Systemic risks to financial stability improving but remain elevated

Ljubljana – The general gravity of systemic risks to financial stability has been reduced as the economy has rebounded, but there are elevated risks stemming from the housing market and the long-term profitability of banks, according to the central bank’s latest Financial Stability Review.

“Year-on-year growth in housing prices exceeded the EU average by almost two percentage points in the first quarter,” vice-governor Primož Dolenc told the press on Monday.

The share of fixed-interest loans has been rising and 71% of all housing loans approved in the first half of the year have fixed interest. This may cause long-term problems for banks.

Credit risks remain elevated as well. Whereas banks’ exposure to non-performing loans continued to decrease overall during the pandemic, it has been growing in segments such as consumer loans and lending to the hospitality sector, according to analyst Meta Ahtik.

“We have also found that the quality of deferred loans is much worse compared to other loans,” she said.

The most pronounced risk, and one that has been slightly upgraded, is the income risk – the ability of banks to generate sufficient income.

Banks’ net interest margin was at the level of the median in the EU, but in the past 15 years it dropped by nearly a percentage point, to 1.45%.

Bank profitability is great at first glance, but an in-depth look shows a significant portion of banks’ income is attributable to one-off factors such as bank mergers and reduction in write-downs and provisions.

According to Dolenc, Slovenia and the EU as a whole are facing the dilemma as to whether the banking business is still attractive to investors who provide the banking system with capital.

The central bank’s risk traffic light shows the risks categories broadly unchanged, save for a deterioration of the real estate market risk, which is now designated as elevated, and a reduction in the risk stemming from leasing companies, which has been downgraded from elevated to moderate.

Despite predictions of economic growth exceeding 5% this year, macroeconomic risk remains elevated. Dolenc said this was due to the low vaccination rate and risk of a new wave of infections, which could slow the recovery.