Financial Stability Report - November 2022

Developments so far in 2022 have brought completely new financial stability challenges

The pandemic crisis has been replaced by a combination of high inflation, rising interest rates, war in a neighbouring country, and deteriorating economic prospects. These factors are also weighing heavily on financial stability in Slovakia.

Downside risks to the financial situation are rising, especially in certain parts of the corporate sector

Sharp and uneven increases in prices may have an adverse impact on some firms and disrupt the structure of the business environment. For some firms, their financial situation will improve, for others, it will worsen – depending on their ability to pass on higher costs to customers. The differences between these two groups may, however, be greater than usual. Financial difficulties may also translate into higher non-performing loan ratios.

Risks in the household sector are lower than in the corporate sector for the time being

The impact of rising costs on households has been more gradual and even, allowing some scope for adjustment. We expect that loan defaults will stop decreasing and, under an adverse scenario, may even increase. It is primarily consumer credit portfolios that are at risk. In this respect, labour market developments will have a key role.

Banks are resilient and are positioned to cope with potential credit losses

Národná banka Slovenska has in recent years increased a number of capital buffers, thereby significantly bolstering banks’ resilience. Banks are positioned to cope even with higher losses. They are sound in terms of profitability, with this years’ profits being almost the same as last years’. And on the back of rising interest rates, interest margin compression has moderated.  

Rising interest rates have so far affected mortgage loans the most and corporate loans to a lesser extent

The lending wave that arose in spring 2022 has subsided. Rising interest rates and economic uncertainty are dampening demand for mortgages, thereby mitigating the risks associated with rising indebtedness. Another corollary of this is an end to the sharp growth in property prices. Corporate loan growth remains strong, mainly owing to firms’ need for working capital financing. In this area, too, interest rates have started rising quite rapidly.

The long-dormant issue of liquidity and funding costs is coming back to the fore

Although banks currently have sufficient stable funding, the trends in this area are somewhat negative. In particular, growth in household deposits has slowed. The cost of long-term market funding, including covered bonds, is also increasing. Funding structure changes may have an adverse impact on banks’ profitability and funding stability.