The National Bank of Slovakia. (source: Jana Liptáková)
THE SLOVAK banking sector boosted its aggregate profits last year and experts expect it to remain stable, notwithstanding the turbulence caused in 2011 by questions about the sector’s capital adequacy and liquidity here as well as across Europe. Experts predict that current economic developments and new financial regulations at both the Slovak and European levels will make if difficult for the country's banking sector to repeat its successful financial performance of 2011.
“The condition of the Slovak sector is very good within the EU and it is resistant to negative development,” said Vladimír Dvořáček, the head of the financial markets supervisory body of the National Bank of Slovakia (NBS), in mid-April, as quoted by the SITA newswire, as he reported on the results of the latest stress tests undertaken by the NBS.
The first test simulated a decline in the Slovak economy and the second imagined an existential crisis involving another country or countries.
“The Slovak banking sector showed resilience in both scenarios,” Dvořáček stated.
According to Marek Ličák, the head of the risk analysis department of the NBS, the banking sector showed a relatively significant robustness against unfavourable economic developments at the end of last year. He believes Slovak banks will be able to continue to generate positive interest income even during negative economic periods.
Profits up in 2011
Based on preliminary non-audited results released by the NBS, the overall net profit of the Slovak banking sector rose by 34 percent year-on-year to reach €674 million for 2011. Its capital adequacy ratio was 13.4 percent.
The sector’s profits rose by as much as 90 percent during the first half of last year and then slowed during the second half, leaving the trend moderately negative. Ličák said one of the core reasons for the slowdown was negative developments in the financial markets, re-assessing the value of securities, and a slowdown in the growth of interest income. This became more significant as the sovereign debt crisis more directly affected Slovakia. The banking sector’s profitability also suffered from declining earnings from investments in Slovak government bonds, Ličák said.
The Slovak Banking Association (SBA) commented to SITA that a flurry of one-off revenues contributed to the sector’s rising profits in 2011 and noted that when these are deducted the sector’s profit level is around €503 million, close to the figure for 2010.
Dvořáček also noted that domestic banks followed a classic business model that focused on the local economy, that loans to households were rising and had neared their pre-crisis level, and that housing loans made up a significant portion of the retail part of the banks’ business. Early in 2011 this part of the market posted positive gains but the second half brought a negative trend caused by lower demand as consumers’ willingness to borrow fell. Rising interest rates also had a negative impact. Nevertheless, the volume of new housing loans hit a new high in 2011, exceeding €3.8 billion, considerably higher than the volume of €3.2 billion recorded in 2010.
A similar scenario occurred in the corporate banking sector, where loans to companies started to grow early in the year but then slowed during the second half when companies' financial condition worsened, with Ličák attributing this to a drop in confidence in the economy.
The volume of all bank loans stood at €36.4 billion at the end of 2011, up 8.7 percent year-on-year. The proportion of loans in default dropped slightly in annual terms, from 6.2 percent to 5.96 percent, according to SITA.
Outlook for 2012
The Slovak banking sector is expected to be affected again in 2012 by sluggish activity in the economy and fallout from the sovereign debt crisis as well as new regulatory measures enacted on both the Slovak and European levels. Banking analysts predict these factors will restrict bank profits this year compared with 2011. The NBS pointed out that banks’ financial results for the first quarter of 2012 have already confirmed a downward trend, with sector profits in this quarter falling by 18.8 percent to €141.9 million compared to last year.
“During the first months of 2012 the banking sector reported lower profits than during the same period of 2011,” Petra Pauerová, the NBS spokesperson, told The Slovak Spectator, adding that the special tax levy imposed on banks by Slovakia is one reason for the reduced profit level.
Zdenko Štefanides, chief economist at VÚB Banka, told The Slovak Spectator that growth in the Slovak economy would slow by about half compared with last year due to the moderate recession occurring in the eurozone and this would lead to a drop in demand for financial products as well as a worsening of payment discipline.
“Developments in the banking sector are closely interconnected with the development of the real economy,” Róbert Prega, chief economist at Tatra Banka, told The Slovak Spectator. “In 2012, when we expect a slowdown in economic growth it may be assumed that, regardless of the introduction of the special [bank] levy, the outlook for the banking sector will worsen. The deceleration in economic growth will probably result in a lower demand for loans, especially by the business sector, as well as less growth in deposits.”
ČSOB expects that sharp competition between banks will continue this year, especially in the retail banking sector and said this competition will benefit customers rather than banks.
“We assume that interest rates will rise for both loans and deposits this year and liquidity will become an important factor in the coming months,” Zuzana Eliášová, spokesperson of ČSOB financial group, told The Slovak Spectator.
According to Štefanides of VÚB, the sovereign debt crisis in several eurozone countries has increased risk surcharges and the cost of acquiring long-term capital. Many European banking houses, including those which have activities in Slovakia, have found that attracting capital and maintaining liquidity have become more expensive and sometimes practically impossible.
He pointed out that in this already tense situation, the European Banking Authority has raised the required capital adequacy ratio and banks must comply with this standard by June 30. Štefanides believes many European banks will be able to meet these new rules only by selling some assets and freezing their loan activities.
Regarding other conditions limiting the growth of banks in Slovakia, Štefanides criticised the special levy on banks that was approved by the Slovak parliament last year.
“The levy directly reduces banks’ profits and hinders their ability to strengthen their own financial position,” Štefanides told The Slovak Spectator, adding that he expects it to have a negative impact on the volume and cost of loans.
