Although Slovak banks have operated in a relatively supportive economic environment in recent years, their profitability has remained lower than in many countries of the CEE region. The protracted period of ultra-low interest rates has continued to put pressure on their business model. In 2019, a further expanding lending activity was not enough to compensate for falling net interest margin, what resulted in negative dynamics of net interest income and consequently a marginal decline of total banking revenues. In addition, banks in Slovakia have been paying the special levy, which at present is set at 0.2% of total liabilities per year and costs the sector around 18% of its net profit on average. A key counterbalancing factor has been development of loan impairment provisions. The credit risk costs have descended significantly over the past years and is now at a historically low level, but the default rate has stopped falling. The improvement of asset quality was mainly the result of both dynamic expansion in loans and a decline in the stock of
non-performing receivables. The NPL ratio for Slovakia is among lowest in the CEE region, reaching 2.6% at the end of 2019 and dropping from 2.7% a year earlier. The overall loan-to-deposit ratio continued to be above 100% in 2019, but did not materially change compared to the end of 2018. The Slovak banking sector’s resilience has been strengthened by its increasing capital adequacy. However, at its meeting in July 2019, the Board of Slovak National Bank decided to increase the countercyclical capital buffer rate for Slovak exposures by 50 basis points, to 2.0% of risk weighted assets, with effect from August 2020.
The growth rate of total loans to households gradually moderated in 2019, to 8.0% at year-end. The slowdown was particularly large in the case of consumer loans. Its main causes were the central bank’s tightening of regulatory lending requirements and the incipient saturation of certain market segments. The volume of new housing loans has surged, partly due to borrowers taking advantage of lower rates to refinance or top up their existing loans. The portfolio expanded by more than 10% for most of the year. The continuing high loan growth has largely reflected strong demand supported by a long-running uptrend in borrowing capacity. According to the local central bank, thanks to wage growth and falling interest rates, the loans that borrowers can afford are one-third higher now than they were in 2016. This increase is roughly consistent with the rise in residential prices over the same period. The share of non-performing loans in the total volume of loans to households remained broadly stable and reached 2.9% in December 2019. Development of retail deposits showed a constant downward trend from mid-2016 and bottomed out in Q1 2018. Then, client inflows accelerated, what translated into faster annual dynamics, which stabilized at around 7% in H2 2019. Since the mid-2013 the structure of household deposit base has been changing. The volume of term deposits has been mostly decreasing over the past years, what was more than compensated by strong growth of retail demand deposits, which continued to expand by more than 10% in 2019.
In 2017, the corporate credit market was in the expansionary phase of its cycle, with the average annual growth rate oscillating at around 7-8%. For most of 2018, the volume increase remained slightly decelerated to mid-single digit, while the pace advanced to 7.0% in December. The Slovak economy’s recent slowdown had an impact on the activity of enterprises in H2 2019. The year-on-year increase in total loans to this segment decelerated to around 4%, mostly driven by lower financing granted for investments and contracts with terms longer than one year. The share of non-performing loans in the total volume of loans to non-financial corporations decreased to 3.3% at the end of 2019 from 3.7% in 2018. After an acceleration of corporate deposits from mid-2017 to a local peak in Q1 2018, the year-on-year dynamics visibly slowed down and finally recorded 0% in April 2019. In H2 2019, the annual growth rebounded and ended the year at around 5%.