Financial Stability Report - May 2023

Inflation and the tightening of financing conditions remain major issues for financial stability

While the return of interest rates to normal levels is in several ways positive for stability, it is also revealing weaknesses in the global financial system, as seen, for example, in a wave of individual bank failures abroad. European banks, including Slovak banks, are more tightly regulated and are resilient to this risk.

In Slovakia, the tightening of financial conditions has had a downward impact on demand for new mortgages and, to a lesser extent, corporate loans

Demand for mortgages is falling and so are residential property prices. On the one hand, this slowdown can be viewed positively, as Národná banka Slovenska (NBS) has long been warning of the risks associated with rapid growth in household indebtedness. On the other hand, new loans are riskier than in the past, i.e. they are more sensitive to any deterioration in the economic situation.

Demand for loans to firms has also dropped. While the slowdown in corporate loan growth has been broad based, there has in particular been a longer-term downtrend in demand for loans for fixed investment.

Debt servicing capacity may deteriorate, especially in the commercial real estate sector

The rise in interest costs is particularly significant for firms operating in the commercial real estate sector. In other sectors, input cost increases are more important, and firms have sought to pass on these increases to customers. However, the higher the rise in their costs, the greater has been the decline in their profitability and liquidity.

Households are more resilient to adverse developments

The risk of repayment difficulties is being mitigated by several factors: nominal wage growth, low unemployment, and NBS’s regulatory limit on the debt-to-income ratio of loan applicants, including a requirement for lenders to stress test applicants for an increase in repayments. The main risks in this regard are rising inflation and a possible increase in unemployment. Rising interest rates are having less of an impact.

The interest rate uptrend is increasing banks’ margins

The long-term downtrend in banks’ net interest margins has stopped. This means banks are better placed to absorb any future losses. The sector’s resilience has been further confirmed by stress testing. Recent months have also seen an easing of banks’ liquidity risk.