Actual trends and risks in the Slovak banking sector

Štefan Rychtárik

National Bank of Slovakia

BACEE Country and Bank Conference

Budapest, 14 – 16 November 2006

National Bank of Slovakia

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Presentation outline

1. Characteristics of the Slovak banking sector2. Credit growth – households3. Credit growth – non-financial institutions4. Inter-bank operations5. Financial risks6. Future challenges

National Bank of Slovakia

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• 25 credit institutions (including 7 branches of foreign banks)

• Total assets of banking sector: 38.4 billion € • 0.1% of the EU 25 banking assets

• Capital adequacy from 10.1% to 28.5%, average value 14.4%

• After privatisation in 2000 – 2002, 97.2% of banking sector assets are controlled by foreign banks

• Regulatory issues:• IFRS since January 2005• Basel II from January 2007

Characteristics of Slovak banking sectorNational Bank of Slovakia

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Credit growth – households (I)

Acceleration of credit growth since 2002• demand factors (financial situation of households, real estate prices,…)• supply factors (risk management, orientation on retail,…)

Source: National Bank of Slovakia

National Bank of Slovakia

Loans to households: volumes and changes (in bln. SKK)

0

30

60

90

120

150

180

210

XII-95 XII-96 XII-97 XII-98 XII-99 XII-00 XII-01 XII-02 XII-03 XII-04 XII-05 XII-06

0

1

2

3

4

5

6

7

Total loans to households (left-hand scale)housing loans (left-hand scale)month-to-month changes (right-hand scale)

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Credit growth – households (II)

Source: National Bank of Slovakia

Growing importance of loans to households• increase in share of households in total assets• higher profitability of retail operations (interest + non-interest income)• higher dependence of banking sector on retail operations

National Bank of Slovakia

Loans to households / Total assets

2.5% 2.6%3.3%

4.7%5.2%

5.6%6.0%

8.6%

10.0%

11.8%

14.5%

0%

2%

4%

6%

8%

10%

12%

14%

16%

1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 08/2006

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Credit growth – households (III)

The importance of retail compared to other EU member states• Low saturation of NMS retail markets• Catch-up effect in terms of housing loans

Source: European Central Bank

National Bank of Slovakia

Households: Credit growth vs. loans / GDP (2004)

EU25*MU 12UKSEFI

SK

SL

PT

PL

AT

NL

MT

HU

LU

LI LT

IT

IE

FR

ESGR

ET

DE

DK

CZ

BE

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

0% 10% 20% 30% 40% 50% 60% 70% 80% 90%

housing loans / GDP

cred

it gr

owth

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Credit growth – households (IV)

Source: European Central Bank

The importance of retail compared to other EU member states• Generally faster growth of NMS economies• GDP growth is linked to credit growth and real-estate prices growth

National Bank of Slovakia

Credit growth vs. GDP growth

BE

CZ

DE

ET

GR

ES

FR

IE

IT

LTLI

LU

HU

MT

NL

AT

PL

PT

SI

SK

FI

SEUKMU 12EU25*

0.0%

10.0%

20.0%

30.0%

40.0%

50.0%

60.0%

70.0%

80.0%

90.0%

100.0%

-1.0% 0.0% 1.0% 2.0% 3.0% 4.0% 5.0% 6.0% 7.0% 8.0% 9.0%

average GDP growth (2001-2004)

aver

age

cred

it g

row

th (

20

02

-20

04

)

8Source: National Bank of Slovakia

From 2005 growth of loans to non-financial institutions • Bad experience form 90’s – 25% of loans had to be written off• Financing commercial and residential real estate

Credit growth – non-financial institutions National Bank of Slovakia

Loans to non-financial institutions and households (bln. SKK)

0

100

200

300

400

500

600

700

XII.96 XII.97 XII.98 XII.99 XII.00 XII.01 XII.02 XII.03 XII.04 XII.05 XII.06

T otal loans Loans to non-financial inst itut ions Loans to hoseholds

9Source: National Bank of Slovakia

Growing banks’ positions in the reverse REPO trades with the NBS• FX interventions of NBS against rapid appreciation of Slovak koruna

• Further inflow of foreign capital

Inter-bank operations National Bank of Slovakia

Streilisation of NBS and foreign banks depoists (bln. SKK)

0

100

200

300

400

500

XII.03 XII.04 XII.05 XII.06

Foreign banks deposits NBS sterilisation

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Financial risks

• Interest rate risk– Low interest rate sensitivity of major types of assets and liabilities

=> small open interest rate positions

• Foreign exchange risk– Short balance sheet positions are closed by off-balance sheet items

=> closed FX position (99% VAR in different currencies < 1% of own funds)

• Credit risk– Favourable macroeconomic development => good financial

positions of non-financial institutions and households. Falling NPL ratios: households: 3.25%, non-financial institutions: 5.09%

• Liquidity risk– Loan-to-deposit ratio 75%– Important liquidity buffer in National Bank of Slovakia

(27% of total assets)

National Bank of Slovakia

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Future challenges (I)

Credit risk• Loans to households

• Overall macroeconomic situation(unemployment rates, interest rates, real wages…)

• Banks’ credit standards(financial situation, LTV ratio, risk margin, maturity…)

• Financing commercial real estate• Overall macroeconomic situation

(GDP growth, inflation…)• Banks’ credit standards

(equity ratio, cash flows estimation, risk margin, maturity…)

National Bank of Slovakia

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Future challenges (II)

Credit risk• Orientation to new products

• hedge funds• private equity• structured products

Inter-bank operations• Decrease of the banks’ positions in NBS

• Inter-bank market (without NBS): less profitable• Loans to customers: riskier and less liquid

National Bank of Slovakia

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Štefan RychtárikBanking Supervision Division National Bank of Slovakia stefan.rychtarik@nbs.sk+ 421 2 57 87 28 74

National Bank of Slovakia