Press release - Monthly information on bank performance and the August 2016 Summary of macroeconomic developments

The Governing Board of the Bank of Slovenia discussed the Monthly information on bank performance and the August 2016 Summary of macroeconomic developments.

1. Monthly information on bank performance*

The total assets of banks and savings banks had contracted to EUR 36.4 billion by the end of June, down EUR 1 billion on the end of 2015, and down 2.4% on the same month of last year. In addition to the ongoing decline in liabilities on the wholesale markets, which was less pronounced than in previous years, the contraction in total assets was attributable to the repayment of debt to the Eurosystem in June. The banks made an early repayment of 80% of the funds borrowed in TLRTO I, and as expected borrowed less in the new TLTRO II on account of their high excess liquidity.

Growth in lending activity to the non-banking sector remains negative, but is not deteriorating. The contraction in loans to the non-banking sector stabilised in the second quarter of 2016 at 5.8% in year-on-year terms. While the decline in loans to non-financial corporations has strengthened slightly in recent months, lending to households is continuing to display a positive trend. Favourable interest rates and growth in investment in durables are being reflected in stable growth in housing loans and, since April, in consumer loans.

After March’s withdrawal of government deposits, and the corresponding decline in year-on-year growth in deposits by the non-banking sector, the rate remains at relatively low levels. The proportion of funding accounted for by household deposits is increasing. Despite low interest rates, the stock of household deposits is continuing to increase, albeit entirely on account of sight deposits, which is reducing the stability of this funding. Growth in household deposits had strengthened to 5.6% by the end of the first half of the year. Deposits are increasing at all the bank groups, with little variation in the growth rates, as the highly similar and low interest rates mean that there is no motivation for savers to switch funds between individual banks.

Growth in deposits by non-financial corporations, which account for just over a fifth of deposits by the non-banking sector, slowed significantly in the first half of the year.

In the wake of the contraction in bank lending activity, the banks’ stocks of classified claims and claims more than 90 days in arrears are both declining. The proportion of the latter stabilised at 8% in the second quarter, down 1.9 percentage points or EUR 812 million in absolute terms on the end of 2015. Low-value, highly granulated claims have remained in the portfolio after several years. They include unsecured claims, and have largely been impaired. 
Gross income remains comparable to the same period last year. Year-on-year growth in net non-interest income remains positive, while growth in interest income remains negative. The banks recorded a pre-tax profit of EUR 285 million in the first half of the year. Following successful stress tests, capital adequacy across the banking system is at the appropriate level.

2. Summary of macroeconomic developments, August 2016

Global economic activity slid slightly in the second quarter, and the forecasts are also being lowered. Growth in the euro area in the second quarter slowed to 0.3% in quarterly terms and 1.6% in year-on-year terms. The short-term indicators for industry, retail trade and construction also revealed a somewhat dim picture. Growth is being slowed by a decline in export growth, including exports to China, where economic growth in the second quarter was unchanged from the first quarter at 6.7%. The aggregate confidence indicator in the euro area nevertheless remained stable in July, and unemployment continued to fall in May and June. The forecasts for 2016 have been maintained at close to the year-on-year rates recorded in the second quarter, while in July and August Consensus significantly lowered its forecasts for 2017 for the euro area, the US and the wider global economy, evidently in connection with Brexit. Minor positive exceptions were the forecasts for Russia, Croatia and Serbia. Oil prices fell in July from almost USD 50 to USD 40 per barrel, before rising again to USD 50 over the first two-thirds of August.

Meanwhile in Slovenia the positive dynamic seen in the first quarter continued in the second quarter. It was mostly driven by export growth. Industrial production and merchandise exports grew sharply again in May and June, while exports of services in the main merely remained at the high levels reached last year. It is highly likely that domestic consumption is also growing. This is indicated by growth in merchandise imports, in parallel to exports. Turnover in the retail sector continued to grow over the first six months of the year, albeit only sales of cars and other non-food products, which recorded very high year-on-year indices. The year-on-year indices in other services were also high, although growth was already stalling in the second quarter. Current growth in the construction sector picked up slightly, after the large increase in residential construction seen since last year was joined in the spring by a minor reversal in the infrastructure segment. Consensus’s forecasts for Slovenia for 2016 and 2017 remain unchanged.

On the labour market, the rise in employment and the fall in unemployment have strengthened this year, particularly in the second quarter. The workforce in employment (excluding self-employed farmers) was up more than 2.5% in year-on-year terms in May and June, or almost 20,000. The largest factor in this increase was manufacturing. The employment expectations indicators remain positive, with the exception of construction. Unemployment stood at 99,117 in July, down 9.5% on last July. Deregistrations from unemployment in July were less than in the same month last year, while the number of people newly registering as unemployed was also down. Growth in average wages, and more so growth in the wage bill, have strengthened slightly this year, since December in mostly public services, and in the early part of the year in the private sector, albeit slowing towards the summer.

After a reversal in June, when inflation in Slovenia returned to positive territory after two years, at 0.1%, the rate again fell slightly below zero in July. The rise in inflation was primarily attributable over the last three months to services prices, which surged by 2.4% in June and 2.3% in July in year-on-year terms. Food prices also rose slightly, while the contribution made by prices of non-energy industrial goods remains slightly negative. The rise in inflation was also attributable to a decline in the negative year-on-year contribution made by energy prices. Growth in the narrowest core inflation indicator, which after two years slightly outpaced the euro area overall in the last quarter, suggests at least a moderate strengthening in price pressures, perhaps primarily on account of wage growth, from the perspective of costs or demand.

The consolidated general government deficit (according to cash flow methodology) is narrowing. The full figures are only available for the first four months of the year, but an ongoing improvement is suggested by the developments in the state budget, where the deficit in the three months to July narrowed by EUR 136 million in year-on-year terms. Inflows of taxes and social security contributions over the first seven months of the year were up just over 3% in year-on-year terms. The improved economic situation is particularly evident in increased inflows of taxes based on wages. The only noteworthy decline on the revenue side was recorded by inflows from the EU budget, which were down EUR 100 million in year-on-year terms in July alone, as a result of which government investment spending has declined this year. The required yield on Slovenian government bonds remains low.

*publication only in slov. language (here)