Slovenia’s banking sector: Facts & Figures
With 2.5% GDP growth, the Slovenian economy was one of the fastest growing economies in the euro area in 2016. Growth was mostly driven by private consumption and exports, while government investment declined by 33% and contributed significantly to the contraction of the aggregate construction investment. For 2017, 3.3% growth is forecasted by the European Commission (the independent government office UMAR forecasts 3.6%) and will continue to be driven by strong private consumption and improved public investment. Exports are projected to expand by 6% in 2017 whilst the contribution of net exports to growth is expected to diminish due to increased consumer spending and investments contributing to increased imports. Economic sentiment is positive, employment is expected to grow by 2.2% and domestic demand by 3.8%, with private consumption, at 3.5%, being the main driver of the growth. The public finance picture is expected to improve further in 2017 with the general government deficit decreasing to 1.2% of GDP from 1.8% in 2016 and debt to GDP ratio dropping to 77.8% in 2017 from 79.65% in 2016.
As of year-end 2016 the Slovenian banking sector consisted of 12 commercial banks, three savings banks and three branches of foreign banks. Total assets of the banking system stood at €37.1 billion at the end of 2016, which was 1% down from 2015 and equivalent to 93.2% of GDP (in 2015 97.6%). In the seven years since 2009 – year at which balance sheets of Slovenian banks reached their peak at €52 billion or 144% of GDP – the value of banking intermediation has shrunk by €14.9 billion or 50.8% of GDP due to the resolution of non‐performing assets and weakened credit activity. Most of the banks have tried to refocus their business activities more towards the SME segment and individuals/households, prompting large companies to search for alternative financing sources.
These developments, combined with corporate sector deleveraging, have been reflected in the 1% decrease in corporate loans in 2016 and 4.6% increase in loans to households, although the credit dynamics at the beginning of 2017 signal a slow recovery of corporate loans as well. Three out of five largest banks are government owned, i.e. NLB with 25.8%, Abanka with 10.8% and SID (a development bank) with 7.6% market share. NLB and Abanka are still under the state aid restructuring programme and the government is committed to privatising them. Currently, privatisation activities are under way in the NLB only (being the largest bank in terms of balance sheet size), and in May 2017, the European Commission approved a more gradual sale of the bank, so the government is expected to complete the privatisation of the bank in 2018.
Positive economic sentiment together with beneficial economic developments and historically low interest rates are stimulating borrower demand. Household credit activity grew by 4.6% in 2016 on an annual basis (+1.2% in 2015). Housing loans contributed more than consumer loans to improved credit activity in 2016. But in February 2017, consumer loans growth accelerated to 9.4% on an annual basis, with housing loan growth at 5.8%. At the same time the quality of the banking assets has improved as the share of the claims, more than 90 days in arrears, has declined since the third quarter of 2014 and decreased to 5.3% in February 2017.
In 2016 corporate deposits increased by 9% and household deposits by 7% on an annual basis with sight deposits increasing their share to 65% of non‐bank deposits in February 2017. The growing share of sight deposits amplifies the liquidity risk in banks (even though liquidity ratios are still at a very comfortable level) and, together with an increasing duration gap, there is also the interest rate risk to which banks are being exposed.
The capital position of banks is strong as the CET1 capital ratio for the banking system was 18.4% (2016) and even higher for the group of large domestic banks (19.9%), while the small domestic banks were, with 11.6% CET1 ratio, the most vulnerable group of banks in terms of capitalisation. Liquidity ratios are above the required minimum level and the secondary liquidity reserves persisted at a stable level of about 20% of total assets.
In 2016, all banks in Slovenia returned to profitability. The ROE more than doubled to 8.3%, up from 3.63% a year earlier. The key factors that enabled banks to strengthen their profitability were the decline in credit risk and the sharp reduction in impairments and provisions in addition to a successful resolution of non‐performing claims. However, the low interest rate environment and competition among banks put a tremendous pressure on banks’ net interest margins, which decelerated the net interest income of banks by ‐10% in year 2016. Most of the banks tried to compensate this effect by increasing the non‐interest income (in 2016 up by 11.2%) and by diminishing operating costs (down by 3.3% in 2016), although it has become evident that in the long run changes in banks’ business models will be necessary in order to assure profitability of banking operations in an increasingly competitive environment.