Slovenia's banking system is stable and risks are decreasing, the country's central bank finds in its latest financial stability report. In the coming months, the system is expected to be affected by the cooling of economic activity in the eurozone and inflation persisting at high levels.

The central bank's financial stability report shows that the risks arising from the banking system itself are decreasing. There has not been any risk assessed as high for several consecutive quarters.

"The banking system's resilience to systemic risks is favourable," Bank of Slovenia vice-governor Primož Dolenc told reporters on 9 October. Liquidity and solvency are deemed favourable as well.

Head of financial stability and macro-prudential policy Meta Ahtik noted that Slovenia's inflation rose in the last few months, while in the eurozone it already decreased.

The difference between the real and nominal categories is increasing. In the long-term this could contribute to less optimal investment decisions that could affect credit risk, said Ahtik.

Property prices still rising

Real estate risk remains moderate. While real estate prices have already started decreasing in the north of Europe, Germany and Austria, they are still rising in Slovenia and Croatia.

The rate of growth has decreased in Ljubljana, signalling a turning of the cycle. "For now this trend is very moderate and points to a correction in the property market or a further convergence towards equilibrium," Ahtik said.

Financing risk remains at a moderate level as bank deposits remain high. Interest risk is elevated but a decrease is expected. This is because the growth in the share of fixed-rate loans, which increase interest rate risk exposure in the absence of hedging, has slowed down.

At the same time the share of time deposits among sources with higher deposit rates has been gradually increasing, while the share of sight deposits has been decreasing.

Lower credit risk

The level of credit risk has decreased. The key reason are very favourable developments in the non-performing loans segment, said Ahtik, adding that the hospitality sector, hit the hardest in the Covid-19 pandemic, recorded a significant improvement in portfolio quality. The decrease in credit risk is especially notable for households with fixed-rate interest loans.

The central bank believes that credit risk could worsen, especially because of uncertainties related to the August floods, although the regulator is not recording a worsening of the portfolio and there are few requests for loan moratoriums.

The central bank downgraded its income risk assessment from moderate to low due to the current increase in banks' net interest income generation. Conditions will be favourable only for a limited period of time, said Ahtik.

The bank is implementing a macro-prudential policy based on the situation. According to Dolenc, changes to the countercyclical capital buffer are expected in the near future, most likely in the direction of applying a positive neutral buffer rate. Changes to the sectoral buffer for systemic risks are possible as well.