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Banka Slovenije notes increasing risks to stability of financial system

Ljubljana, 19 June (STA) - The latest Banka Slovenije Financial Stability Review, released by the central bank on Wednesday, speaks of increasing risks to the stability of the country's financial system. The key risks factors include uncertainties in the international environment as well as developments on the housing market.

Speaking to the press about the macroeconomic risks, vice governor Jožef Bradeško highlighted slowed down GDP growth in Slovenia and even more so the rising number of potential negative scenarios in the international environment.

International factors, including a slowdown in Slovenia's key trading partners, could further undermine growth in Slovenia, decrease demand for loans and increase credit risk.

Bradeško also pointed to the risks potentially faced by banks due to the situation of the Slovenian housing market, which has been growing fast for some time. Prices rose by 10% in 2017 and last year by more than 18%, the most among eurozone countries.

Bradeško as well as the head of the central bank's department for financial stability and macro-prudential policy Tomaž Košak attribute the fast growth primarily to an imbalance between supply and demand and less to financial factors.

The banking system is much less exposed to housing market risks than before the financial crisis, the growth of housing loans is also much more moderate, while banks' exposure to the construction sector is much lower too, Banka Slovenije says.

Košak feels housing is not overpriced yet, but he added this would inevitably happen if prices keep rising at current rates.

On the other hand, should housing prices drop significantly, banks would be hit by a drop in the value of real estate held as insurance collateral and by increased credit risks resulting from a possible economic downturn and higher unemployment.

Meanwhile, credit growth has continued, in particular in consumer lending, where growth exceeded 12% in March. The central bank noted the more than 80% of consumer loans in Slovenia have a maturity of over five years, while the share is below 50% elsewhere in the eurzone.

Lending to business has grown much more slowly, standing at 3.5% in March, which Košak said was also a result of companies performing well.

A third risk highlighted by Banka Slovenije along with international trends and the housing market is the challenge of securing sufficient revenue in the face of continuing low interest rates.

The banking system recorded high profits in 2018, but the net interest margin and the growth of net interest revenue were very low, Košak said. Moreover, the gross profit of EUR 531 million, exceeding even pre-crisis levels, was also a result of adjustments to impairment and provisions.

Meanwhile, the quality of the credit portfolio continues to improve and Košak finds it important that banks continue resolving their bad claims before a downturn that would make this more difficult and costlier.

As for the capital adequacy of the Slovenian banking system, Banka Slovenije said it was sound and comparable to the situation elsewhere in the eurozone.

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