Pandemic-resilient Slovak banks remain strained by low interest rates, credit risk

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Slovakian bank profits fell by around a quarter in 2020, but local lenders will remain resilient even as the economy worsens, the country’s central bank said in its latest financial stability report.

Slovakian banking sector’s 2020 net profit fell about 25% year-over-year, according to data from S&P Global Market Intelligence, as local banks increased their provisions for potential loan losses, fearing loan repayment issues amid the COVID-19 pandemic.

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

The Slovak banking sector has handled 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, in a context of economic contraction of 5%, increase in unemployment and closure of many sectors of the economy for a good part of the year, the banking sector was able to continue to increase loan and deposit volumes. [at] a pace similar to that before the pandemic, “Štefanides said in written comments.

A cautious approach

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

Lenders have acted responsibly and adhered to prudent lending standards, which will ensure that Slovakia does not face “economy zombification”, which is a concern for some other European countries, according to the bank central bboard member Vladimír Dvořáček.

Shareholder prudence helped, said Dvořáček, presenting the financial stability report at a press conference. Shortly after the start of the pandemic, the central bank has recommended that banks reassess their dividend payment plans, and shareholders have pursued a prudent dividend policy, ensuring that much of the profit from the pre-crisis period is retained. This helped them build their capital, and the the sector’s capital adequacy regularly approaches 20%, said Dvořáček.

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Bank profits will gradually return to pre-pandemic levels in the coming years, and 2021 results will benefit from authorities’ decision last year to abolish the country’s special bank levy, 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 have been suspended under loan moratoria, have resumed regular repayments with no problem. Vseobecna uverova banka’s said tefanide.

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

Slovakia’s largest bank, Slovenska spořitel’na, said in April that it continued to take a cautious approach to risk management and made significant provisions in the first quarter, with a net impairment 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 group Erste since 2001. According to data from S&P Global Market Intelligence, it has the largest retail presence in the country, as well as the largest share of the market deposit. In the business segment, she specializes in serving small and medium-sized businesses.

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Low interest rate environment, real estate market

Banks are also under pressure from low rates, the central bank said in its report. Štefanides added that the continued pressure on margins is an important 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,” tefanides said. With the ECB rate remaining for the foreseeable future, “there is really no relief in sight”; Slovak banks will have to seek new sources of revenue, switch to paid activities and improve efficiency, and perhaps seek opportunities for mergers and acquisitions, he said.

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

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