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Outlook for Slovak banking sector deteriorating, central bank says

saidApril 6 that the outlook on the future profitability of the country's banks isdeteriorating due to low interest rates and a recently introduced law that willmake it easier to repay mortgage loans early.

"Theseconditions put into question the sustainability of the traditional businessmodel of the Slovak banking sector," said the central bank, which alsopointed out that even Slovakia's record-high growth of lending in 2015 couldnot offset the decline in interest margins.

Atthe same time, the central bank highlighted that Slovak banks remain resilientto adverse developments in the economy and financial markets thanks to theirhigh capital adequacy. According to its annual financial-sector analysis, allSlovak banks would meet both the 8% and 10.5% capital requirements in itsbaseline scenario, while in its economic-downturn scenario they would need €16million — or 0.3% of the sector's own funds — to meet the 10.5% requirement. Inthe worst long-term-recession scenario, Slovakia's lenders would need €3million of additional capital to reach the 8% capital requirement and €132million to meet the 10.5% capital adequacy ratio.

Notingthat the results are worse than those of previous stress tests, the centralbank said this was due to the tightening of stress-testing methodology.Its baseline scenario assumes economic growth of 3%, while theeconomic-downturn scenario envisions weaker-than-expected economic developmentin emerging economies, triggering anxiety on financial markets and a decline inthe global economy. The worst long-term-recession scenario supposes thatnegative trends of the previous scenario become more permanent, causing adeepening recession in 2017, as well as negative inflation.

Thescenarios did not take into account the potential consequences of a recentlyapproved Slovak law that will make it easier and cheaper to repay mortgageloans early. The regulator noted that it is difficult to estimate the value ofmortgages that could be refinanced as a result, but estimates that between onethird and 50% of the aggregated mortgage portfolio could be affected, resultingin a sudden drop of interest payments.

Inthat case, lenders would need additional capital of between €3 million and €11million to meet the 10.5% requirement in the baseline scenario, between €33million and €43 million in the economic-downturn scenario and between €190million and €202 million in a long-term recession. In the last scenario,lenders would also need between €45 million and €48 million to meet the 8%minimum capital requirement.