Economic environment remains favourable for bank performance

Amid moderate economic growth and further monetary policy measures to address high inflation, the economic environment remains favourable for bank performance and for their income generation. The banks have passed rising interest rates through into borrowing terms for the non-banking sector, while there has only been a small rise in the remuneration of deposits. This was reflected in high net interest income in the banking system over the first four months of this year. Given the continued increase in net interest income and the low creation of impairments and provisions, profit and ROE strengthened significantly and were up on their figures in the same period of 2022.

Slower growth in loans to the non-banking sector

Lending to the non-banking sector is slowing. Year-on-year growth in the loan stock slowed gradually over the first four months of the year, reaching 3.3% in April, but remains higher than the euro area average (2.4%). The largest declines in the contributions to growth compared with the end of last year were recorded by loans to other financial institutions and loans to non-financial corporations. Year-on-year growth in household loans also continued to slow, but at 5.5% in April, it remained significantly above the euro area average (2.5%). The slowdown was primarily attributable to a slowdown in new housing loans: year-on-year growth in the stock of housing loans had declined to 5.9% by April, although it was still almost double the rate in the euro area overall (3.0%). Current lending to households via consumer loans strengthened. The year-on-year rate of growth rose to 3.2%, outpacing the euro area average (2.9%) again after a long period of trailing.

Household deposits remain a robust source of bank funding

Deposits by the non-banking sector remain at high levels, but have declined slightly over the first four months of this year in all sectors other than households. Household deposits increased further, although the increase was significantly smaller than the increases over the same period of previous years (the year-on-year rate of growth had slowed to 6.2% by April), but they nevertheless remain a robust source of funding for Slovenian banks. The rise in interest rates on fixed-term deposits that is clearly evident in euro area countries is now being very slowly tracked by Slovenian banks, which is encouraging savers to fix more of their savings for longer terms.

Asset quality indicators are continuing to improve

The NPE ratio declined to its lowest level to date over the first four months of this year, at 1.0%. The most notable improvements were in sectors that suffered the greatest deterioration during the pandemic, most notably accommodation and food service activities, where the NPE ratio has begun to decline this year after rising for two and a half years, although it remains high. After reaching 15% at the end of last year, the NPE ratio had declined to 13.4% by April of this year.

Profit is up sharply on the same period last year

The banks have passed rising interest rates through into borrowing terms for the non-banking sector, while there has only been a small rise in the remuneration of deposits. Amid the further increase in net interest income over the first four months of this year, this was reflected in high gross income and net income in the banking system. Net impairments and provisions remained low, and accounted merely for just over 1% of the disposal of gross income. Pre-tax profit over the first four months of the year was up three-quarters (75.6%) on the same period last year. Given the rise in interest rates, there is an expectation of an increase in interest income, and thus in net interest, which is the main driver of the increase in profit.

The banking system’s capital position remains solid. The rise in capital ratios is attributable to a decline in risk-weighted assets and a rise in regulatory capital driven by retained earnings and smaller losses from securities revaluations. The banking system’s good liquidity also improved slightly further.

Publication Report on bank performance with commentary, April 2023, is available here.