Slovakia's bank tax to hit lenders' capital, lending capacity

An additional tax on Slovak banks could hinder lending volumes and capital accumulation, according to analysts and the country's banking association.

Amid attempts to reduce the largest budget deficit in the EU, Slovakia's new government proposed an additional tax of 30% on local banks' profits in 2024, which will then fall 5 percentage points per year to 15% in 2027. Together with the regular corporate tax, Slovak banks will be subject to a 45% effective tax rate in 2024 and pay €580 million to the state, Finance Minister Ladislav Kamenický said Dec. 5. The effective tax rate will gradually drop to 33% in 2027.

The tax hit means Slovakian banks will lose the ability to generate sufficient levels of capital and fully cover demand for loans, the country's banking association said. They will also likely be incentivized to pass on some of the additional expenses to borrowers, according to Pedram Moezzi, economist for banking risk at S&P Global Market Intelligence.

"Given the reliance of the sector on retained earnings to supplement regulatory capital, the new tax levies also pose the risk of reducing banks' resilience," Moezzi said in a Dec. 7 note.

The Slovak banking sector is dominated by the units of multinational banking groups including Erste Group Bank AG, Raiffeisen Bank International AG, KBC Group NV and Intesa Sanpaolo SpA.

The additional tax could deal a roughly €80 million blow to the 2024 net profit Erste unit Slovenská sporitel'na a.s., according to Karel Nedvěd, an analyst at Czech lender Fio banka. This would represent a significant impact on Slovakia's biggest bank, which recorded a €242.8 million profit in 2022, though the hit to Erste Group would be more limited at about 3% of net profit, Nedvěd said in a Dec. 5 note.

Return on equity at Slovakian banks has been increasing, and year-to-date 2023 figures have already exceeded those of full year 2022, S&P Global Market Intelligence data shows. Total capital adequacy ratios at the biggest banks are above 16%, with Slovenská sporiteľňa having the highest ratio of almost 20% as of Sept. 30.

As of the end of October, Slovakia's banking sector posted a net profit of over €970 million, exceeding the record results of 2022. Income tax paid to date reached €273 million.

The result was supported by net interest income, mainly from the corporate segment, according to the Slovak central bank. Net interest margin (NIM) after the first nine months of the year increased to 1.8% from the year-ago 1.5%, the central bank said in its November financial stability report. NIM at Intesa unit Vseobecna uverova banka a.s. was 2.2% as of June-end and was also above 2% at Slovenská sporiteľňa as of September-end, Market Intelligence data shows.

Operating pressures

Despite the recent improvements, the Slovak banking sector is one of the least profitable across central Europe as measured by return on average assets (ROAA), Moezzi said. Sectorwide ROAA stood at 0.84% in 2022, compared with 1.19% in the Czech Republic and 1.15% in Hungary, Market Intelligence data shows. Slovenská sporiteľňa had the highest ROAA ratio among the country's largest banks at 1.18% as of September-end.

The Slovak central bank attributes the weaker profitability to banks' lower sensitivity to interest rate changes due to high proportion of fixed-rate retail mortgage loans in their portfolios, though it noted that interest income growth will be more stable than in other countries.

Slovak banks can partially reduce their taxable base by increasing expenses or offering better rates on deposits, Moezzi noted. They could also try to minimize the impact of the higher tax on capital resilience by increasing loan loss provisions as a pretax expense item. "By doing so, the sector can help mitigate the impact of higher taxes on its overall resilience," Moezzi said.

The tax is part of broader measures proposed by the Slovak government to bolster social spending and reduce the budget deficit. The government also plans to increase the tax on dividends from 7% to 10% and offer tax relief and special allowances to mortgage holders who face higher repayments after refinancing their loans.

The proposals came days before Slovakia's long-term foreign currency issuer default rating was downgraded to A- by Fitch, which cited deteriorating public finances.

Slovakia is one of many European countries that have proposed additional taxes on banks. Spain and Italy are the two largest European economies to have introduced new bank taxes, and several other governments, particularly in central and Eastern Europe, have followed suit amid investors' concerns that they could stay in place for longer than originally planned.

– Access Slovak banking sector aggregates on S&P Capital IQ Pro. – Access economic and demographic data for Slovakia on S&P Capital IQ Pro. – Compare banks' tax expenses using the Screener tool.