FINANCIAL INSTITUTIONSSECTOR IN-DEPTH 10 DECEMBER 2015ANALYST CONTACTSArif Bekiroglu 4420-7772-1713AVP-Analyst arif.bekiroglu@moodys.comAleksander Blacha 44-20-772-5282 Associate Analyst aleksander.blacha@moodys.comHenry MacNevin 44-20-7772-1635 Associate Managing Director henry.macnevin@moodys.comCarola Schuler 49-69-70730-766 Managing Director - Banking carola.schuler@moodys.comBanking - SlovakiaIncreased SME Lending Will Bring Diversification Benefits to Slovak Banks Summary Slovak banks have focused on mortgages loans to drive credit growth over recent years, leading to significant concentration towards this sector. The countrys SME sector is now expected to see stronger growth which may offer opportunities for Slovak banks to increase diversification in their loan portfolios, although the risks associated with this sector are higher.The Slovak banking sector came through the global financial crisis relatively unscathed, largely due to healthy domestic consumption which helped offset export market volatility. Mortgages were in greatest demand, with growth in mortgage lending averaging 13% a year since 2009. Momentum was fuelled by increasing household purchase power and rising competition as banks sought higher loan volumes to compensate for narrowing margins caused by falling interest rates. As a result a significant concentration towards this sector has emerged, with mortgages now making up by far the largest share of the banks' loan books, at 43%.The strong competition, combined with the low-interest environment in Europe, has driven mortgage lending margins to historical lows. Some relaxation of underwriting standards has also occurred, evidenced by rising percentages of loan to property values. The central bank issued new guidelines last year that aimed to prevent unhealthy mortgage lending practices from taking hold. These included stress-testing borrowers capacity to absorb interest rate shocks, capping high loan- to-value mortgages, and restricting loan repayment periods.With housing debt to GDP still only moderate at 23% at the end 2014, mortgage lending has further room to grow in Slovakia. However, with lending rates at historic lows, banks will only be able to achieve higher yields through diversification into different segment.While consumer loans offer higher lending rates at between 12% and 14% (almost twice the euro-area average) the segment already makes up 13.9% of the aggregate loan book, versus a euro-area average of 11.2%, meaning that further growth could be constrained. The extended maturity of some of these loans is also cause for concern. While this increases affordability, it lengthens the term of indebtedness, reducing the agility of households in an economic downturn. This may lead to regulatory measures to tighten underwriting practices in the future as household leverage increases.Slovakias strong economic outlook and export-driven open economy may provide greater future growth opportunities for ...
