Latvia bank deposits to grow as cash leaves Cyprus, Moody’s says

Non-resident deposits in Latvia, which plans to adopt the euro in 2014, will swell as cash leaves Cyprus after the island’s bailout, according to Moody’s Investors Service.

Non-resident deposits, which make up almost half the Baltic nation’s total, rose 32 percent in the last two years, while domestic savings fell 2 percent, Moody’s said today in an e- mailed report. Instability in countries such as Russia and Cyprus may spur that trend as depositors turn to the European Union as a home for their cash, it said.

“We expect further deposit inflows into the Latvian system, which is stable by comparison, although we recognize such flows are currently limited by the capital controls,” London-based Moody’s analysts Richard B. Foster and Simon Harris wrote in the report, referring to restrictions on money flows from Cyprus.

Latvia has sought to quell concern about its non-resident banking industry after Cyprus, whose economy is about the same size, roiled markets with its rescue. Non-resident deposits, mostly from the former Soviet Union, have risen since 2002, when Latvia’s application to join the EU was approved.

Non-resident deposits are credit-negative for Latvian banks and lenders holding them need more sophisticated risk and liquidity management to guard against potential volatility, Moody’s said.

“We view non-resident deposits as less stable than their domestic counterparts because they lack strong ties with the host banking system and tend to be driven by unpredictable political trends,” it said.

Latvian non-resident deposits grew by 400 million euros ($527 million) in the first quarter, when 6.4 billion euros left Cyprus, Latvia’s bank regulator said today on its Twitter Inc. account.