High profit generated by the banking system during the first half of the year; continuing growth in lending activity in the low interest rate environment presents a key challenge
The Bank of Slovenia finds that the situation in the banking system remains good even as risks have increased. Growth in total assets has risen this year, as has the banking system’s lending activity. The Bank of Slovenia has noted high growth in consumer loans in the aforementioned segment, while growth in housing loans remains stable. Growth in loans to corporates has remained at a similar level for the last year and half. In today’s publication, the Bank of Slovenia warns of uncertainty regarding the generation of stable revenue in the future, despite the banking system’s still-high profit.
Growth in the banking system’s total assets has risen this year, to stand at 4.4% in year-on-year terms in June. On the investment side, the banks have primarily increased loans to the non-banking sector, by EUR 812 million (by EUR 292 million in June alone). Here the Bank of Slovenia has noted high growth in loans to foreign corporates. That growth began to rise rapidly last year and stood at 35% in year-on-year terms in June. Nevertheless, loans to non-residents only account for 4.3% of all loans to the non-banking sector. The banking system’s investments in securities, which account for one quarter of total assets, were also up during the first half of 2019, by EUR 163 million.
Similar to last year, the main factor in growth in loans to the non-banking sector are loans to households. Growth in consumer loans remains high (11.7% in year-on-year terms in June). Growth in housing loans remains high but stable, as the high growth in residential real estate prices begins to slow. According to the Bank Lending Survey (BLS), growth in demand for housing loans is also slowing.
Growth in loans to corporates remains at the level recorded last year (at between 2% and 3%), but rose to 5% in June on account of larger loans to one major Slovenian company. Continuing to record one of the highest growth rates are loans to corporates in the manufacturing sector, where the slowdown in activity is already being seen in slowing growth in loans.
The stock of non-performing exposures (NPEs) in the banking system continues to decline and stood at EUR 1.4 billion in June. The Bank of Slovenia has also noted that the proportion of new NPEs from transactions concluded in the last two and a half years is low. In this respect, it brings attention to the consistent maintenance of previously achieved credit standards, as the expected cooling of economic growth in the future could be partly reflected in an increase in new NPEs.
The banking system continues to finance its investment activities primarily through deposits by the non-banking sector. Year-on-year growth in household deposits was stable until May of this year at 7%, but rose to 8.2% in June, which was mostly likely due in part to a tax break on payments of annual leave allowances. Growth in corporate deposits at banks has been slowing since the middle of last year, when it stood at 12% in year-on-year terms, and was 0.5% in June this year. At EUR 6.4 billion, the stock of corporate deposits remains high.
Figure: Growth in loans by sector
Source: Bank of Slovenia
The banking system’s pre-tax profit during the first half of the year amounted to EUR 402 million, an increase of one quarter relative to the same period last year. Contributing to that high profit was an above-average increase in net non-interest income, moderate growth in net interest income and the continued net release of impairments and provisions. In that respect, the Bank of Slovenia warns that a slowdown in lending activity in the low interest rate environment could increase the pressure on net interest income and thus on the banking system’s profitability.
According to the latest available figures, the Slovenian banking system’s capital adequacy remained solid in the first quarter of this year, and was close to the euro area average on a consolidated basis. The Bank of Slovenia finds that capital adequacy varies considerably from bank to bank.
Publication is available here.