Monthly information on banks performance in March 2018
The Governing Board of the Bank of Slovenia discussed and approved the Monthly briefing on bank performance in March 2018.
Highlights:
- The banking system’s lending activity is slowing in the household segment, while corporate loans are maintaining low but stable growth.
- Growth in household deposits remains relatively high, with slightly slower growth in sight deposits.
- The banking system generated a pre-tax profit of EUR 143 million in the first quarter of this year, similar to the same period last year. The release of impairments and provisions was less than last year.
The Slovenian banking system’s total assets amounted to EUR 38.1 billion in March, up 1.3% in year-on-year terms. The main increases on the funding side in the first quarter were recorded by household deposits and equity. On the investment side, this year the banks have increased their loans to banks and the non-banking sector, while investments in securities have declined.
After increasing in early 2018 as a result of an actual increase in loans to non-financial corporations and households, and also as a result of the impact of the introduction of new accounting standards, year-on-year growth in loans to the non-banking sector slowed to 5.1% in March. There was a contraction in loans to non-financial corporations in March, but year-on-year growth nevertheless increased slightly, to 3.4%. After declining for several years, short-term corporate loans are increasing again. The credit standards of the largest Slovenian banks have eased slightly this year, while growth in corporate demand for loans has strengthened.
Growth in household loans has been slowing since last October, the year-on-year rate reaching 6.5% by the end of March. Growth is slowing in housing loans and consumer loans alike: year-on-year growth in the former slowed to 4.1%, while year-on-year growth in the latter slowed to 11.5%.The slowdown in lending activity has coincided with a moderate tightening of credit standards on consumer loans, and unchanged standards on housing loans. Similarly, demand for housing loans remained relatively unchanged, while demand for consumer loans declined slightly.
In recent years the banks have radically changed the structure of their funding through debt repayments, which has been reflected in the high proportion of funding accounted for deposits by the non-banking sector, which is now just over 72%. Year-on-year growth in deposits by the non-banking sector declined to 4.2% in the first quarter. Household deposits remain the most important source of funding, and were up 5.8% in year-on-year terms in March of this year. The proportion of total deposits by the non-banking sector accounted for by sight deposits approached 70%. For the moment the banks have no need to fund lending activity from other resources: the increase in deposits by the non-banking sector over the last year was still larger than the increase in loans.
The quality of bank investments is improving. The NPE ratio declined to 5.4% in March, as NPEs declined to EUR 2.3 billion. The introduction of IFRS 9 at the beginning of 2018 accounted for 0.3 percentage points of the decline in the NPE ratio. The stock of NPEs in the non-financial corporations portfolio declined to EUR 1.6 billion, which accounts for two-thirds of total NPEs at banks, but the NPE ratio remains high despite the decline, at 11.8%. The banks recorded a decline of 4.4% in NPEs to non-residents to EUR 328 million.
The banking system generated a pre-tax profit of EUR 143 million in the first quarter of this year, similar to the same period last year. Gross income was up 2.8% in year-on-year terms, as a result of an increase in net non-interest income. Growth in net interest income remains negative, although the decline is slowing. After stabilising in the final quarter of last year, when it stood at 1.83%, the net interest margin declined to 1.81% in the first quarter. The banks increased their impairments and provisions in March, reducing the total net release of impairments and provisions in the first quarter of 2018 to EUR 8.7 million.
The surplus liquidity in the banking sector remains high. The proportion of the pool of eligible collateral at the Bank of Slovenia that is free remained high, despite a slight decline in the first quarter. Secondary liquidity accounts for almost a fifth of total assets. The structure of secondary liquidity is continuing to shift in the direction of a smaller proportion of Slovenian government securities, the figure reaching 45% in March.
The banking system’s total capital ratio declined by 1 percentage point in 2017 to end the year at 19.8% on an individual basis, and 18.1% on a consolidated basis. Strengthening lending activity saw the increase in capital requirements outpace the increase in regulatory capital last year, which led to the decline in the total capital ratio.