to 3.2 percent by end-2006, partly reflecting overall rapid credit growth and the change in early 2006 in the methodology for computing NPLs, but also the implementation of sound risk management practices, especially in the foreign-owned banks that dominate the system.
The banking sector is almost entirely foreign owned. Of the 17 banks registered in
Slovakia in September 2006, only two very small institutions were locally owned. Foreign owners are typically well established banks from other EU countries, particularly Austria, Germany, and Italy. While subject to strong growth in recent years, banking sector assets, at around 95 percent of GDP, are still significantly lower than in the EU-15 but are in line with
the New Member States (NMS) average.
Concentration among commercial banks remains relatively high, which is not
unusual for an economy of a relatively small size. Three banks—owned by Erste Bank, Raiffeisen Zentral Bank (both Austrian), and Bank Intesa (Italian), respectively—dominate the market with a combined market share of around 50 percent of total banking system assets. Competition among banks has been increasing as evidenced by a generally declining concentration ratio (although there was some increase in 2006), and declining interest rate
SOURCES OF POTENTIAL RISK TO FINANCIAL STABILITY
The current macroeconomic outlook does not pose immediate risks to financial
sector stability. As discussed in the accompanying Staff Report, real GDP growth has been buoyant and is expected to accelerate to above 8 percent in 2006, supported by robust domestic demand and an improved contribution from net exports. Although inflationary pressures intensified somewhat in 2006, and the fiscal deficit has risen to 3.4 percent of GDP (from 2.8 percent of GDP in 2005), the new government which took office as a result of the June 2006 general elections confirmed its commitment to adopt the Euro in January 2009 and meet all the Maastricht criteria.1 However, the Government’s goal of boosting social spending as much as possible without breaching the Maastricht fiscal deficit criterion could create some inflationary pressures. The NBS increased its key policy rate by 175 basis points during 2006 (from 3 percent to 4.75 percent), and further interest rate hikes have not been ruled out.
1 The five Maastricht criteria that EU countries must meet in order to adopt the Euro cover the inflation rate, the government deficit, government debt, long term interest rates, and the exchange rate. On March 16, 2007, the NBS and the ECB announced a 8.5 percent revaluation of Slovakia’s ERM II central parity (see the context and policy discussions in the accompanying staff report).