Jan Cienski in Warsaw -

Slovakia's banks are recovering strongly from the economic crisis - so strongly in fact that there are worries the banks are taking undue risks as they scramble to attract deposits and lend out money in an economy still shaken by the steep downturn of 2009.

Mortgage lending rates are seeing an improvement, but thanks to a 15% drop in real estate prices from the pre-crisis peak, many borrowers are wary about getting into debt or are waiting for prices to fall further before taking the plunge. That has banks responding with practices like lending 100% of a property's value - something that was rarely done in 2009. "We are not happy that some of our competitors seem to have forgotten that there was a crisis and have returned to irresponsible practices," says Jozef Sikela, CEO of Slovenska Sporitelna, Slovakia's largest bank and a unit of Austria's Erste Bank. He says his bank won't lend more than 90% of a property's value.

The rating agencies are also worried. "Banks have loosened their mortgage criteria, with some returning to pre-crisis origination practices," warns Moody's Investors Service. "A large proportion of high-[loan/value] mortgages is one of our concerns for the Slovakia banking market, especially as house prices are still under pressure."

There is also fierce competition among the smaller banks in Slovakia to raise funds, setting off a deposit war. The €100,000 deposit guarantees brought in during the early days of the crisis to stabilise the European banking system is making it easier for smaller institutions to drive up deposit rates. In Slovakia, the largest banks are Slovenska Sporitelna (of Erste), VUB (of Italy's Intesa Sanpaolo) and Tatra (of Austria's Raiffeisen Bank International), as well as mid-sized banks such as CSOB, owned by Belgium's KBC Group, and UniCredit, owned by the Italian group of the same name, and a host of small and aggressive banks. "Banks are able to overpay the market," says Sikela of the deposit competition. "This is completely unfair - we will definitely not compete on the same level."

Return to profit

Despite Sikela's complaints and worries on the part of rating agencies, the Slovak banking system seems to be returning to rude health after the crisis.

In 2009, when Slovakia's economy contracted by 4.7%, the banking sector's net profit of €279m was down 48% from the previous year. One reason was lower foreign exchange income because of Slovakia's adoption of the euro at the beginning of the year. "The euro did represent a big loss for us, but we made it up in other areas," says Sikela.

In addition, there was a steep drop-off in business activity due to banks imposing much tighter credit conditions for both mortgage and consumer loans. As a result, the annual rise in retail lending dropped from 30% before the crisis to 10% by the end of 2009, while overall lending increased by only 1%.

But last year, Slovak banks saw their profit more than double to €514bn as they absorbed the profit hit from being in the Eurozone, while the Slovak economy rebounded in large part because of Germany's unexpectedly strong export boom. Much of Slovakia's industrial sector has become part of Germany's supply chain.

Despite the one poor year, Slovak banks were well capitalised and didn't need help from the central bank. Furthermore, going into the crisis Slovak banks had been much more conservative than many banks in Western Europe, which had sought to pump up profits by investing in exotic financial instruments. Because of joining the euro, Slovak banks were also immune from the foreign-currency lending that has been a source of pain for Polish and especially Hungarian banks. "In general, banks are only interested in the domestic retail and corporate segment," says Jozef Makuch, governor of the National Bank of Slovakia. "As retail loans and loans granted to the corporate sector are still quite profitable, banks haven't been forced to seek more risky investments... As a result of the conservative balance sheet structure, Slovak banks were not hit by the first wave of the crisis. The impact was visible only in the second stage of the crisis, when the domestic economy dropped as a consequence of decreased foreign demand."

That conservatism shows up in the banking system's numbers - Slovakia has a loan/deposit ratio of 81% and a Tier 1 capital ratio of 12.5%.

As Slovakia recovers, retail lending is increasing the fastest, with corporate lending trailing behind. Makuch says that Slovakia's rebound seem to be more pronounced than that being experienced by other Emerging Europe economies.

The big risk factor is Germany. If its unexpectedly strong economic expansion and furious export growth slows, then Slovak factories supplying parts and components to Germany will see their sales fall. That could potentially cause problems for companies and any resulting increase in unemployment could impact consumer and mortgage lending.