Monthly report on bank performance, November 2018

Governing Board of the Bank of Slovenia discusses the Monthly briefing on bank performance in September 2018.

Highlights:

• Loans to the non-banking sector are growing, primarily as a result of an increase in household loans, meaning housing loans and consumer loans alike.
• September’s increase in household deposits was smaller than in previous months. Year-on-year growth remains solid, despite declining. Sight deposits are increasing further, albeit more slowly than in previous years.  
• The banking system generated a pre-tax profit of EUR 422 million over the first nine months of the year, which was attributable to favourable factors on the income side: net interest income and net non-interest income both increased.

Growth in the balance sheet total slowed slightly in the third quarter of this year, reaching 3% in year-on-year terms in September. The balance sheet total actually declined in September for the second consecutive month, by EUR 82 million to EUR 38.5 billion. Deposits by the non-banking sector, which this year have been the largest factor in the growth in the balance sheet total, remained unchanged in September. The banks used funds held on account with the central bank to repay liabilities to banks in the rest of the world. On the investment side, household loans are continuing to increase.

Loans to the non-banking sector increased by EUR 95 million in September, as a result of growth in loans to households and non-residents. Despite the increase, year-on-year growth in loans to the non-banking sector declined to 5.9%, as a result of a base effect. Year-on-year growth in loans to non-financial corporations was relatively stable in the third quarter, at 2.8%. In terms of this year’s increase and the overall stock, loans to non-financial corporations remain behind household loans.

Growth in household loans remains solid and stable, the year-on-year rate standing at 6.9% in September. The stock of household loans increased by EUR 0.5 billion over the first nine months of the year to EUR 9.9 billion, equivalent to more than a quarter of the banks’ total investments. Housing loans remain ahead of consumer loans in terms of stock and in terms of this year’s nominal increase. Year-on-year growth in consumer loans remains high at 11.4%, although it is not increasing. After a slight increase in the third quarter, year-on-year growth in housing loans reached 4.5% in September. Fixed-rate loans have increased further this year, among housing loans and consumer loans alike, albeit slightly more slowly than in the previous two years.

The quality of bank investments is continuing to improve. The NPE ratio declined to 4.5% in September, while the NPL ratio declined to 6.3%. Despite a rapid improvement, portfolio quality remains weakest in the non-financial corporations segment, where the NPE ratio is 9.6%. Given the favourable financial position of households, the NPE ratios in the household segment remain below average, at 2.5% for housing loans and 3.3% for consumer loans. 

Household deposits remain the most important source of funding for Slovenian banks. They have increased by EUR 811 million this year to EUR 18.3 billion, and account for almost 48% of the banking system’s total funding. A smaller monthly increase and a base effect meant that year-on-year growth in household deposits slowed in September, but it remains solid at 5.8%. In the maturity breakdown, sight deposits are increasing further, albeit more slowly than in previous years. The proportion of sight deposits increased to 72% of total deposits by the non-banking sector and 74% of total household deposits in September.

Slovenian banks generated a pre-tax profit of EUR 422 million over the first nine months of the year, up 14% on the same period last year. The banking system’s gross income was up 5.1% in year-on-year terms, as a result of increases in net interest income and net non-interest income. The positive growth in net interest income was the result of an increase in loans and the favourable funding structure. These favourable factors also contributed to the gradual increase in the net interest margin, which reached 1.84% at the end of September. The income disposal side saw a continuation of the net release of impairments and provisions, which amounted to EUR 41 million across the banking system over the first nine months of the year.

The banking system’s liquidity position remains favourable. The banks have highly liquid assets in the amount of 12% of their balance sheet total at their disposal in the form of cash on hand and deposits at the central bank, and also have secondary liquidity at their disposal in the amount of a fifth of the balance sheet total. In the event of the need for additional liquidity, there is a solid proportion of the pool of eligible collateral at the Eurosystem that is free. The banking system’s liquidity coverage ratio remains well above the regulatory requirement.

The banks remain strong in capital terms. The banking system’s total capital ratio improved in the first half of the year, reaching 20.6% on an individual basis and 18.9% on a consolidated basis. The improvement in capital adequacy was the result of growth in regulatory capital outpacing growth in capital requirements. Capital requirements are increasing in line with credit growth, while the banks are primarily increasing regulatory capital through retained earnings, and less through recapitalisations.