Favorable economic situation reflected in the banking system
12/22/2021 / Press release
The economic situation remains very favorable at the end of the year, which is also reflected in the Slovenian banking system. Banks have developed their lending activity: the year-over-year growth in housing loans has accelerated in particular, while the growth in business loans has also accelerated under the influence of mostly one-off factors.
The pre-tax profit remains relatively high in the banking system (at 402 million euros over the first ten months of the year), the banks having continued to make write-downs and provisions. According to the Monthly Bank Performance Report, the sustainability of profitability at these levels is therefore questionable, given the continued decline in net interest income and income stagnation.
Strong growth in home loans
Lend to the non-banking sector started to increase year-on-year in the second quarter of 2021, with the rate reaching 4.5% in October. Become thin household loan reached 3.8% in October and is mainly driven by growth in home loans. The year-over-year growth in home loans has accelerated sharply in recent months and reached 8.1% in October, while the year-on-year decline in consumer loans has stabilized in recent months (it was 6.2% in October).
Annual growth in loans to non-financial corporations strengthened to 5.1% in October, due to the relatively weak base last year and large loans to two companies (the rate would have been 1.8% in the absence of these two factors). The largest contributions to overall growth came from loans for capital investment and loans for working capital. The fastest growing sectors are information and communication, electricity and water supply, and construction. Loans to the wholesale and retail sector also increased after declining for more than a year, while outstanding loans to the transportation and storage sector continued to contract year on year.
After improving in the first half of 2021, system-level portfolio quality indicators have remained broadly unchanged in recent months. The share of exposure to increased credit risk is nevertheless increasing again in certain sectors, notably in services. Certain segments of the household portfolio also saw their indicators deteriorate.
Chart: Loans to the non-banking sector
Source: Banka Slovenije
Household deposits remain high, despite slower growth
The improving economy also led to a slowdown in the growth of household deposits and deposits of non-financial corporations, most likely due to increased financing of deferred investments and new investments. After a long period of increase, household deposits fell by 132 million euros between August and October, although their overall increase this year was still significantly higher than that of deposits from non-financial corporations.
The banking system recorded a slight improvement in income in September and October compared to the summer, although the bottom line of the Slovenian banking system is still stagnant. Net interest income continued to decline, even if the year-on-year decline slowed against a backdrop of an upturn in lending, and stood at 3.3% in October. The net interest margin is also down and stands at 1.42% over the last 12 months.
High profits generated by net write-backs of depreciation and provisions
Pre-tax income remained high and amounted to 402 million euros over the first ten months of the year, while pre-tax ROE stood at 9.9%. One of the main factors behind the continued high profitability is that 11 out of 16 Slovenian banks recorded a net write-back of impairments and provisions. In recent years, Slovenia has often been one of the few countries in the EU where the banking system has recorded a significant release of depreciations.
The future profitability will depend largely on the stability of the evolution of the income of the banking system, while in the short term it will depend more on the evolution of net impairments and provisions. Given the continued year-over-year decline in net interest income and income stagnation, the long-term sustainability of profitability at current levels remains questionable.
Publication being translated.