The aggregate net profit of Slovak commercial banks for the first half of 2013 rose 5.1% y/y to EUR 288.4mn, buoyed by a strong growth in non-interest income, central bank data showed.

The sector’s net non-interest income jumped 24% y/y to EUR 314.3mn in H1 2013, while the banks' main source of revenue - the net interest income, edged down 0.2% y/y to EUR 880.5mn. The robust growth in net non-interest revenue was driven mainly by a 69% rise in dividends received and by a 61% drop in costs related to debt securities transactions. Net creation of reserves and provisions for the six-month period swelled by 109% y/y to EUR 125.6mn.

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. On the other hand, those negative factors seem to be counteracted by the strong growth in non-interest income, observed in the second quarter of the year. If this trend continues, it would have a positive effect on the sector’s profitability. However, we must also note the huge expansion of the net creation of reserves and provisions, which reflects the worsened economic situation in the country and suggests a risk from escalation of bad debts.