Bank profits nearly halved

SLOVAK bankers have been under a magnifying glass over the past two years with politicians pondering choices of regulation or trimming routines for what they consider as far too muscular banking houses in the country.

SLOVAK bankers have been under a magnifying glass over the past two years with politicians pondering choices of regulation or trimming routines for what they consider as far too muscular banking houses in the country.

While market watchers say Slovakia’s banking sector is among the healthier ones in Europe, the Slovak government has already decided to force local banks to bring what the government calls more transparency to complicated banking fees and envisions mandating a standard package of services that must be identical across all banks.

But the country’s banks believe that it will be developments in the real economy in 2010 which will most significantly impact their operations.

Last year the banking sector saw its net profit drop by 45.2 percent year-on-year, mostly due to the impact of the global downturn on the local economy, but also due to a decline in revenue linked to adoption of euro, according to the Slovak Banking Association (SBA).

The banking sector recorded a profit of €279 million in 2009, which was €230 million less than in 2008, according to preliminary figures provided by the National Bank of Slovakia (NBS), the country’s central bank.

“The performance of the banks has been impacted not only by the crisis but also by impacts fromthe installation of the euro,” Marcel Laznia, spokesman of the SBA, told The Slovak Spectator.

Laznia listed lower profitability, a reduced volume of new loans, and a deterioration in the quality of credit portfolios as the main challenges faced by the banking sector in 2009. Stagnating interest revenues, less income from foreign exchange operations and the need to increase reserves for non-performing loans were responsible for the largest shares of the drop in revenues, Laznia added.

According to data from the central bank, the banking sector reported stagnation in interest income, the dominant component of banks’ profit. While banks’ interest income had regularly grown at a double-digit rate in past periods, it increased by just one percent to a level of €1.561 billion in the twelve months of 2009, the SITA newswire wrote.

The adoption of the euro at the beginning of 2009 led to a drop in revenues from foreign exchange operations, causing the banking sector’s profit from such transactions to shrink by 77 percent.

Commercial banks also attribute their lessened profitability and lower revenues from foreign payment services to a decrease in fees for international transactions to the level of fees for domestic transactions, with net income from fees and commissions dropping by 11 percent in 2009 to €406 million, according to SBA.

The banks have also stated that their lower profit is linked to advance preparation for loan defaults in 2010 as banks are required to establish reserves to cover potential losses. Net formation of reserves in the banking sector grew to €405.9 million in 2009.

While international financial observers fixing their eyes on the global banking scene suggest that at least one big bank might still be brought to its knees by the financial and economic crisis, Slovakia’s market watchers say that the country’s banking sector is still among the healthiest and its bankers are anticipating a moderate revival in the coming year.

“In 2010, we expect a moderate revival in loans and a halt in the increase of the percentage of failed loans,” Laznia said.

In 2010, the health of the banking sector will be most significantly impacted by the recovery of the real economy, the chief analyst with Tatra Banka, Robert Prega, told The Slovak Spectator.

“Credit policies of commercial banks this year will be influenced by the development of the economy and mainly by growing unemployment,” said Prega.

Despite this, Prega said that over the course of the year gradual relaxation of loan standards by commercial banks can be expected.

“Compared to 2009, mainly loans for businesses should revive,” Prega noted, adding that the banks will still have a selective approach towards particular clients or whole branches. “Personal loans – considering the strong slump in the economy – grew solidly also in 2009. Two-digit growth of personal loans can be expected also in 2010.”

Corporate loans in default swelled significantly last year and reached 6.72 percent in December 2009 compared to a rate of 3.32 percent in January 2009. Personal, retail loans in default stood at 5.04 percent in late 2009, compared with 3.99 percent in January of the same year, SITA wrote.

In terms of trends in defaulted loans, Boris Gandel, spokesman of Tatra Banka, said that the end of the year rate of defaults in both the corporate and personal loan segments had developed in line with the bank’s expectations. He said the bank did not record any considerable change in the trend of the share of non-performing loans over the last quarter, adding that Tatra Banka remains under the average for the entire Slovak banking sector.

But the increase in the number of loans in default was reflected in an increase in the banks’ reserve provisions, up 23 percent or €77 million in 2009 compared to 2008. Companies initiated new loans for over €7.8 billion last year with most of these proceeds spent on operation-related expenses rather than investment. In a year-on-year comparison, new corporate loans dropped in volume by 15.7 percent and retail personal loans posted a 20-percent decrease. Housing loans had the biggest downswing, down €679 million to €2.281 billion or nearly 23 percent, SITA wrote, based on data from the central bank and SBA.

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