Credit risk

Pandemic-resistant Slovak banks remain tested by low rates and credit risk

Profits for Slovak banks have shrunk by around a quarter in 2020, but local lenders will remain resilient even as the economic situation deteriorates, the country’s central bank said in its latest financial stability report.

The Slovak banking sector’s 2020 net profit fell about 25% year-on-year, according to data from S&P Global Market Intelligence, as local banks increased their provisions for potential loan losses amid fears of credit problems. repayment of loans amid the COVID-19 pandemic.

The largest Slovak banks, Erste Group Bank AG unit Slovenská sporitel’na as, Intesa Sanpaolo SpA unit Vseobecna uverova banka as and Raiffeisen Bank International AG unit Tatra banka as, reported net profits of 108 million, 83 million and 106 million, respectively, for 2020, compared to 180 million, 120 million and 135 million in 2019.

The Slovak banking sector has managed 2020 reasonably well, given the unprecedented situation caused by the pandemic, Vseobecna uverova banka chief economist Zdenko Štefanides told S&P Global Market Intelligence.

“Indeed, against a backdrop of a 5% contraction in the economy, rising unemployment and closure of many sectors of the economy for much of the year, the banking sector was able to continue to increase loan and deposit volumes. [at] a pace similar to pre-pandemic,” Štefanides said in written comments.

A cautious approach

The central bank, Narodna banka Slovenska, said in its report that Slovakian lenders “have fulfilled their role” during the coronavirus crisis, helping local businesses cope with the revenue contraction caused by the lockdowns by providing state guaranteed loans and through regular loans.

According to the central bank bboard member Vladimír Dvořáček.

The prudence of the shareholders helped, said Dvořáček while presenting the financial stability report at a press conference. Shortly after the start of the pandemic, tThe central bank recommended that banks reassess their dividend payout plans, and shareholders pursued a cautious dividend policy, ensuring that much of the profits from the pre-crisis period were retained. This helped them build their capital, and the the sector’s capital adequacy regularly approaches 20%, Dvořáček said.

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Bank profits will gradually return to pre-pandemic levels in coming years, and 2021 results will benefit from authorities’ decision last year to abolish the country’s special banking tax, the central bank said.

Banks are also expected to release some of their accumulated loan loss provisions in 2020 as the majority of customers, whose loan repayments were suspended under loan moratoriums, resumed their regular repayments without any issues. Vseobecna uverova banka said Stefanides.

Nonetheless, the sector’s performance will continue to face increased costs associated with pandemic-related credit risk, the central bank said.

Slovakia’s largest bank, Slovenska spořitel’na, said in April that it continued to apply a cautious approach to risk management and made significant provisions in the first quarter, with a net writedown of financial assets s amounting to 17.7 million euros.

Slovenska spořitel’na was the first savings bank opened in Slovakia, established in 1825, and has been part of the Austrian Erste Group since 2001. It has the largest retail presence in the country, according to data from S&P Global Market Intelligence, as well as the largest share in the filing market. In the business segment, it specializes in serving small and medium-sized businesses.

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Low interest rate environment, housing market

Banks are also under pressure from low rates, the central bank said in its report. Štefanides added that continued pressure on margins is a significant issue for local banks and their core profitability; Net interest income is the main source of income for Slovak banks, accounting for around 75% of overall operating income.

“It’s one of the highest shares in the EU, but interest rates in Slovakia are among the lowest,” Štefanides said. With ECB rate on hold for foreseeable future, “there really is no relief in sight”; Slovak banks will have to look for new revenue streams, shift to fee-based activities and improve efficiency, and perhaps look for mergers and acquisitions opportunities, he said.

There are also risks in the housing loan segment which, during the coronavirus crisis, increased at a rate comparable to previous years, according to the central bank. Competition between banks contributes to this. Mortgage loans to households have grown rapidly in recent years, while Slovak household debt to GDP is approaching 50%, one of the highest ratios in Central and Eastern Europe, S&P Global said. Ratings in a recent report.

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