The persistent uncertainty in the international environment continues to be reflected in the Slovenian economy. In the second quarter the economy made up for its contraction during the early part of the year, but the economic growth forecasts have been revised downwards since the spring. Under these circumstances the performance of the Slovenian banking system remains good. The general level of systemic risks to the banking system has not changed over the last half-year according to Banka Slovenije’s assessment. The majority of the risks are assessed as low to moderate, while the banking system’s resilience is assessed as high. During a period of high risks and uncertainties posed by the international environment, it is particularly important that Banka Slovenije uses measures under its preventive macroprudential policy stance to help maintain the banking system’s resilience to domestic and external shocks.
Banka Slovenije presents its assessment of risks in the banking system and resilience to them in the new Financial Stability Review. Despite a slight increase in NPEs, the credit risk indicators remain favourable, and the assessment of credit risk is therefore being held at moderate with a stable outlook. The deterioration in loan portfolio quality remains limited to certain non-financial corporations, and primarily comes from industry, given its greater exposure to more challenging international economic conditions. After falling for several years, the number of bankruptcy proceedings initiated began to rise in September of last year, and with it the banks’ exposure to these firms, which nevertheless remains small.
The assessment of funding risk is also being held at moderate with a stable outlook. Deposits by the non-banking sector remain a stable source of funding. The recent fall in interest rates on deposits and the rise in the stock of sight deposits are widening the maturity gap, thus increasing the risk of funding instability posed by this gap. It therefore remains important for banks to continue closely monitoring their customers’ saving habits, and to tailor their services in good time to handle the competition, which is becoming tougher for them given the advent of new providers of digital banking services.
The banks’ sensitivity to changes in interest rates has again risen in recent times, owing to which interest rate risk is assessed as moderate, while the outlook has been downgraded. This was attributable to a further rise in the share of fixed-rate loans to the non-banking sector, amid a simultaneous lengthening of the average residual maturity of these loans, and an increase in securities holdings amid a reduction in primary liquidity. While some of the banks, particularly the larger banks, have increased their hedging against interest rate risk with more extensive use of derivatives, at others this risk remains more pronounced.
The risk inherent in the real estate market is assessed as moderate for the second consecutive year, but with a stable outlook. The real estate market has stabilised, but there are still long-term risks in connection with affordability and the limited supply of residential real estate. Income risk is assessed as low for the second consecutive year, but with a downgraded outlook, largely on account of a decline in net interest income. Both net interest income and total income in the banking system nevertheless continue to significantly exceed the levels seen before the interest rate rises began in the second half of 2022.
Increased geopolitical risk means that the assessment of cyber risk is being held at elevated with a stable outlook. The assessment of climate risks is being held at moderate, again with a stable outlook.
Resilience of the banking system
The resilience of the banking system from the perspective of solvency and profitability continues to be assessed as high with a stable outlook. Our expectation is that the banks will remain highly solvent in the future. The assessment of resilience in the liquidity segment is also high and stable, although the capacity to cover net outflows and required funding deteriorated slightly. There remains considerable variation in the liquidity surpluses at individual banks.
Preventive stance of macroprudential policy
Banka Slovenije is responding to the risks described above through its measures of macroprudential policy, which remains preventive and balanced, with a focus on strengthening the resilience of the banking system and limiting systemic risks. In light of the persistent macrofinancial uncertainty, it is vital that the existing macroprudential instruments provide adequate protective mechanisms against potential adverse shocks. The comprehensive combination of these measures is strengthening the banking system’s resilience and reducing the possibility of risk being transmitted to the banking system and then to the real sector.
Figure: Banka Slovenije’s risk and resilience dashboard for the Slovenian financial system
Note: The colour code in the risk and resilience dashboard relates to the assessment for up to one quarter in advance. The arrow illustrates the expected change in risk or resilience in the scale (up or down) over a slightly longer horizon of around one year. For risks, an up arrow means an increase in risk, and vice-versa, while for resilience it means strengthening, and vice-versa. The risk and resilience dashboard is based on analysis of key risks and resilience in the Slovenian banking system, and is defined as the set of quantitative and qualitative indicators for defining and measuring systemic risks and resilience.
Source: Banka Slovenije
Publication Financial Stability Review undergoing translation.