The Slovak banking system has made significant progress in improving its creditworthiness in the past few years, Standard & Poor's Ratings Services said in a report published today ("Bank Industry Risk Analysis: Slovak Republic").
"Restructuring and privatization of the banking sector has almost been fully completed and the whole sector is now privately owned, mostly by foreign shareholders," said Standard & Poor's credit analyst Ekaterina Trofimova. Ms Trofimova explained that strategic investors are bringing advanced risk-management systems and know-how to the market, thereby escalating competition, especially in retail banking, the major growth area for banks. The future development of the banking sector relies on several factors: progress in the country's corporate sector and in the development of retail banking; the growing wealth of the population; and prospects of growth in the EU.
"The upward momentum of ratings on Slovak banks, seen in the past four years, should also continue," said Ms. Trofimova, "but at a slower pace."
The report notes that the Slovak Republic's economy has benefited significantly from successful macroeconomic stabilization, various microeconomic reforms, and integration into EU structures. Ongoing restructuring and privatization of the banking, energy, gas, and other strategic sectors, as well as important improvements in the business regulatory framework, have significantly strengthened the economic environment. Strong real GDP growth in Slovakia (4.2% in 2003 and 4.4% in 2002) has been boosted by recent privatization and foreign direct investments (FDI).
Continued economic growth and restructuring have translated into banks' loan growth and asset-quality improvement. Loans increased by 14% in 2003. Classified loans decreased to 8.15% at March 31, 2004, from 22.7% at year-end 2001. Assisted by their foreign parents, Slovak banks have revamped their credit-granting procedures and controls. Due to restructuring, capitalization has improved, with the system's capital adequacy ratio at 21% at March 31, 2004. This, as along with adequate profitability, underpins banks' future growth potential and improves their flexibility to deal with unexpected negative events. Retail and SME lending is growing fast, but has a short track record and risk management systems are untested.
Standard & Poor's says that banks still face challenges stemming from a lack of diversification, relatively weak--albeit improving--credit culture, and a need for continued restructuring in the corporate sector. Although household income levels are still limited and unemployment remains relatively high, individuals' low financial leverage provides some comfort with regard to their debt repayment capabilities.
The three largest banks, Slovenska Sporitelna a.s. (BBpi/--/--), Vseobecna Uverova Banka, a.s. (BB+/ Positive/B), and Tatra Banka (BBB-/ Positive/A-3), represent almost 55% of the system's total assets. This level of concentration does not threaten the competitive dynamics of the system, comprising 18 banks, three branches, and eight representative offices of foreign banks. Further consolidation is likely, encouraged by tougher regulatory requirements.
Standard & Poor's now holds a more positive view on the strength of the Slovak regulatory and supervisory framework, owing to the proactive enhancement of rules that have reduced gaps with more mature financial systems. Although a relatively strong framework is in place, there is still work to be done, namely in the area of risk management and credit controls. The National Bank of Slovakia is currently working on continued convergence with EU standards, preparation for and implementation of Basel II principles, and strengthening banking supervision.
"Bank Industry Risk Analysis: Slovak Republic" is available to subscribers of RatingsDirect, Standard & Poor's Web-based credit analysis system, at www.ratingsdirect.com. Ratings information can be found on Standard & Poor's public Web site at www.standardandpoors.com; under Credit Ratings in the left navigation bar, select Find Ratings, then Credit Ratings Search.
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