The aggregate net profit of Slovak commercial banks for the first four months of 2013 grew 4.5% y/y to EUR 186.7mn, buoyed by a strong growth in non-interest income, central bank data showed.

The sector’s net non-interest income jumped 29.2% y/y to EUR 196.7mn in Jan-April, while the banks' main source of revenue - the net interest income, fell 2.6% y/y to EUR 579.4mn. Net creation of reserves and provisions for the four-month period widened by 64.8% y/y to EUR 54mn.

IntelliNews comment: The aggregate net profit of Slovak commercial banks dropped 27% last year to EUR 488.2mn mainly due to the introduction of a 0.4% special tax on corporate bank deposits as of January 1, 2012, which was extended to cover also retail deposits as of October 2012. Commercial banks’ earnings performance was also negatively affected by historically low interest rates, which, coupled with the weakening lending activity and intense competition between banks for borrowers and depositors, squeezed interest rate margins.

We expect the banking sector to remain under pressure this year as its profitability will be affected by the hike in the special tax and by the increase in the corporate tax rate from 19% to 23% as of Jan 1, 2013, as well as by a projected significant slowdown in the domestic economy and an expected further narrowing in margins due to intensifying competition for deposits. The strong growth in non-interest income last month was surprising, and if this has not been a result of one-off events and the trend continues, it may have a positive effect on the sector’s profitability.