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Central bank finds credit and income risks increasing

Ljubljana, 16 April (STA/APA) - The liquidity of the Slovenian banking system is currently favourable, but the trends are not favourable, the central bank says in its latest report. With macro-economic risks, high credit and income risks are coming into the forefront, Banka Slovenije deputy governor Primož Dolenc said on Friday.

Data show that all groups of activities that are not affected by coronavirus measures are recovering and that companies have significantly adjusted to the challenging situation. "The macro-economic risk is still assessed as high but has been reduced somewhat as the outlook improved," Dolenc noted.

The uncertainty of economic prospects is being increased by the third wave of the epidemic.

Dolenc said at today's online presentation of the Report on Financial Stability that high savings of households, which continue to rise, pointed to a potential rise in private consumption.

The situation on the labour market in general is stable, so future recovery will strongly depend on the epidemic and the vaccination process.

The tough economic situation affects the operations of the banking sector. "Credit risk has increased and is assessed as high, income risk remains increased," Dolenc said.

"In Slovenia, the return on capital in the banking system was relatively high last year, but the profit would have been more than 40% lower if there had not been for the one-off effect of a merger of two banks."

The return on capital would have been even lower, by about a third, if banks had realised the costs of forming provisions and impairments, which would match the long term-average.

The net interest margin plummeted in recent years. After the crisis years of 2013 and 2014, when it temporarily reached its low at 1.7%, it returned to 2.15% in the first months of 2015, and in February this year it dropped to 1.5%. "This is the lowest point since Slovenia gained independence."

In 2014, banks made extraordinary progress in reducing their exposure and entered the new crisis with a smaller share of non-performing loans than in some other eurozone countries but not with clean balance sheets.

"What was left in the system were mainly bad loans to the sector of small and medium sized companies and it seems that precisely that sector will be most affected by the current tough situation," Dolec warned.

The share of approved loan deferrals last September was twice as high in Slovenia as in the EU, with most of them from the sectors most affected by the pandemic.

Because of stimulus measures the problems of the real sector have not spread so much to the banking sector, Dolec said, noting though that now was the time for exit strategies.

Since loans deferrals will expire in the coming months, banks will need to take an individual approach to restructuring financial liabilities.

The resilience of the banking sector to high credit risks and increased income risks has thus deteriorated to medium with significant differences among banks.

As there are many banks in the country and the number of potential customers is decreasing, Dolenc believes it is time to think about the structure of the Slovenian banking system.

Thus he commented on the information that the Hungarian bank OTP, which recently purchased the SKB bank, is also eyeing the NKBM bank, which last year acquired Abanka.

Systemic risks stemming from the business operations of leasing companies remain increased. Insurers have seen a rise in premiums in property and health insurance and a drop in life insurance. The damages section has deteriorated because of health-related insurances, and profitability has decreased.

Despite the epidemic, mutual funds recorded the highest inflow of funds in the last 10 years.

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