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NBS expects deteriorating quality of bank credit portfolios

CREDIT risks in the Slovak banking sector will increase this year because of the impact the unfavourable situation in the global economy is having on the Slovak economy, according to a financial stability report published by the National Bank of Slovakia (NBS) on July 6. Banks will experience worse credit portfolio quality for loans to households as well as to non-financial corporations, according to the NBS.

CREDIT risks in the Slovak banking sector will increase this year because of the impact the unfavourable situation in the global economy is having on the Slovak economy, according to a financial stability report published by the National Bank of Slovakia (NBS) on July 6. Banks will experience worse credit portfolio quality for loans to households as well as to non-financial corporations, according to the NBS.

"It is highly probable that the unfavourable outlook of the local economy for 2009 and 2010 will lead to a higher rate of failed household loans," wrote the NBS, as quoted by the SITA newswire. “The financial position of households, which is in Slovakia chiefly determined by income and employment, will thus worsen, which will negatively influence chiefly highly indebted households.”

Similarly, the central bank also expects a worsening of the situation in loans to corporations, although the rate of failed loans to non-financial corporations developed favourably last year.

"Corporations generated enough resources from the previous favourable period, but this will probably change in the upcoming period," writes the NBS, adding that sectors that are more sensitive to the economic downturn made up almost 60 percent of the portfolios of banks' corporate loans in late 2008.

The productivity parameters of these corporations started to worsen significantly during the final quarter of 2008 and banks in general reacted to this in the second half of 2008 by showing a more cautious attitude to lending.

"Nevertheless, the quality of loans provided earlier largely depends on the size of the GDP contraction and the duration of these negative trends," adds the central bank.

With regard to other components of the Slovak financial market, the sectors of collective investment and pension savings will also feel the impact of the global economic crisis.

"Strongly turbulent developments on the global financial market in the autumn of 2008 led to higher equity risk in the portfolios of local funds," reads the NBS report.

According to the central bank, equity risk increased in growth and balanced funds administered by pension fund management companies, equity mutual funds and some funds of supplemental pension companies. The companies reduced equity risk by selling shares and diversifying portfolios in favour of government bonds.

With regard to mutual funds, the uncertainty of investors caused a significant outflow of funds chiefly, from equity funds. Nevertheless, funds had a sufficient volume of liquid assets to be able to pay out investors and did not have to make use of the legal opportunity to close funds, according to the central bank.

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