of existing market participants. 10 i.e. within the framework of the provision of payment services and electronic money services

0

10

20

30

40

50

60

70

80

06-2018 06-2019 06-2018 06-2019

Payment institutions Electronic moneyinstitutions

0

2

4

6

8

10

12

14

16

18

06-2018 06-2019

Electronic money institutions


Quarter 2 2019

16

STATE FUNDED PENSION SCHEME


Q2 2018 Q1 2019 Q2 2019 Changes in

the reporting period

Number of assets managers 9 8 8 - Number of investment plans 31 31 31 - Number of participants 1 278 477 1 290 458 1 289 154 ↓ Net assets (billion euro) 3.5 3.9 4.1 ↑ Returns since the beginning of the year, % -0.8 5.0 7.1 ↑ Management expenses, % 0.7 0.5 0.5 -

In the reporting quarter, a number of asset managers announced the application of the principles of sustainability for investment, with a further focus on the environmental, social and corporate governance aspects of investment. In May, a new investment plan was launched, planning to focus on companies – sustainable business leaders in their sector, while two investment plans merged, thus there were 31 investment plans at the end of June.

The accumulated pension capital continued to grow, reaching 4.1 billion euro at the end of June. Since the beginning of the year the pension capital accumulated in investment plans increased by 14.5%, or 519.8 million euro. Of all new contributions, 63.5% were made in active plans and 21% – in conservative plans.

All investment plans posted positive returns since the beginning of the year and their results demonstrated the financial market trends that were favourable to both stock and bond markets. Financial markets reacted positively to progress in the US-China trade negotiations, as well as to Central Banks’ statements related to the monetary policy. In the reporting quarter, the returns of conservative plans ranged between 2.1% and 5.6%, of balanced plans– from 5.6% to 6.9%, while of active plans – from 5.2% to 15.1%.

Investment plan management expenses did not change considerably – for all types of investment plans, i.e. conservative, balanced and active the ratio of management expenses to net assets remained at 0.5%.

Investment policy of investment plans generally remained conservative, but the trend to invest more in potentially higher-yielding financial instruments continued. The share of debt securities decreased in the total investment plan portfolio, while the share of investment fund shares increased, reaching 53.1% at the end of June (including 50% focused on equity securities and 43% – on fixed income instruments). Debt securities made up the second largest share in the total investment portfolio (37.6%), and 61% of these were securities issued or guaranteed by the government, the proportion of which tended to decline, i.e. the share of debt securities issued by commercial companies was increasing. At the end June, 80.9% of debt securities had an investment-grade credit rating, which was slightly more than at the end of March.

The share of investments made in Latvia continued to fall – new investments were mainly made outside Latvia. At the end of June, the amount of investments made in Latvia amounted to 668.5 million euro, or 16.2% of total investment (including 294.3 million euro invested in securities issued or guaranteed by the government, 75.1 million euro in corporate debt securities, 3.5 million euro in shares, 37.2 million euro in investment funds, 28 million euro in venture capital market in Latvia, while 230.2 million euro were placed in credit institutions). Of total foreign investments, 93% were placed in the EEA member states, with the largest part in Ireland, Luxembourg and Lithuania.


Quarter 2 2019

17

Management of state funded pension scheme funds

Net assets, million euro Contributions to investment plans since the beginning of the year (million euro)

Returns of investment plans since the beginning of the year (%)

Management expenses (annualized,% of net assets)

Structure of investment portfolio by financial instruments and groups of countries ** (%)

Breakdown of debt securities by rating*

Investment fund shares by focus of their investment*

*30.06.2019, data source: Bloomberg ** by the country of issuer's registration

500

1000

1500

2000

2500

3000

06-2018 09-2018 12-2018 03-2019 06-2019

Conservative Balanced Active

96

70289

Conservative

Balanced

Active

0

5

10

15 max

3rd quartile

1st quartile

min

Weighted average (by netassets)

0

0.5

1

1.5

2

06-2018 09-2018 12-2018 03-2019 06-2019

Conservative plans Balanced plans

Active plans

0%

20%

40%

60%

80%

100%

06-2018 09-2018 12-2018 03-2019 06-2019

Deposits and claims to credit institutionsRisk capitalInvestment fund sharesSharesDebt securities

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Equity Fixed income Other


Quarter 2 2019

18

PRIVATE PENSION FUNDS



reporting period

Number of pension funds 6 6 6 - Number of pension plans 18 18 17 ↓ Number of members 294 434 309 057 314 249 ↑ Net assets (million euro) 448.3 491.9 511.6 ↑ Returns since the beginning of the year, % -1.1 4.9 6.9 ↑ Administrative and management expenses, % 1.4 1.1 1.2 ↑

In the reporting quarter, two pension plans were merged, thus there were 17 pension plans operating at the end of June.

The activity of both individuals and employers in relation to making contributions to the 3rd pillar of the pension system continued to increase. Since the beginning of the year, a total of 38.5 million euro was contributed to pension plans, i.e. by 19.4% more than during the corresponding period of the previous year. Individuals’ contributions grew by 8.3%, employers' contributions by 5%, while a significant increase in total contributions was due to the inclusion of solidarity tax share for 2018 in the 3rd pension pillar. Total capital accumulated in pension plans reached 511.6 million euro at the end of June, increasing by 10.9% since the beginning of the year. The number of members in private pension plans also increased rapidly, reaching 32.5% of Latvia's economically active population at the end of June.

Positive trends in financial markets were also reflected in the performance of pension plans and the average returns of pension plans in the first half of 2019 was 6.9% (for individual plans ranging from 0.2% to 13.1%).

For private pension plans, the level of management expenses was similar to that in the previous quarter: the ratio of administrative expenses and investment management expenses to net assets at the end of June was 1.2%.

The investment structure of private pension plans did not change significantly during the quarter. More than half, or 54.3% of investment portfolio of pension plans, consisted of investment fund shares (including 52% focused on equity investment and 43% on investment in fixed-income instruments). Compared to the end of 2018, the share of investment fund shares and claims to credit institutions increased slightly, while the share of debt securities declined slightly, reaching 35.5% at the end of June. The structure of debt securities followed an upward trend in the share of debt securities issued by commercial companies, reaching 45.6% at the end of June. At the end of reporting quarter, 80.3% of debt securities had an investment-grade credit rating.

There has been a declining trend in investments made in Latvia. At the end of June, 91 million euro were invested in Latvia, and the share of the investments in the total portfolio was 17.8% (compared to 19% at the end of 2018). Of total investments, 79.4% were made in other EEA countries.


Quarter 2 2019

19

Performance of private pension funds

Net assets, million euro Contributions to pension plans, million euro

Returns of pension plans since the beginning of the year (%) Administration and management expenses (annualized, % of net assets)

Structure of investment portfolio by financial instruments and groups of countries ** (%)


Investment fund shares by focus of their investment *

*30.06.2019, data source: Bloomberg ** by the country of issuer's registration

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0% 20% 40% 60% 80% 100%Equity Fixed income Other


Quarter 2 2019

20

INVESTMENT FUNDS



reporting period

Number of investment management companies 12 11 11 - Number of investment funds 26 24 24 - Investment fund assets (million euro) 213.7 216.2 220.6 ↑ Returns since the beginning of the year, % bond funds -1.8 5.9 8.5 ↑ mixed funds -0.8 7.5 9.4 ↑ equity funds -0.2 12.7 16.6 ↑ Management expenses, % bond funds 1.3 1.3 1.3 - mixed funds 1.6 1.4 1.4 - equity funds 2.0 1.9 1.9 -

In the first half of 2019, financial markets recovered from large previous-year drops and investment funds' assets grew by 8.6%, reaching 220.6 million euro at the end of June. Since the beginning of the year, assets of bond funds grew by 7.3%, assets of mixed funds – by 20.7%, while equity funds’ assets - by 10.4%.

All investment funds posted positive returns since the beginning of the year, demonstrating favourable trends in the financial markets. Bond and stock markets responded positively to signals given by central banks regarding their planned monetary policy. Significant price increases on stock markets were also driven by progress in the US-China trade negotiations: European, US and global stock indexes ended the first half of the year with a double-digit rise in percentage terms. The six-month returns of bond funds ranged from 3.5% to 15.4%, of mixed funds – from 8.5% to 10.7%, while of equity funds – from 9.4% to 25.7%.

Investment policy of investment funds was focused on corporate debt securities in the high-yield/high-risk segment. In the investment fund sector, the largest market share was covered by bond funds, thus debt securities (83.4%), of which 69.9% were rated below investment grade level (i.e. below BBB-) or unrated, also dominated in the total securities portfolio. Investment fund shares (most of which focused on equity securities), as well as shares and other variable-yield securities represented 13.2% and 3.4%, respectively, in the total portfolio.

There were no major changes to the geographical allocation of the portfolio of investment funds in the reporting quarter. The share of investments in the EEA countries declined slightly, reaching 44.5% of total investment at the end of June, while the share of investments in the CIS countries remained practically unchanged at 8% and the share of investments in other countries slightly climbed, reaching 46.9%.


Quarter 2 2019

21

Performance of investment funds

Assets, million euro Returns by type of fund since the beginning of the year (%)

Structure of investment portfolio by financial instruments and groups of countries** (%)


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*30.06.2019, data source: Bloomberg **by the country of issuer's registration

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Equities

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International financial institutions

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Quarter 2 2019

22

ALTERNATIVE INVESTMENT FUNDS



reporting period

Number of fund managers 17 20 20 - Number of funds 21 29 29 - Fund assets (million euro) 138.1 186.7 189.5 ↑ Fund returns since the beginning of the year, % 4.8 1.9 1.8 ↓

In the reporting quarter, the assets of alternative investment funds continued to grow. Since the beginning of the year, total assets of alternative investment funds increased by 9.1%, reaching 189.5 million euro at the end of June. The assets of real estate investment strategy funds increased by 0.3%, reaching 55.9 million euro at the end of the reporting quarter. Due to new investments in companies, the assets of private equity investment strategy funds increased by 13.2%, reaching 133.7 million euro at the end of June.

Alternative investment funds invested mainly in equity. The majority of the total assets of alternative funds consisted of equity (143.2 million euro) and loans (25.5 million euro).

Alternative investment funds focused on domestic market investment, but its share tends to shrink. At the end of June, 67% of alternative fund assets were invested in Latvia, 23% in Estonia and 10% in Lithuania (72%, 14% and 14%, respectively, at the end of 2018).

Assets, million euro Assets by country at the end of the reporting period, %

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Other assets

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Equity

66.9

22.7

10.1

0.3

Latvia Estonia

Lithuania Other countries

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