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NOT ENOUGH RESERVES CREATED TO OFFSET RISKY LOANS

NBS report faults big state banks

"To a large extent it is the government's fault that we have not seen any faster restructuring of the problematic banks yet, since the state budget failed to provide the sum necessary to help restructure loans inherited from communist times."
-Slovak bankanalyst who preferred to remain anonymousThe Slovak banking sector recorded an increase in overall assets in the first half of 1998, but still has not done enough either to improve its capital adequacy ratio or deal with classified loans. This analysis was the main thrust of a September 10 National Bank of Slovakia (NBS) report on monetary development for the first six months of the year.
The central bank said the combined assets of banks operating in Slovakia totalled 815.3 billion Sk ($23.3 billion) at the end of June 1998, an increase of around five percent against the end of last year. Primary sources (deposits) of banks rose by only 900 million Sk to total 448.6 billion Sk ($12.8 billion) at the end of June.


"To a large extent it is the government's fault that we have not seen any faster restructuring of the problematic banks yet, since the state budget failed to provide the sum necessary to help restructure loans inherited from communist times."

-Slovak bankanalyst who preferred to remain anonymous



Little protection. Governor Vladimír Masár's NBS bank claimed big state banks need to create better reserves for bad debt.
Ján Kuchta

The Slovak banking sector recorded an increase in overall assets in the first half of 1998, but still has not done enough either to improve its capital adequacy ratio or deal with classified loans. This analysis was the main thrust of a September 10 National Bank of Slovakia (NBS) report on monetary development for the first six months of the year.

The central bank said the combined assets of banks operating in Slovakia totalled 815.3 billion Sk ($23.3 billion) at the end of June 1998, an increase of around five percent against the end of last year. Primary sources (deposits) of banks rose by only 900 million Sk to total 448.6 billion Sk ($12.8 billion) at the end of June.

But the report also noted that classified assets remain a big problem for the banking sector, as the sum of these risky receivables rose by 6.1 billion Sk to 126.2 billion. "Higher growth in classified assets over reserves and provisions caused a decrease in the share of classified assets covered by these reserves and provisions to 53.6% from 54.4%," the central bank report said.

Slovak bankers pointed the finger of blame at the government. "To a large extent it is the government's fault that we have not seen any faster restructuring of the problematic banks yet, since the state budget failed to provide the sum necessary to help restructure loans inherited from communist times," an analyst from a Slovak bank said.

Bankers have also been anxiously awaiting a long-delayed amendment to the banking law that would free financial institutions from paying taxes on interest payments they have accrued but have not collected because debtors failed to make the payments.

Good news and bad

The overall basic capital in the Slovak banking sector, including permanently deposited sums in foreign bank branches, totalled 33.953 billion Sk ($994 million). Basic capital itself stood at 29.613 billion Sk, an increase of 2.3 billion from the beginning of this year. The rise reflected a basic capital increase of two billion Sk at troubled Investičná a rozvojová banka (IRB) and a 300 million Sk equity hike at Istrobanka. Foreign investors account for 35.4% of the basic capital sum.

The profits of the banking sector rose by 67% to 3.4 billion Sk ($10 million).

But the NBS noted a decline in the reserves created to cover risky loans, and said that this decline had caused an increase in potential losses from uncovered classified assets by 1.3 billion Sk to 13.7 billion. The main problems of classified assets remains at those banks which inherited the vast majority of bad loans from the communist regime and are now undergoing a so-called restructuring programme. These banks are the largest saving bank Slovenská sporiteľňa, the largest commercial bank VÚB, and IRB bank, which has been under a caretaker administration imposed by the central bank since last December because of liquidity problems.

"The uncovered potential loss from classified assets in transforming banks rose by 1.2 billion Sk and totalled 11.1 billion Sk," the central bank report said. This means that restructuring banks account for 81.1% of the uncovered potential loss of the entire banking sector.

The major international rating agency Standard and Poor's lowered the ratings of the two largest Slovak banks - Sporiteľňa and VÚB - to single B from BB minus last week, citing the rising sum of classified loans in their portfolios as one of the main reasons for the move.

The rating agency also rejected the opinion that merging the two banks - a move recently suggested by Prime Minister Vladimír Mečiar to speed up their recovery - would provide a quick solution to their problems. The agency argued that a merger would simply create a single bank with the same portion of bad assets, and would not solve the core of the loan portfolio problem. Standard and Poor's suggested that any merger would have to be accompanied by cost reduction and cuts in the number of staff as well as branches to bring positive results.

Telling signs

The capital adequacy ratio of the banking sector is the main yardstick for assessing the health of banks. It measures the banks' own capital against the credit it has extended, weighted according to risk. While the international standard for the capital adequacy ratio of an individual bank is 8.0%, the Slovak figure rose 0.27% to a strong 10.3% for the entire banking sector in the first half of the year.

The increase in the adequacy ratio was influenced by a faster rise in the banks' capital over their classified assets. However, there still were five banks that did not meet the required capital adequacy ratio of 8.0% at the end of June, the same number of banks as at the end of the first quarter and one more than in December 1997. The central bank does not name banks that fail to meet capital adequacy ratio requirements.

The central bank also noted that it had registered a high number of banks failing to meet credit limits for individual clients. 17 banks failed to meet the liquidity ratio between assets and liabilities with maturity of up to one month; the central bank said that this demonstrated "an insufficient level of management" of assets and liabilities in these banks.

The Slovak banking sector consisted of 25 banks, three branches of foreign banks and nine representative offices of foreign banks as of the end of June.

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