Monthly report on bank performance, October 2018
Governing Board of the Bank of Slovenia discusses the Monthly report on bank performance, October 2018.
- In their lending activity banks are focusing primarily on households, and less on non-financial corporations, where they have nevertheless maintained stable positive growth since the beginning of 2017. August’s increase in loans to the non-banking sector was larger than in the previous months.
- Growth in deposits by the non-banking sector is continuing, primarily as a result of growth in household deposits. In the low interest rate environment it is only sight deposits that are continuing to increase.
- The banking system generated a pre-tax profit of EUR 407 million over the first eight months of 2018. The increase in profitability was attributable to several favourable factors simultaneously. Growth in net interest income has been positive since May and is gradually increasing, net non-interest income is continuing to record solid growth, operating costs are broadly unchanged, and the banking system has seen a net release of impairments and provisions overall this year.
The banking system’s balance sheet total increased by EUR 0.6 billion over the first eight months of the year to stand at EUR 38.5 billion in August, up 3.3% in year-on-year terms. The largest contribution to the increase on the funding side came from deposits by households. On the investment side there was an increase in loans to the non-banking sector, the most liquid forms of bank investment, while investments in securities declined.
August’s increase in loans to the non-banking sector was larger than in the previous months, taking the year-on-year rate of growth to 6.7%. Corporate loans increased by EUR 245 million over the first eight months of the year, while the year-on-year rate of growth stood at 2.8% in August, comparable to previous months. Household loans increased by EUR 428 million over the first eight months of the year to EUR 9.8 billion in August, up 6.9% in year-on-year terms. Year-on-year growth in housing loans remained moderate in August at 4.4%, while growth in consumer loans was a high 11.7%. Consumer lending activity was particularly pronounced last year at certain banks under majority foreign ownership, while this year the increase has been more evenly distributed across the banks.
Deposits by the non-banking sector were up 5.8% in year-on-year terms in August. The largest contribution to the increase came from household deposits, year-on-year growth in which reached 6.9% in August. Non-financial corporations still have relatively large deposits at banks, in the amount of EUR 6.5 billion, up 9.3% in year-on-year terms. Household deposits are up EUR 0.8 billion this year, despite the usual seasonal decline in August. In the low interest rate environment it is only sight deposits that are continuing to increase. By the end of August they had increased to account for almost 72% of deposits by the non-banking sector, and almost 53% of the balance sheet total.
The quality of the banking system’s portfolio in August remained at the same level as July, with an overall NPE ratio of 4.6%. Portfolio quality improved relative to the previous months in all client segments, and in all sectors in the non-financial corporations segment. The NPE ratio was down 1.4 percentage points on the end of 2017, while NPEs were down EUR 568 million. The remaining NPEs are concentrated at a few banks, which requires a more active approach to reduction at an individual level. This would significantly improve average portfolio quality at the level of the banking system as a whole. The rapid increase in household loans is continuing to raise the proportion of bank exposure accounted for by the sector, which increased from 23% at the end of 2016 to 24.7% in August 2018. In the wake of the increase in exposures, the quality of the household portfolio is not deteriorating: the NPE ratio stood at 3.3% for consumer loans, and 2.6% for housing loans in August. Given the forecasts of favourable macroeconomic indicators over the next two years, there can be no expectation of an increase in credit risk in this segment, provided that credit standards are maintained at least at their current level.
Slovenian banks generated a pre-tax profit of EUR 407 million over the first eight months of the year, up a fifth on the same period last year. The increase in profit was attributable to favourable factors on both the income and expense sides. Net interest income and net non-interest income over the first eight months of the year were both up in year-on-year terms, while operating costs actually declined slightly. The net release of impairments and provisions has continued for the second consecutive year, and amounted to EUR 59 million over the first eight months of the year.
The banks’ liquidity position remains favourable, with a high proportion of highly liquid assets, i.e. the banks’ claims against the central bank and claims in the form of sight deposits at banks, which accounted for almost 12% of the balance sheet total in August 2018. The proportion of the balance sheet total accounted for by secondary liquidity remains stable, at just under a fifth. The banks’ indebtedness at the Eurosystem is low, for which reason the pool of eligible collateral at the Eurosystem that is free is relatively high.
After declining in 2017, capital adequacy improved again in the first half of 2018. The total capital ratio reached 20.6% on an individual basis in June, and 18.8% on a consolidated basis. Despite ongoing credit growth, capital requirements increased by less than regulatory capital in the first half of this year. In the wake of the banks’ favourable performance, the increase in regulatory capital was primarily attributable to retained earnings, and less to bank recapitalisations.