Financial system is stable; cooling of the economy an insecurities are increasing some systemic risks

The financial system in Slovenia is stable, according to the Bank of Slovenia’s latest Financial Stability Review. Key systemic risks are increasing, primarily on account of the cooling economy and the uncertainties in the international environment. This has led to elevated income risk, as the conditions for achieving and maintaining profitability worsen. The risk inherent in the real estate market remains elevated, but is diminishing as growth in real estate prices slows. The adoption of macroprudential measures has reduced credit risk in household lending. Other risks remain moderate. The results of a bank survey are also presented in the report. These reveal that banks are increasing their funding for developing new products and services based on fintech, and are also aware of the importance of sustainability and climate risks.

The uncertainties in the international environment are increasing, which is also being reflected in weaker growth in the Slovenian economy. In the low interest rate environment, this in increasing the banking system’s income risk. Bank profitability will thus increasingly depend above all on the volume of lending.

The risk inherent in the real estate market remains elevated, but is diminishing as growth in real estate prices slows. Growth in housing loans remains moderate and stable, and the banking system’s exposure to construction is low.

Credit risk in the banking system is assessed as low, largely as a result of the successful reduction of non-performing loans in recent years. The consumer loan segment did represent a significant source of risk, but the adoption of binding macroprudential measures in the area of household lending has reduced these risks. Consumer loans constitute a smaller proportion of the banks’ credit portfolio, but their high growth in recent years means that they have risen rapidly in importance. The actual quality of the recently raised loans will only be evident when the economy cools.

The banking system’s capital adequacy is relatively good, although generating profits will become more challenging for the banks as economic growth slows. Sensible profit distribution will be important for the banks in the future, particularly at banks with low capital surpluses. There is significant variation from bank to bank with regard to their capital and liquidity positions. 

Table 1: Bank of Slovenia’s overview of risks to the Slovenian banking system

Source: Bank of Slovenia

Bank of Slovenia survey

The Bank of Slovenia has conducted a survey of banks with regard to the future challenges awaiting this segment of financial service providers. The majority of banks are already facing competitive pressure from fintech firms, which is now impacting their business models. Banks are entering into commercial partnerships, and are earmarking more and more funds for developing new products and services based on fintech. In so doing they are primarily focusing on established technologies.

The survey also showed that banks are aware of the importance of sustainability and the existence of climate risks, but for the moment are addressing them more in principle than in practice. As climate change becomes more urgent, progress will need to be faster in this area, particularly in sustainable financing.

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