IMF issued its staff report and selected issues report under the 2018 Article IV consultation with Slovak Republic. Directors concurred that the banking system is well-capitalized, liquid, and profitable. Directors commended the authorities for proactively using macro-prudential policies over the past four years to curb lending to risky and highly indebted borrowers. They also welcomed the authorities’ readiness to further tighten macro-prudential measures if needed.
The staff report reveals that the banking sector is sound, but vulnerable to adverse macroeconomic shocks. Profitability remains high supported by low operating costs. Banks’ capital adequacy strengthened in 2017 due to higher retained earnings and loans are fully funded by domestic deposits. Non-performing loans are low and adequately provisioned. Banks have sought to maintain their profitability by expanding their loan books to compensate for low interest rates, which has increased their sensitivity to adverse shocks and, specifically, to a further decline in the net interest margin or an increase in operational cost. Banks also face some risks from increasing maturity mismatches and exposure to the commercial real estate sector. The authorities support European efforts to further strengthen banking regulations. Assessments by both SSM and the National Bank of Slovakia (NBS) supervisors show that a relatively high profitability and adequate capital buffers provide Slovak banks with room to change their funding structure and absorb the costs of issuing MREL-eligible liabilities, if required.
Another significant EU level reform, the migration to IFRS 9, was implemented on January 01, but with a five-year transition period. While the change to IFRS 9 is expected to have a mild effect on the banking sector’s own funds as provisioning standards are tightened, it is not expected to have an impact on bank profitability in 2018. NBS and ECB share a common understanding of financial sector risks and the need for targeted macro-prudential measures. The authorities have gradually tightened both capital and borrower-based macro-prudential measures to counter rising vulnerabilities. The borrower-based measures consisting of limits on Loan-to-value (LTV) ratios and Debt Service-to-Income (DSTI) ratios were initially recommendations, but became binding restrictions and now cover both mortgage and consumer lending as well as bank and non-bank lending. In addition, the countercyclical capital buffer (CCB) on domestic exposures was raised to 0.5% in August 2017 and will be raised to 1.25% as of August 01, 2018. These core measures are complemented by maturity limits, interest rate-sensitivity tests, and a mandatory amortization schedule for annuities. The measures taken to date seem to be slowing down household credit growth, and the share of loan with high LTV ratio is declining. Staff welcomes the recent measures to impose limits on the Debt-to-Income ratio (DTI) and further tighten LTV limits.
A feature in the selected issues report assesses Slovakia’s household and private sector indebtedness against macroeconomic fundamentals, identifies key vulnerabilities from rapid household credit growth, assesses policy responses to date, also presenting further policy options. The assessment highlights that proactive tightening of macro-prudential policies by the authorities is slowing down credit growth and is building needed buffers. The recently adopted limits on debt-to-income ratios would complement existing borrower-based measures to dampen further lending growth to highly-indebted borrowers. These measures appropriately balance the need to preserve access to credit for Slovak households with the need to safeguard financial stability.
Keywords: Europe, EU, Slovak Republic, Banking, Macro-prudential Policy, IFRS 9, CCyB, Article IV, IMF
Scott is a Director in the Regulatory and Accounting Solutions team responsible for providing accounting expertise across solutions, products, and services offered by Moody’s Analytics in the US. He has over 15 years of experience leading auditing, consulting and accounting policy initiatives for financial institutions.
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