development report 2012 - UMAR

34 Development Report 2012
Development by the priorities of SDS – A competitive economy and faster economic growth
end of the year, 59 this share rose to more than 30% and
totalled approximately EUR 4 billion, or a good quarter
more than at the beginning of the year. Since refinancing
pressures on the banks dramatically increased last year in
the euro area as a whole, and access to interbank market
financing was significantly reduced, the ECB adopted
additional measures to mitigate liquidity problems and
stimulate lending. The most important of these were
long-term refinancing operations with a maturity of 36
months in which the ECB provided almost EUR 500 billion
in loans to banks in the EU at the first auction at the
end of December last year. According to our estimates,
Slovenian banks secured an additional EUR 900 million
in long-term funds at this auction.
The quality of bank assets also rapidly deteriorated
during the past year. The share of bad debts accounted
for as much as 11.2% of the total banking system
exposure, or EUR 5.5 billion. In the last few months of
the year, the increase in C-rated loans 60 came to a halt,
which was, in our opinion, primarily the result of a faster
reclassification of debts into lower loan ratings; however,
the increase in receivables in this rating intensified at the
end of the year, which points to the fact that conditions
in the Slovenian banking system will not improve so
soon. The increase in non-performing loans still remains
high. At the end of the year, they totalled EUR 3 billion
and accounted for 6% of total bank exposure. The
deterioration in the quality of claims was fastest in the
construction sector and in the activities in which major
corporate takeovers took place 61 and, in the past few
months, also in manufacturing, particularly in metal
Figure 11: Net flows of non-performing loans by activity
In EUR million
1200
1100
1000
900
800
700
600
500
400
300
200
100
0
-100
Other
Households
Trade
Transport and storage
Financial and insurance
services
Manufacturing
Professional, scientific and
technical activities
Construction
2008 2009 2010 2011
Source: Bank of Slovenia, calculations by IMAD.
59
The data are for October 2011.
60
C-rated loans include those in which the share of impairments,
i.e. provisions, accounts for 15.01–40%.
61
These activities are financial intermediation, trade, transport
and storage and professional, scientific and technical activities.
products and mechanical industries. The volume of
non-performing loans increased significantly in these
activities during the past year; however, this was not so
high in other activities, which represent 14.0% of the
total exposure of banks during this period.
As a result of the deterioration in the quality of their
assets, the banks created additional provisions and
impairments, which further inhibited lending. Last
year, provisions and impairments totalled EUR 1.1 billion,
or 40% more than in 2010. According to our estimates,
provisions totalled EUR 3.5 billion at the end of last year.
Although the level of provisions was high, we believe
that the banks could be even more restrictive in creating
them, given the rapid deterioration in investment
quality. The rate of covering the lowest quality debts with
provisions declined during the past year. The inadequate
coverage of non-performing loans by banks was also
one of the reasons for the credit rating downgrades of
banks and the state 62 .
In addition to the aforementioned lack of financial
resources, one of the reasons for the modest lending
volumes 63 is also the weak demand for loans by both
businesses and households. Slovenian businesses are
among the most highly indebted in the euro area, which
severely restricts their options to borrow further. In the
past year, companies and NFIs repaid loans obtained from
local banks totalling almost EUR 1 billion net. In 2010, net
payments amounted to one tenth of the net payments
made in 2011. On the other hand, the companies that
were sufficiently large, successful and financially stable
increased their foreign borrowing, which totalled EUR
185.1 million in the past year. Net payments of domestic
and foreign loans totalled almost EUR 800 million last
year – twice the amount for 2010 64 . Accordingly, we
estimate that corporate debt fell in the past year but
still remains among the highest in the euro area. To
increase borrowing potential, companies will have to
further reduce their debts or provide additional capital 65 ,
which would bring in fresh funds, reduce their financial
leverage, and facilitate the acquisition of debt finance.
An important limitation regarding the corporate demand
for loans is weak economic activity and the further slump
anticipated in this regard. As a result, companies mostly
demand loans for refinancing, but their investment
activity remains low. At the beginning of the last quarter,
the situation improved but credit activity nevertheless
62
Credit rating agencies also indicate that the poor conditions
in the banking system were one of the reasons for Slovenia's
credit rating downgrade.
63
Our net lending estimate is based on a comparison of the
lending volumes in two different time periods.
64
The decrease is partly also due impairments created during
this period.
65
We believe that this is a rather limited possibility as there is
almost no alternative to bank loans as a source of financing in
Slovenia, and, in a situation of weak economic activity, operating
results do not provide for the sufficient capital strength of
companies.