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Moody’s improves rating of Slovak banking sector

THE INTERNATIONAL rating agency Moody’s has changed its outlook on Slovakia’s banking system from negative to stable. It reflects current improvements in the macroeconomic environment that will limit the downside risks to asset quality and profitability in the coming 12-18 months, the agency wrote on its website on April 4.

THE INTERNATIONAL rating agency Moody’s has changed its outlook on Slovakia’s banking system from negative to stable. It reflects current improvements in the macroeconomic environment that will limit the downside risks to asset quality and profitability in the coming 12-18 months, the agency wrote on its website on April 4.

“These limited downside risks, combined with the system’s healthy capital buffers and stable funding and liquidity profiles, underpin the stable outlook,” Moody’s wrote.

The agency said that as economic growth rebounds amid a broader eurozone recovery, Slovak banks’ operating environment will strengthen.

“The key driver behind improving economic growth in Slovakia will be exports, as demand from Slovakia’s key trading partners in Europe gains momentum,” Moody’s explained.

Regardless of high unemployment, the agency also expects domestic demand to strengthen “amid current supportive public policies, including the European Central Bank (ECB)’s accommodating stance”. In its central scenario, Moody’s anticipates real GDP growth of 2.5 percent in 2014 and 3.2 percent in 2015, up from an estimated 0.9 percent in 2013.

The stronger macro and operating environment will alleviate banks’ asset quality pressures, particularly in retail, trade and manufacturing. Overall, system-wide NPLs remained relatively stable at 5.3 percent of total loans in 2013, a level which Moody’s expects will improve slightly during the outlook horizon mainly due to loan growth.

While the latest ECB rate cut in November 2013 will lead to some margin pressure, good credit growth, especially in the higher-margin retail business, and lower credit costs, position the banking system to maintain good profitability with a return on assets at around 1 percent. However, Moody’s acknowledges that the upside to profitability will be limited, not least by the government’s bank levy introduced in January 2012, according to the website.

Moody’s expects Slovak banks’ capitalisation to remain favourable relative to expected losses, supported by the prudent capital rules of the Slovak central bank. The system-wide Tier 1 capital ratio stood at 15.7 percent at December 2013.

Moody’s added that funding and liquidity profiles will remain stable. Despite loan growth, Moody’s continues to expect that Slovak banks will be able to fully fund their loan books through their stable deposit bases and thus maintain very low reliance on wholesale funding sources.

Source: Moody’s

Compiled by Radka Minarechová from press reports

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