NBS: Profits of Slovak Banks to Fall in Next Few Years

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NBS building in Bratislava. (Photo by TASR)

Bratislava, November 24 (TASR) – The Slovak financial sector has maintained its high resilience to external shocks, with all banks in Slovakia having enough of their own resources at their disposal and also meeting all capital criteria with comfortable margins, said the central bank’s (NBS) financial market supervision department director Vladimir Dvoracek on Thursday.

Dvoracek was presenting a Report on Financial Stability in November 2016. At the same time he pointed out that the Slovak banking sector’s profitability is expected to drop in the next few years. Even though the banks’ profits rose by 6 percent year-on-year in the first three quarters of 2016, when non-recurring effects are calculated in, it becomes evident that overall profits were down by 8 percent.

“We conducted a simulation of profitability for the next three years, and it emerged that we’ll see a drop in the profitability of the banking sector next year, with this trend, albeit more moderately, set to continue in 2018 and 2019,” said Dvoracek, adding that the overall slump in profits could be as huge as 40-50 percent in the next few years.

This development should be largely driven by a continuing drop in interest incomes. NBS pointed in particular to a significant fall in mortgage incomes, with this situation due to a legislative change in March that introduced a ceiling on fees for repaying loans prematurely. This resulted in a doubling of refunding loans, while interest rates have declined steeply.

“With regard to the expected level of profitability and the growth of capital requirements, we assume that banks will have to restrict the paying of dividends in the near future somewhat,” noted Dvoracek.

As much as 75 percent of banks’ profits were distributed as dividends in recent years.

NBS also reported that the stability of the Slovak financial sector has been supported solidly by the domestic economy, which continued growing at a stable rate. At the same time there has been a dynamic double-digit increase in the volume of loans provided to households, including consumer loans and housing credit.

Meanwhile, corporate lending has also been developing well, recording stable growth.

Nonetheless, NBS also cautioned that Slovak households have been running into debt perhaps too quickly as of recently, with Slovakia posting the fastest growth in this regard in central Europe.

“Within a few years we may catch up with countries in western Europe when it comes to debt levels, while our households are less secured in financial terms,” warned Dvoracek, adding that this makes households far more sensitive to possible negative economic developments.

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