Actual trends and risks in the Slovak banking sector Štefan Rychtárik National Bank of Slovakia BACEE Country and Bank Conference Budapest, 14 – 16 November 2006 National Bank of Slovakia

2 Presentation outline 1.Characteristics of the Slovak banking sector 2.Credit growth – households 3.Credit growth – non-financial institutions 4.Inter-bank operations 5.Financial risks 6.Future challenges National Bank of Slovakia

3 25 credit institutions (including 7 branches of foreign banks) Total assets of banking sector: 38.4 billion € 0.1% of the EU 25 banking assets Capital adequacy from 10.1% to 28.5%, average value 14.4% After privatisation in 2000 – 2002, 97.2% of banking sector assets are controlled by foreign banks Regulatory issues: IFRS since January 2005 Basel II from January 2007 Characteristics of Slovak banking sector National Bank of Slovakia

4 Credit growth – households (I) Acceleration of credit growth since 2002 demand factors (financial situation of households, real estate prices,…) supply factors (risk management, orientation on retail,…) Source: National Bank of Slovakia National Bank of Slovakia

5 Credit growth – households (II) Source: National Bank of Slovakia Growing importance of loans to households increase in share of households in total assets higher profitability of retail operations (interest + non-interest income) higher dependence of banking sector on retail operations National Bank of Slovakia Loans to households / Total assets 2.5% 2.6% 3.3% 4.7% 5.2% 5.6% 6.0% 8.6% 10.0% 11.8% 14.5% 0% 2% 4% 6% 8% 10% 12% 14% 16% /2006

6 Credit growth – households (III) The importance of retail compared to other EU member states Low saturation of NMS retail markets Catch-up effect in terms of housing loans Source: European Central Bank National Bank of Slovakia

7 Credit growth – households (IV) Source: European Central Bank The importance of retail compared to other EU member states Generally faster growth of NMS economies GDP growth is linked to credit growth and real-estate prices growth National Bank of Slovakia

8Source: National Bank of Slovakia From 2005 growth of loans to non-financial institutions Bad experience form 90’s – 25% of loans had to be written off Financing commercial and residential real estate Credit growth – non-financial institutions National Bank of Slovakia

9Source: National Bank of Slovakia Growing banks’ positions in the reverse REPO trades with the NBS FX interventions of NBS against rapid appreciation of Slovak koruna Further inflow of foreign capital Inter-bank operations National Bank of Slovakia

10 Financial risks Interest rate risk –Low interest rate sensitivity of major types of assets and liabilities => small open interest rate positions Foreign exchange risk –Short balance sheet positions are closed by off-balance sheet items => closed FX position (99% VAR in different currencies < 1% of own funds) Credit risk –Favourable macroeconomic development => good financial positions of non-financial institutions and households. Falling NPL ratios: households: 3.25%, non-financial institutions: 5.09% Liquidity risk –Loan-to-deposit ratio 75% –Important liquidity buffer in National Bank of Slovakia (27% of total assets) National Bank of Slovakia

11 Future challenges (I) Credit risk Loans to households Overall macroeconomic situation (unemployment rates, interest rates, real wages…) Banks’ credit standards (financial situation, LTV ratio, risk margin, maturity…) Financing commercial real estate Overall macroeconomic situation (GDP growth, inflation…) Banks’ credit standards (equity ratio, cash flows estimation, risk margin, maturity…) National Bank of Slovakia

12 Future challenges (II) Credit risk Orientation to new products hedge funds private equity structured products Inter-bank operations Decrease of the banks’ positions in NBS Inter-bank market (without NBS): less profitable Loans to customers: riskier and less liquid National Bank of Slovakia

13 Štefan Rychtárik Banking Supervision Division National Bank of Slovakia National Bank of Slovakia