Companies lose their taste for credit

WHILE the Slovak corporate sector is in relatively good financial health, its solvency is deteriorating, reducing companies’ appetite for new loans.

“Since the beginning of the year we have been registering a rapid worsening of the solvency of Slovak companies,” Peter Makovický, executive officer of Exekučná, a debt-recovery company, told The Slovak Spectator. “While in the past small and medium-sized enterprises in particular had payment problems, nowadays the secondary insolvency of large companies is nothing special.”

Makovický specified that the situation of companies doing business in the construction sector, in which overdue claims are holding back the entire sector, is worst.

Corporate loans

Households owed banks €16.4 billion at the end of 2011, while the volume of loans provided to non-financial institutions, i.e. companies, amounted to €15.5 billion, Poštová Banka calculated, using data from the National Bank of Slovakia.

Eva Sadovská, an analyst with Poštová Banka, explained to The Slovak Spectator that the global economic crisis, whose impacts Slovakia’s economy started to feel from the autumn of 2008 onwards, did not leave banks unmoved. They became even more prudent and cautious when providing loans.

“While during the pre-crisis year of 2007 banks showed a ‘red card’ to only 4 percent of loan applications submitted by SMEs, in 2010 this figure jumped to 9 percent,” Sadovská said, citing data from Eurostat. “The prevailing problems of companies continue to be mirrored in the still-high share of failed loans, which did not fall below 8 percent in 2010 and 2011.”

Ľubomír Koršňák, senior analyst at UniCredit Bank Slovakia, told The Slovak Spectator, that the volume of failed loans by non-financial companies in Slovakia hovers around 7 to 8 percent, and stood at 7.6 percent in January. Slovakia registered the highest volume of failed loans in October 2010, when they accounted for 8.2 percent. Before the crisis the figure was only around 2.5-3 percent.

“However, the growth in failed loans has already stopped,” Koršňák told The Slovak Spectator. “The still relatively high volume of failed loans by non-financial companies in the Slovak banking sector is a consequence in particular of loans which failed during previous years still being on banks’ books.”

Despite the tougher conditions being set down by banks, the aggregate volume of loans provided to companies increased by 7 percent, or €1.012 billion, to €15.5 billion between 2009 and 2011.

Poštová Banka specified that merchants (retail, wholesale and repair of motor vehicles) made up the biggest share of loans, nearing €3.3 billion in 2011, an increase of €18 million or 0.6 percent from 2009, followed by industry with €2.9 billion, a decrease of 5.3 percent compared with 2009. Real estate and activities within the real estate sector was the third-most indebted sector, owing banks almost €2.8 billion, an increase of 8.4 percent since 2009. The sectors of electricity, gas, steam and cold air supply also proved hugely loan-hungry, with their aggregate loan book swelling 164 percent between 2009 and 2011, a rise of €878 million to €1.4 billion.

On the other hand, aggregate loans decreased the most in the sectors of mining, down 22.7 percent – or €16 million – to €56 million, and construction, down 13.1 percent – or €138 million – to €919 million.

During 2012 credit extended to households increased while that granted to businesses shrank. Loans to households were up by 9 percent, but loans to corporations fell by 3 percent compared to the previous year, the Trend economic weekly reported in early February.

Slovakia’s corporate sector remains one of the least indebted in the eurozone.

Slovak private debt as a percentage of its annual GDP amounted to 76.3 percent in 2011, Vladimír Vaňo, senior analyst at Sberbank Slovensko, told The Slovak Spectator, citing the most recent Eurostat statistics. Only Romania (71.1 percent of GDP) and Lithuania (66.6 percent of GDP) had lower relative levels of private debt within the EU. At the other end of the spectrum, the highest relative private sector indebtedness was recorded in Denmark (237.5 percent of GDP), along with the Netherlands (223.7 percent of GDP).

“The low level of private sector debt in Slovakia is related to the relatively low average level of indebtedness of Slovak households, which is partly a reflection of how Slovak state and cooperative flats were privatised in the nineties,” said Vaňo. “The credit growth expansion to both companies and, especially, to households begun later than in the developed countries of the EU and this credit expansion also started from a lower base.”

As a result of the way state flats were privatised in the 1990s, according to Eurostat, Slovakia has a relatively high share of home ownership, with 77 percent of occupants living in homes they own.

“In general, it is not that easy to compare the total level of private debt between countries, since this number should always be compared against the total level of assets of private companies and households,” said Vaňo.

By definition, he explained, corporate investment loans or the most prevalent mortgage loans to households are targeted either on the financing of productive assets, in the case of companies, or on acquisition of residential real estate, in the case of households. Therefore, it is more appropriate to compare the net assets of the private sector, i.e. the difference between the value of assets and the value of the debt, rather than merely the volume of the debts, i.e. credit used for the acquisition of part of these assets.

Koršňák and Marcel Laznia, an analyst at the Slovak Banking Association (SBA), also regard the indebtedness of Slovak companies as being relatively low.

“The ‘maturity’ of the given market has a significant influence on the indebtedness of companies as well as households,” Laznia told The Slovak Spectator. “New member countries of the European Union traditionally have a lower share of bank loans to GDP than countries in western Europe.”

Laznia added that over the last few years, especially as a consequence of the economic situation in Europe, the demand for loans from companies has been falling, particularly in the case of long-term investment loans. Simultaneously it is possible to observe a tightening of standards from the side of banks, also as a consequence of unfavourable economic outlooks.

Koršňák confirmed that the volume of loans provided to companies has been decreasing. While it is higher in nominal figures than during the pre-crisis years, this is, to a significant extent, only the result of rising prices. According to him, the share of bank loans provided to companies decreased from 23.1 percent of GDP in 2009 to 20.9 percent of GDP in 2012, the level lowest since 2006.

“During the last few months we have seen the volume of bank loans stabilise,” said Koršňák. “In spite of this it is not possible to speak about a growth of loans provided to non-financial companies. Last year, especially in the second half, they curbed their investment activities, and we do not expect any fundamental revival of private investment in the economy even this year. There are several reasons for such a development: from uncertain economic outlooks and weak orders, to the increase in the tax burden, which cut companies‘ own resources for further investments.”

With regards to companies’ appetite for new loans, Makovický does not regard the outlook as very positive.

“For the time being there is a problem in Slovakia with loans,” said Makovický. “Only creditworthy companies or companies able to provide security can get a loan.”

According to Makovický, banks are avoiding risky loans, adding that fewer loan applicants are being labelled creditworthy than in the past.

“The appetite for loans has decreased,” said Makovický. “This is related to the general business mood, in which most businesspeople asked would assess the upcoming period negatively. Because of increased levies and higher taxes, companies will have less money to make new investments and I expect that a consequence will be stagnation of several sectors in Slovakia.”

According to Vaňo, gross fixed capital formation (i.e. investments) in 2012 declined in real terms by 3.7 percent compared with a year earlier.

“This is the determining factor influencing also the development of companies’ demand for new corporate loans,” said Vaňo, adding that according to National Bank of Slovakia statistics, the total volume of loans to non-financial corporations in Slovakia declined by 3.4 percent year-on-year in 2012.

“The demand for new corporate loans is chiefly influenced not only by the development of industrial production, which influences the extent of utilisation of existing capacities, but also by the near-term outlook for further development of industrial production, as signalled by development of new industrial orders as well as by business confidence,” said Vaňo.