Downturn in bank performance as the economy struggles
The Slovenian banking system is doing business in the face of a sharp decline in economic indicators caused by the Covid-19 epidemic and the lockdown measures. The Monthly report on bank performance finds that the situation has been reflected on the investment side of the balance sheet in a slowdown in credit activity: loans to households and corporates alike have declined. On the funding side, deposits by the non-banking sector are increasing. According to the data available to date, there has been no deterioration yet in the quality of the credit portfolio, but this is expected in the following quarters. Amid the anticipated deterioration in the portfolio and the contraction in the economy, the banks are again creating net impairments and provisions after several years of net release.
Alongside a fall in interest income and non-interest income, this had brought a significant decline in the banking system’s profit even in the first quarter of this year, and even larger falls are expected in the coming quarters. Following this year’s contraction, the economy is expected to stabilise over the next two years.
Bank investments: slowdown in credit activity
On the investment side of the balance sheet, the banks mainly increased their liquid assets in balances at the central bank in April. Investments in securities continued to decline, but they still account for a fifth of the banking system’s balance sheet total.
Bank credit activity slowed when the epidemic was declared and large parts of the economy were shut down. Year-on-year growth in loans to the non-banking sector slowed to 5.5% in April (from 6.2% in March). Here it should be highlighted that a more significant impact on credit activity is expected in the following months. It is thought that, to a certain extent, the figures for the months for which data is available still reflect transactions that were begun earlier.
Year-on-year growth in corporate loans slowed, but remained solid at 6.6%, double the rate of growth in household loans. The dynamics in corporate loans vary, depending on the sector. Year-on-year growth in bank loans to firms in the sectors of trade, miscellaneous business services, and real estate activities has remained positive in this year, as has year-on-year growth in loans to the accommodation and food service activities sector over the last two months. Year-on-year growth in loans to manufacturing firms has been weak for some time now. It was mainly loans to large enterprises that increased over the first four months of this year; loans to SMEs declined. The expectation for the remainder of the year is that the emergency law on government guarantees will have a positive impact on corporate loans.
Figure 1: Bank loans to corporates by activity
Year-on-year growth in household loans has gradually declined this year, reaching 3.1% in April. The declaration of the epidemic, which severely constrained household consumption, was a factor in the sharp slowdown in growth in consumer loans; the year-on-year rate was just 1.2% in April. By contrast, year-on-year growth in housing loans stood at 5.2%, still at its average from last year. Banka Slovenije is expecting rising unemployment, falling household income and the resulting increased caution with regard to spending, particularly on durables, luxury goods and real estate, to all be factors that will act to slow future growth in household loans.
Bank funding: increase in deposits by the non-banking sector
The banking system continues to finance its investment activities primarily through deposits by the non-banking sector, which have increased during the epidemic, albeit mainly in the form of sight deposits. There was a particular increase in household deposits, which were up 9.8% in year-on-year terms, the largest increase since February 2009. The increase in saving is most likely attributable to payments of additional benefits to households during the epidemic, and in particular to reduced spending on goods and services. Households have kept these assets in liquid form, in the desire for immediate availability. This has brought an increase in sight deposits, which by April accounted for 80.6% of all deposits, while fixed-term deposits have declined. March’s pronounced increase in corporate deposits was not repeated in April, but the year-on-year rate of growth reached 7%.
Year-on-year growth in the balance sheet total strengthened over the first four months of this year, reaching 7.5% in April, the highest rate of the last ten years. The banks have seen a sharp downturn in their business conditions. In these circumstances, in contrast to previous years, they have resumed creating impairments and provisions, which is already being reflected in lower profitability. The banks recorded a pre-tax profit of EUR 96 million over the first third of the year, down more than a half on the same period last year.
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