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Financial Stability Report - November 2023

Credit market stabilisation after downswing

  • Mortgage and corporate loan originations have stabilised in 2023
  • The slowdown in lending is due to a drop in demand, not credit tightening by banks
  • Consumer credit has increased along with inflation

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Households and firms able to service loans even at higher interest rates

  • Rising loan repayments should themselves not lead to an increase in non-performing loans
  • Credit default risk could rise in the event of an economic downturn
  • The commercial real estate segment is particularly vulnerable

Banking sector still resilient

  • Banks’ resilience is confirmed by sufficient levels of capital and liquidity
  • Profitability growth has also contributed to the sector’s stability
  • Interest margins have returned to sustainable levels

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The list of risks to financial stability remains the same, but their nature is changing

Risks associated with inflation are gradually diminishing. Rising interest rates remain an important factor and are currently essential for a return to the inflation target. It is therefore no longer a rise in rates per se that is the risk, but rather the uncertainty about how long rates will remain elevated. The risk of adverse economic developments is also intensifying.

Most borrowers are coping with higher loan payments

Although interest rates have risen quite sharply, most households and firms should be able to continue servicing their loans without significant problems. Non-performing loan ratios are still at low levels. The impact of rising loan payments on mortgage-paying households is addressed in an analytical commentary published on the NBS website (in Slovak only). The impact of interest rate rises on firms has been more moderate.

The key factor for future debt servicing ability will be how the economy and labour market evolve.

The commercial real estate sector faces the greatest risk

This sector is more indebted than others and will therefore feel the impact of interest rate hikes to a greater extent. But even in this sector, thanks to relatively high margins, rising interest costs should themselves not lead to a significant increase in non-performing loans. The risk, however, lies in a combination of rate increases and adverse revenue trends.

Higher interest rates are slowing the flow of mortgages and corporate loans

During 2023, however, both markets stabilised, albeit at lower levels. The softening demand for mortgages has also been reflected in falling housing prices. This natural correction of prices is not unwelcome from a financial stability perspective.

The banking sector remains resilient with sufficient capital headroom

Capital adequacy ratios have continued rising and liquidity is stable. Interest margins have returned to sustainable levels and the sector’s profitability has increased. Banks’ interest income, especially from the corporate sector, has risen significantly in 2023. In the coming years, however, interest income will grow more slowly.

The Report looks at a number of topical issues

The impact of crypto-assets and the digital euro on financial stability are addressed in separate boxes.

Other boxes provide analyses of the following:

  • the profitability of Slovak banks as compared with foreign banks
  • the evolution of interest rates on households’ time deposits
  • how rising interest rates are affecting banks
  • accounting changes for insurance companies