Stable outlook for Slovak banking

The fundamental credit outlook for the Slovak banking system is stable, reflecting the rated banks' focus on traditional banking activities, their generally sound financial fundamentals and low risk appetite. The outlook is also underpinned by the operating environment, which has not deteriorated as rapidly as in some other Central and East European countries, and by the relatively limited impact of the global banking crisis on Slovak financial institutions, Moody's Investors Service said in its new Banking System Outlook for Slovakia.
"The Slovak banking sector has benefited from strong domestic economic growth and relatively low interest rate environment in recent years, which have underpinned the strong loan growth on the market. The demand for loans has been high in both the retail and corporate segments, while banks were competing to increase their market shares," explained Gabriel Kadasi, a Moody's analyst and author of the report.
However, as the credit crisis is spreading into Central Europe, Slovak banks are also becoming more cautious due to tightening liquidity and worsening macro economic conditions.
The overall risk profile of the Slovak banks is relatively conservative. Credit risk remains the banking system's key risk, especially after the fast increase in loan portfolios. Moody's expects that the weakening of the operating environment will test the banks' portfolio quality and their risk management systems. Asset quality ratios are seen worsening due to the seasoning of the portfolios and low growth expectations. In addition, Moody's noted that Slovak banks are characterised by high borrower concentrations but expects that this should improve with the expansion into retail and SME lending.
Tighter lending conditions and moderate slowdown in the economic growth are likely to translate into a slowdown in loan growth and a slower increase in revenue generation, resulting in lower banking sector profitability. The introduction of the euro in 2009, increased funding costs and growing provisioning will also likely have a somewhat downward impact on profits in the short to medium term. However,
Moody's expects the impact to be relatively modest and on its own unlikely to exert pressure on bank ratings unless other financial indicators deteriorate more than currently anticipated.
"The liquidity of the sector remains ample and loan growth is still funded primarily by the customer deposit base. However, funding sources are tightening rapidly and banks will have to pay more attention to liquidity management and pricing," cautioned Kadasi. In Moody's view the competition for deposits will intensify as further growth in the loan portfolios will be in many cases determined by the banks' ability to increase their deposit base. Capital adequacy has been weakening due to the rapid asset growth and dividend payments, but remains satisfactory for the Moody's rated banks.
"The credit crisis has had only a limited impact on the Slovak banks, which have benefited from their domestic focus and the sector's good liquidity position. However, the banking system is not immune to international money market conditions and has already witnessed a growth in funding costs and tightening of liquidity conditions. Additionally, banks that rely on parental funding may be negatively affected by any liquidity issues at the parent banks," Kadasi added.
Foreign investment in the Slovak banking system remains high, with foreign owners controlling around 97% of total capital. Moody's continues to expect the banks' strategic shareholders to provide their subsidiaries with not only expertise and knowledge transfer, but also financial support in the event of need.