Slovakia Commercial Banking Report Q3 2007

Robust Growth To Continue As Exports Soar The Slovak economy grew by 9.0% y-o-y in Q107, driven by continued fast-paced expansion of the export-oriented manufacturing sector and anchored by accelerating private consumption growth. We expect little to change through 2007 and, in line with the recently released figures, have raised our fullyear real GDP growth figure to 8.5%. Over the long term we are forecasting a gradual slowdown in the economy as greenfield investment and manufacturing output growth levels off. That said GDP growth should remain above 5% through our forecast period, underpinned by strong service sector growth, expected as private consumption booms in line with rising wages and greater household wealth.

The Slovak economy remains the fastest growing in Central Europe, with real GDP growth coming in at an impressive 9.0% y-o-y in the first quarter. As expected, industrial output in the manufacturing sector continues to be the key factor, driven by the operations of several major automobile production facilities which came on line in Q406. Manufacturing turnover increased by 20.0% y-o-y in Q107, led by an astounding 100.2% growth in the production of transport equipment. As output in the export-oriented industries soars, the country's trade profile is looking increasingly rosy. In real terms, exports of goods and services increased by an impressive 24.1% y-o-y in Q107, amounting to SKK375.5bn, exceeding the value of imports for the first time since Q104. The export growth figure not only exceeded the 17.1% y-oy Q106 figure, but was also the largest quarterly y-o-y increase in over eight years.

This is not to say that exports are the only major factor. Foreign investor interest in the country remains strong with gross foreign direct (GDP) investment totalling US$6.1bn in January-February, up from US$3.9bn over the same period in 2006. With large inflows of greenfield investment into new manufacturing plants continuing, gross fixed capital formation (GFCF) rose by 7.7% y-o-y in the first quarter, raising the quarterly value of fixed capital investment to SKK98.6bn, up from SKK89.1bn in Q106. Also underlining the strong Slovak economic performance is steady and robust private consumption growth, which expanded in real terms by 6.5% y-o-y in Q107, down just slightly from the 6.6% y-o-y growth figure recorded over the same period a year earlier. The economic picture certainly looks healthy and our view is that there are few risks to the growth outlook over the short term. In line with the strong Q1 data, we have revised upward our real GDP growth forecast to 8.5% from 7.8%.

The Commercial Banking Sector The hard numbers that BMI has collated from Slovakia's commercial banking sector indicate that Slovakia is home to a fairly mature banking sector. As at December 31 2006, total assets, loans and deposits amounted to US$62.5bn, US$26.0bn and US$37.7bn, respectively. These figures are, for instance, similar to those for Romania, a country with four times the population of Slovakia.

As is the case in the neighbouring Czech Republic, all three key ratios are low in Slovakia. As at December 31 2006, the loan/deposit, loan/asset and loan/GDP ratios were 69%, 41.7% and 46.3% respectively. All three ratios have been rising over the past year. The loan/deposit ratio in particular is rising at a rapid rate. This suggests that, unlike their peers, the multinational banks' subsidiaries in Slovakia are still attracted to the idea of recycling deposits to non-bank clients. However, the Slovak banks are also sources of net funding for activities elsewhere.

Also worth noting is the fact that 'other assets' are huge - at 38.8% of total assets - in relation to 'total liabilities', which are only 31.2%. The implication here is that the Slovak banks would prefer to recycle deposits as loans to other financial institutions (in Europe) than to lend the deposits to non-bank customers or try to earn fees by selling some other financial product (e.g. insurance) to the owners of the deposits. The implication is that competitive conditions in the various different parts of the Slovak financial system are such that it makes sense for the multinational banks that dominate the Slovak banking scene to use their Slovak subsidiaries as a source of funding for activities in other countries.

Slovakia's banks appear, collectively, to hold bonds worth US$12.2bn. The banks' bond holdings grew by 23.5% over the year to December 31 2006, recovering from their earlier fall. The figures suggest that holding government bonds are starting to be seen as equally attractive as lending the money to affiliates in other countries or indeed to non-bank borrowers. The banks' bond holdings currently amount to about 19.5% of total assets. BMI considers that in an international context, the banks are highly exposed to bonds.

Press Reports Reports in the Slovak and international press generally reflect two issues. First, and as discussed throughout this report, Slovakia's economy has been booming. A main consequence of this is that lending has grown rapidly. Some of the lending has been for housing: however, a number of banks have also reported growth in demand for corporate loans. A press report by Slovenska Tlacova Agentura (the Slovak Press Agency) at the end of March 2007 indicated that outstanding housing-related loans advanced by Slovenska Sporitelna, the largest bank in the country roughly doubled in the year to the end of March 2007 to SKK30bn (or around US$1bn). The press report suggests that the bank's clients like home equity loans (which have been available since early 2005) as well as conventional mortgages.

Bearing in mind, though, that Slovenska Sporitelna's market share is around 15-20%, and that total loans outstanding at the end of 2006 amounted to around US$26bn, it would probably still be fair to say that housing-related loans are growing rapidly from a low base.

The second key issue is that the bankers, both within and outside Slovakia, remain bullish. A Dow Jones International news report from mid-April 2007 indicated that GE Money Bank, a unit of General Electric, has opened three branches in Slovakia.