Banka Slovenije will not extend the measure restricting profit distributions by banks and savings banks; the recommendation for leasing companies will also expire

Banka Slovenije has decided not to extend the macroprudential measure temporarily restricting profit distributions (until the end of September) by banks and savings banks during the adverse economic situation brought about by the Covid-19 epidemic. Banka Slovenije will continue monitoring the capital and dividend plans of banks and savings banks on an individual basis. Similarly, the recommendation for leasing companies will also expire at the end of September.

We nevertheless expect banks, savings banks and leasing companies to take a conservative approach and to act prudently, having regard for their individual circumstances. We emphasise that in planning their profit distributions banks and savings banks should not underestimate future risks, which remain high.

The macroprudential measure restricting profit distributions by banks and savings banks was adopted by Banka Slovenije in April of last year, in light of the huge economic and financial uncertainty during the Covid-19 epidemic. The recommendation to restrict profit distributions was extended to leasing companies one month later. The aim of the measures was increasing the resilience of the financial system to financial shocks, maintaining financial stability and preventing disruptions to the financial system. Banka Slovenije’s assessment is that the objective has been met, as the measures helped to conserve the capital of banks and leasing companies so that they were able to continue supplying credit and leasing to businesses and households.

According to the latest figures, the economic situation in Slovenia and the euro area improved in the first half of this year. The commercial banks have robust capital adequacy and high liquidity, and furthermore the current profitability indicators present a relatively favourable picture. This year’s stress tests showed the banking system able to withstand losses and maintain capital adequacy under the baseline scenario and adverse scenario alike.

The strength of the economy in the first half of this year was also reflected in an improvement in the performance of leasing companies, where the proportion of claims more than 90 days in arrears declined further. Despite a small downturn, leasing companies’ profitability remains positive, while their capital structure improved.

Banka Slovenije has stepped up its monitoring of the capital and dividend plans of banks and savings banks at the individual level as part of the regular supervisory review and evaluation process, which was also being conducted while the measure was in place. The supervisory review process encompasses periodic detailed monitoring of current capital adequacy, and of the planning for capital adequacy and capital structure. We also review the banks’ preparedness for less-frequent events that could have an impact on capital adequacy. Supervisory review also includes reviewing whether in its internal documents a bank adequately defines its own assessment of capital needs with regard to risks that it expects to take up in its activities.

Given the differences in the capital positions and resilience of individual banks, savings banks and leasing companies, our expectation is that they should continue to take a conservative approach to undertaking profit distributions, taking account of their own business circumstances and future risks.

Here we reiterate that there remain large risks in connection with the future evolution of the epidemic and its adverse impact on the economy, for which reason Banka Slovenije will continue monitoring the situation carefully, and will respond appropriately in the event of a significant increase in risks.