Press release - Meeting of the Governing Board of the Bank of Slovenia: Economic developments, bank performance

1. The Governing Board of the Bank of Slovenia discussed current supervisory matters.

2. The Governing Board of the Bank of Slovenia discussed the Summary of economic developments, August 2015, the July 2015 Inflation report and the Bulletin on fiscal consolidation in Slovenia.

The available monthly figures for the second quarter of this year point to a minor slowdown in economic growth, which should nevertheless outpace the euro area average. Growth remains mostly attributable to export growth, while the recovery in domestic demand remains very moderate with the exception of purchases of consumer durables (used housing). This has been reflected in a 12-month current account surplus, which at the end of the second quarter exceeded 7% of GDP for the first time, a sign of the imbalances in the structure of economic growth. Given its pronounced dependence on exports, the Slovenian economy is becoming increasingly sensitive to global economic fluctuations. The risks to growth have increased recently, as the economic situation has deteriorated in Russia, China and Brazil.
Public investment has strengthened in recent months, but this has not yet been reflected in construction activity, which declined significantly in the second quarter. The situation on the labour market is recovering, but numerous imbalances are still present. The number of registered unemployed fell below 110,000 in July for the first time since 2012, although long-term unemployment accounts for more than 54% of the total. The proportion of the unemployed with tertiary qualifications is also continuing to rise. The figure exceeded 17% in July, up approximately 7 percentage points on the figure before the outbreak of the crisis in 2008. At the same time, there has been a notable decline in wage growth in an environment of moderate deflation. It stood at 0.5% over the first half of the year. The growth in real wages and thus in purchasing power is increasingly attributable to growth in employment and falling prices. The deflation rate slowed by 0.2 percentage points to 0.7% in July. Energy prices fell even more sharply as a result of the fall in oil prices, but inflation in other product categories rose, at least temporarily. The slowdown in the fall in prices of non-energy industrial goods in particular could be attributable to the pass-through of the exchange rate into final consumer prices as a result of the ECB’s quantitative easing, but at this moment reliable assessments are not yet feasible.

3. The Governing Board of the Bank of Slovenia discussed the August 2015 report on the performance of the banks in the current year, developments on the capital market, and interest rates (Report in slov. language).

Demand for loans in the household segment also increased in the second quarter of 2015, after a long period of decline. The increased demand was reflected in an increase in new loans, and year-on-year growth in the stock of household loans turned positive in May, having been negative for three years. The changes in household demand were primarily the result of increased consumer confidence and falling interest rates, and also lower real estate prices in the housing market. According to the ECB’s regular survey of credit standards and demand for loans, the banks slightly eased their credit standards for household loans after a long period of no change, similar developments having been seen across the euro area since the beginning of 2014.
Growth in corporate lending remains negative, although the decline is slowing at the large domestic banks and the savings banks are recording positive growth. There has been increased corporate demand for loans since the beginning of last year, encouraged by economic growth and falling interest rates on bank loans. The banks are maintaining the credit standards for corporate lending at the levels previously reached.

As the spread between asset interest rates and liability interest rates narrows and the proportion of assets accounted for by lending declines, the banks are increasingly facing downward pressures on the net interest margin in the future. These include the maturing of a large part of the portfolio of debt securities in the coming years, which the banks will have to replace with lower-yielding investments. The possibilities of further reductions in liability interest rates are limited, partly because of the low levels currently reached, and partly because of the sharp reduction in the average maturity of deposits as low-yielding sight deposits have increased.

Bank profitability will be put under less pressure from impairment and provisioning costs than during the 2011 to 2013 period. The quality of the banks’ portfolio has remained stable since January: 11.6% of claims are more than 90 days in arrears. The nominal stock of claims in arrears declined by EUR 309 million over this period, most notably in the sectors of non-residents and non-financial corporations, although the impact of this decline on the proportion of claims in arrears was limited owing to the contraction in bank balance sheets. The improvement in the quality of claims against manufacturing firms is encouraging.

The banks generated a pre-tax profit of EUR 140 million in the first half of 2015.