Bank of Slovenia: Banking System Stable, Real Estate Risk Increasing

The general level of risks to financial stability in Slovenia has further decreased since spring, with risks to the banking system mainly stemming from geopolitical tensions in several areas affecting the global economy. All classic systemic risks to the financial system remain low or moderate and are not increasing, only the risk arising from the real estate market remains moderate but is strengthening, notes the Bank of Slovenia in its latest financial stability report.

The Bank of Slovenia emphasizes that residential real estate prices continue to rise, with the main reasons being wage growth, low unemployment, and low household indebtedness, which strengthen demand, while on the other hand, supply remains modest due to insufficient investments in residential construction. Furthermore, the current deterioration in sentiment in the construction sector could further impact conditions and sentiment in the real estate market.

Macroeconomic trends in Slovenia (inflation, economic growth, employment) remain more favorable than in the euro area. The risk of bank financing remains moderate, but there is still a significant gap between the maturity of bank sources (mainly sight deposits) and investments. Interest rate risk is also moderate, but with the reduction of ECB interest rates, the spread between loan interest rates and bank deposit interest rates is also decreasing. On the other hand, the Bank of Slovenia has lowered credit risk to the lowest level, as in their assessment "the shares of non-performing loans remain low, and banks' exposure to bankrupt companies is negligible." Income risk in the banking system and the risk arising from leasing companies remain low, while climate risk is assessed as moderate by the Bank of Slovenia.

Cyber Risk Remains Elevated

Cyber risk is the only risk that the Bank of Slovenia continues to assess as elevated, due to the global increase in cyber threats. In the EU, the number of critical cyber attacks on banking institutions is increasing, and targeted stress tests on cyber risks have shown that hypothetical cyber attacks would not have a significant impact on the functioning of key economic functions of banks and thus on financial stability.

While all key risks come from the external environment, the Slovenian banking system remains highly resilient, solvent, and profitable. "If there are no unforeseen events in the last quarter, the banking sector will also operate very successfully this year. According to the latest data, the profit of banks before taxation is even higher than last year," assesses the Deputy Governor of the Bank of Slovenia Primož Dolenc. If banks also allocate part of their record-high profits to reserves this year, favorable trends at the end of the year could also be reflected in a high capital adequacy ratio. However, it is expected that the lowering of ECB interest rates in the future will slightly reduce banks' incomes and profits.

The article was translated into English with the help of artificial intelligence. We apologize for any potential language errors.