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Fitch: Slovak Lending Rules Will Slow Loan Growth, Aid Stability
March 13, 2017 / 2:19 PM / 8 months ago

Fitch: Slovak Lending Rules Will Slow Loan Growth, Aid Stability

(The following statement was released by the rating agency) LONDON, March 13 (Fitch) Tighter standards on mortgage lending in Slovakia are credit positive for banks, as they should protect asset quality and restrict excessive loan growth, Fitch Ratings says. We expect loan growth to slow to about 7% this year, from 10% in 2016 when loan growth to the non-financial sector was one of the fastest in the EU, fuelled by residential mortgages. The new rules, which take effect this month, should also improve financial stability. Slovak banks have good asset quality, reflecting conservative risk-taking and a supportive economic environment. However, household loan growth was rapid in 2016, driven by falling unemployment, rising wages and property prices, and low interest rates. Against this backdrop of fast growth, Slovakia's central bank is introducing new limits to control lending - a countercyclical move to limit exposure to potential deterioration in the economy. This should reduce the risk of banks loosening their underwriting standards or allowing their capitalisation to become weak while consumer demand for debt remains high. Slower loan growth should reduce the risk of a residential property price bubble in Slovakia. In its latest financial stability report, the central bank highlighted the shrinking volume of available flats, a factor behind a steady rise in real estate prices. A higher debt service cushion, as required by the new measure, should mitigate asset quality pressure in a potential economic stress. These credit positives are partially offset by a likely reduction in banks' profitability. Slovak banks' revenue is the most reliant on net interest income in the CEE region (2013-2015: about 80% of total revenue). We expect lower loan growth rates, coupled with margin pressure and a bank levy, to weaken profitability, with ROA dropping below 1% in 2017 (2016: 1.1%). The new rules are on top of a 0.5% countercyclical capital buffer that banks will have to hold from August. The buffer on its own was not likely to limit fast credit expansion, given the strong capitalisation of Slovak banks and the potential for weaker ones to lower dividend pay-outs to maintain growth. Under the new rules, lending with loan-to-value (LTV) over 80% is limited to 50% of each bank's total new lending from March and 40% from July. Last year, LTVs over 80% accounted for about half of new lending across the banking sector, and materially above half for some banks. In addition, banks will need to apply a harmonised assessment of borrowers' repayment capacity. Housing lending will be further limited based on loan payments of a maximum 95% of disposable income (gradually tightening to 80%), and a buffer for a hypothetical 2pp rise in interest rates. Contact: Jakub Kopiec, CFA Analyst +48 22 330 6702 Fitch Polska S.A. 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