The situation in the banking system remains good, while risks have increased

The situation in the banking system remains good, while risks have increased

The Bank of Slovenia finds that the situation in the banking system remains good, according to the latest information, even as risks have increased. The profitability of the Slovenian banking system increased again, while this year has also seen growth in the balance sheet total and bank lending activity. The quality of the credit portfolio is continuing to improve, most evidently in the corporate segment. The capital adequacy of the Slovenian banking system remains comparable to the euro area average. The Bank of Slovenia draws attention to increased risks: while economic growth gradually slows, the key challenge for the banking system remains generating stable income in the low interest rate environment.

Growth in the balance sheet total has increased this year: the year-on-year rate reached 4.3% in May, up 2 percentage points on the end of last year. On the funding side, the largest factor in the increase was deposits by the non-banking sector, household deposits in particular. On the investment side, the banks increased their loans and their other forms of liquid assets. Year-on-year growth in consumer loans remains high, at 12.2%, while growth in housing loans is moderate, albeit slowly increasing, at 5.1%. Growth in corporate loans remains relatively low, at 3%.

The quality of the credit portfolio is continuing to improve, most markedly in the corporate segment. The NPE ratio declined to 3.4% overall in May, and to 7.1% in the corporate segment. In the consumer loans segment, which is currently the fastest-growing, the NPE ratio remains low, at 2.6%. In light of the risk of the potential approval of larger loans at longer maturities without adequate collateral, the Bank of Slovenia is focusing particular attention on this very segment.

The banking system’s profit is continuing to increase. On the income side this was attributable to moderate growth in net interest income and an above-average increase in non-interest income, while the net release of impairments and provisions is also a significant factor. Pre-tax profit during the first five months of the year amounted to EUR 303 million, up 21% on the same period last year.

Figure: Selected bank performance indicators, %

Source: Bank of Slovenia

The capital adequacy of the banking system remained solid in the first quarter of 2019 (at 17.9%), and comparable to the level at the end of last year, when it was close to the euro area average. The Bank of Slovenia finds that capital adequacy varies considerably from bank to bank. The liquidity position of the Slovenian banking system remains good, which is being reflected in relatively high holdings of liquid assets at banks, and good liquidity ratios.

The Bank of Slovenia draws attention to the elevated macroeconomic risks, particularly on account of the uncertainties in the international environment. Growth in net interest income could slow again in the low interest rate environment, thereby increasing the pressure on bank profitability.

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