Financial Stability Report – May 2024
Risks diminishing in intensity
- Even with higher interest rates, loan defaults are not increasing
- Commercial real estate remains subject to elevated risk
- Geopolitics and concerns about public finance developments are also sources of risk
Higher interest rates affecting lending
- Mortgage origination is lower but stable
- Mortgages have been partly replaced by consumer credit flows
- Corporate lending has stopped growing
Further strengthening of banking sector resilience
- Bank profits have increased
- Capital and liquidity positions have improved
- NBS macroprudential policy remains unchanged
Risk diminishing in intensity
Several external risks have slightly decreased. Inflation has fallen, and a gradual reduction in interest rates is expected. The main source of potential risks going forward continues to be geopolitical developments. At the same time, there are concerns about the sustainability of Slovakia’s public finances if consolidation efforts are insufficient.
Despite an environment of higher interest rates, loan defaults are not rising. Almost all corporate loans are now being repaid at higher interest rates, while around one-fifth of mortgages are currently subject to higher rates.
The corporate sector’s financial situation is stable. Risks are higher, however, in the commercial real estate sector and especially in the office segment, where occupancy rates are falling. Even so, no significant losses are envisaged.
The mortgage portfolio’s sensitivity to negative shocks has increased, owing to a decline in the value of mortgaged properties and the granting of loans with high debt service-to-income ratios.
Higher interest rates affecting lending
Mortgage origination remains subdued but stable. A slowdown in mortgage lending is to be expected at times of elevated interest rates. By contrast, consumer credit growth is accelerating, reflecting faster growth in purchases on the back of rising prices, as well as a gradual improvement in households’ financial situation.
Corporate loan growth has stalled, largely because of lower demand from firms.
Further strengthening of banking sector resilience
The banking sector’s net profit for 2023 increased by almost a half year-on-year, with its growth being driven by accelerating interest income. Banks used their higher profits to bolster their capital positions. The bank levy as currently configured is not expected to dent the banking sector’s resilience or lending capacity. Banks’ liquidity has also been boosted by renewed growth in household deposits.
Other topical issues addressed in the Report
- Favourable trends have also been seen in the insurance, investment fund and pension fund sectors.
- Stress testing confirms the financial sector’s resilience.
- The risk of contagion of negative shocks in the financial sector is relatively low.
- Existing risks require maintaining macroprudential tools at their current calibrations.