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Moody’s confirmed stable outlook of Slovak banks

Slovakia’s outlook reflects continued economic growth will support banks' loan quality and profitability over the next 12 to 18 months.

Illustrative stock photo(Source: Sme)

The international rating agency Moody’s has confirmed the stable outlook for Slovakia’s banking system. It expresses the expectation of how bank creditworthiness will evolve in this system over the next 12-18 months, it informed in a press release.

The outlook reflects the agency’s view that the country’s continued economic growth will support banks’ loan quality and profitability over the next 12 to 18 months. Slovak banks’ healthy capital buffers and their sound funding and liquidity profiles are further safeguards for financial stability.

As for the operating environment, Moody’s expects that robust domestic consumption and investment will drive the Slovak economy over the coming quarters, helped by supportive public policies, low energy prices and cheap borrowing costs. The agency expects the real GDP growth amounting to 3.6 percent in 2017, up from 3.2 percent in 2016 and 3.6 percent in 2015. It also expects that unemployment, currently at 11 percent, will continue to fall as the economy expands.

Downside risks to the forecast include declining exports in the event of a further EU slowdown and deflationary pressures. To a lesser extent, the economy could be affected by a more fragmented political picture after the Slovak elections in March this year, which could hamper policymaking; a sharper-than-expected economic slowdown in China or a prolonged recession in Russia, which could further damage global confidence; and a potential British exit from the European Union, which could lower confidence further.

“We believe that Slovak banks are reasonably able to withstand such adversities, should they arise, owing to their domestic focus and moderate private sector indebtedness,” Moody’s wrote in the press release.

Regarding the asset risk, Moody’s claimed that the problem loans have stabilised, mainly owing to the supportive operating environment, and stood at 5.0 percent of total loans as of year-end 2015. It expects that problem loans will remain around this level over the outlook horizon. However, a new focus on higher margin, higher risk segments such as loans to small and mid-sized companies and to unsecured retail customers is a cause for caution.

As for capital, Moody’s predicts that it will remain strong and well-leveraged, after strengthening in recent years through partial profit retention. The system-wide Tier 1 capital ratio stood at 16.5 percent and leverage (Shareholders’ Equity to Total Assets) at 11.1 percent at December 2015.

“Large dividend pay-outs to some weaker performing Western parent banks that have occurred in recent years are an ongoing concern, particularly if the capital base of the Slovak subsidiary starts to decline,” Moody’s claimed.

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