Economic environment
Post-pandemic economic rebound in Slovenia was strong and sustained throughout the year 2021. The -4.2% GDP contraction in 2020 was overcome by a solid +8.1% growth in 2021, which was well above the average growth rate of 5.4% in the Euro area. Economic growth in Slovenia was strongly driven by domestic demand, based on both, strong domestic private consumption (+11.6) and investment growth (+12.3). Relatively favorable trends continued also in the export oriented sectors of the economy throughout the year. Employment level reached its historically highest level in 2021, which resulted in only 4.8% unemployment rate and tight labor market conditions. Year on year growth of wages slowed down in Q4/2021 as a consequence of termination of certain epidemic-related bonus payments in the public sector mostly. Inflation rate started to pick up during the year and culminated at y-o-y +4.9% at the end of the year, mostly driven by energy prices but also by prices of services and non-energy goods, where international supply chain problems also represented an important factor.
The fiscal position of the country somewhat deteriorated due to the pandemic related measures effects but on the other hand mitigated by economic revival and growth acceleration in 2021, so consequently government debt ratio stood at 74.7% and the year end and the primary balance of the general government sector amounted to -6.4% of GDP in 2021.
Structure
As of year end 2021 there were 11 commercial banks, 3 savings banks and 2 branches of foreign banks operating in Slovenian banking sector. Total assets of the banking system increased by 8.1% in 2021 and reached 48.3 billion Eur at the end of the year, which was equivalent to 92.8% of GDP. In 2021 the second largest bank in the market, NKBM d.d., went on sale and the most successful bidder for majority stake in the bank was the Hungarian OTP bank, which already owned SKB bank since 2019. This transaction was an announcement for creation of a major baking group with a market share of about 30% as measured by total assets and a major step towards the consolidation in Slovenian banking sector. However, as of the year end 2021 the deal was still pending, subject to regulatory approval.
Lending and deposits
While credit growth in Slovenian banks in 2020 mostly stagnated, credit activity was largely restored in 2021, as the average annual growth rate of loans to non-banking sector amounted to +6.3% at the end of the year (+0.2% in 2020). Growth of loans to non-financial corporations was with +6.3% (-1.4% in 2020) slightly stronger then the growth of loans to households, which amounted to +5.1% (+0.1% in 2020). The main driver of the increase in lending activity was the growth in housing loans (+9.1%) which could be attributed to increasingly favorable conditions banks offered to mortgage loans takers. On the other side net consumer loans contracted by -4.6% in 2021, which was primarily attributable to repayments of loans from previous years, when consumer lending was well above average (BoS, Feb. 2022). An interesting phenomenon in 2021 was a sharp increase in loans to non-residents (+21.8%), which was driven by loans extended to large foreign firms in some larger banks in the market. Despite accelerated growth in 2021 loans to non-residents represented only 3.3% of total banking assets, while the share of total loans to non-banking borrowers represented 51.9% of total assets at the year end.
Year 2021 also brought signs of deterioration in the quality of some banking assets. This was the case with exposures to certain service sectors and towards the end of 2021 also with some segments of household loans portfolio. Therefore, the IFRS reclassification of credit exposures resulted in 5.8% share of Stage 2 exposures in December 2021, which was still significantly lower than 8.7% average share of Stage 2 exposures in the EU as of Q3/2021.
A heavy reliance of banks on the deposits, as a major source of funding, continued in 2021, with non-banking deposits representing 77.1% of total liabilities, although their rate of growth decelerated in 2021 and ended up at +6.5% (+10.3% in 2020). Still, households’ deposits with its 49.6% share of total liabilities constituted the largest portion of deposits that grew at +6.8% annual rate in 2021 (+10.2% in 2020). With +12% annual rate the growth of non-financial corporations’ deposits happened to be much stronger in 2021, but this category of deposits represented only 18.6% in the total structure of the banks’ liabilities. Additionally, the proportion of sight deposits strengthened again in 2021, and ended up at 82.5% for the deposits by the non-banking sector and 86.8% for the households’ deposits. While deposits represent a reliable, cost effective and relatively stable source of funding, banks need to focus on adequate management of the maturity gap as it represents a potential source of funding risk in future.
Banking activity, performance and economic contribution
Profitability of the banks in Slovenian banking sector, as measured by ROE, improved from 9.6% in 2020 to 11.4% in 2021, but still did not reached the pre-pandemic level of profitability of 12.2% in 2019. Enhanced profitability in 2021 was attributable to the improvement in the economic situation, which was reflected mainly in the net release of impairments and provisions and to a lesser extent in the improved income developments. Namely, the net interest margin in the banking system reached a record low level at just 1.41% at the year end of 2021 and the depletion of the net interest income could not be fully compensated for by a relatively favorable enhancement in banks’ non-interest operations.
Despite a slight decline in the average capital adequacy ratio in 2021 the capitalization of Slovenian banks was maintained at relatively high levels. The total capital ratio (consolidated basis) at the year end 2021 amounted to 18.4% (19.1% in the euro area) and common equity Tier 1 ratio to 16.9% (15.8% in the euro area). The capital adequacy ratio in Slovenian banking sector was considerably affected by the accelerated growth of risk-weighted assets, which went up by +32% in the 2014 – 2021 period (on average only +6.2% in the euro area) as a consequence of credit growth, merger of individual banks and predominant use of standardized approach for the credit risk assessment. Nevertheless, the capital position of the Slovenian banking sector remains solid and banks well prepared for challenging times ahead.