The situation in the banking system remains good

The current favourable economic conditions have had a positive effect on the operation of the banking system. The gradual normalisation of economic conditions and increased private spending have contributed significantly to slowing down the growth in deposits from households and non-financial corporations, and to boosting lending to the non-banking sector. In the area of lending to households, growth was notably spurred by strengthened growth in housing loans. In the publication Monthly Information on the Operation of Banks we have also determined that in the first four months of 2022 banks have operated at a lower profit than in the same period the year before, mainly due to reduced income and the formation of net impairments.

Stronger lending both to non-financial corporations and households

In the first four months of this year lending to the non-banking sector gained considerable momentum, and in April reached 10-percent year-on-year growth. The April increase in lending was the biggest since October last year and more than twice that of the average monthly growth from April 2021 to March 2022.

This growth was spurred principally by the increase in loans to non-financial corporations (NFC), which in April reached 11.8% year-on-year, and in contrast to recent months loans were taken out for a variety of purposes, for all size classes of NFC and in the majority of NFC activities.

The growth in loans to households, at 7.6% year-on-year in April, exceeded the level prior to the outbreak of the pandemic, and once again ranked in the quarter of European countries with the highest growth. A major contribution to this came in the form of boosted household lending through housing loans, which saw year-on-year growth rise to 11.4% in April. Growth in these loans has been gaining momentum without interruption for more than a year, and in April was the highest in the euro area after Lithuania and Slovakia. Meanwhile, due to the large scope of repayments on loans taken out in the period of above-average growth, consumer loans increased only to a smaller extent, with a continued decline in their scope on a year-on-year basis. In April it was down 2.8%, and growth was among the lowest in the euro area.

Banks financed the increased lending principally by reducing liquid assets they hold in accounts at the central bank. This meant a reduction in primary liquidity, yet nevertheless it still significantly exceeds the share in the balance sheet total prior to the start of the pandemic.

The growth in household deposits is returning to its pre-pandemic level

The first four months of this year saw a continuation of year-on-year growth in deposits by households and NFCs, but at lower rates than in the first two years after the outbreak of the pandemic. The slowdown in their growth since last year can be attributed to a large extent to the gradual normalisation of economic conditions and increased private spending. The volume of household deposits this year up until April increased by EUR 367 million, which is comparable to the same period in the years before the pandemic. Their year-on-year growth was almost equal to the year-on-year growth of NFC deposits, with both being halved in the latest one-year period. A reduction in the growth of household deposits is also being noted in all other countries of the euro area. Slovenia ranks as one of those countries where the year-on-year growth in household deposits has slowed down the most, alongside a strong recovery in private spending over the last year. We anticipate that this trend will continue, with an increase in private spending and growing prices of essential goods.

Meanwhile Slovenia remains one of the euro area countries where sight deposits are predominant among deposits. The proportion of sight deposits is thus at a historically high level, having risen to 88.3% of all household deposits and 83.4% of all NFC deposits. The high uncertainty will most probably be reflected in the future behaviour of savers.

Lower profit partly the result of creating net impairments

In the first four months of 2022 banks generated a pre-tax profit of EUR 132 million, which was a quarter lower than in the same period of the previous year. Profits were down due to lower incomes from one-off effects and the creation of net impairments and provisions, while net interest income and net income from fees and commissions gained ground compared with the same period last year. After the releasing of impairments and provisions contributed significantly (two thirds) to the high profits of banks last year, in the uncertain circumstances we may expect their continued creation. Currently the share of net impairments and provisions in the generation of gross income is still very low, at less than three percent.

Illustration: Growth of loans by customer group in the non-banking sector and loan type

Source: Banka Slovenije.

Publication Monthly report on bank performance, June 2022 is available here.