"Preparations for a less favourable turn of events should start in good times," Primož Dolenc, the interim governor of the Slovenian central bank, told an annual bankers' conference in Ljubljana.
Dolenc assessed the state of the Slovenian banking system as favourable; the banks continue to have a strong capital base, despite a slight decrease in capital adequacy ratio in 2017.
The pressure on capital adequacy is blamed on a spike in lending. This has been quite high this year and the last, a development reflected in the fact that the fall in interest revenue has bottomed out.
It is mainly longer-term and unsecured retail loans which are increasing; these are granted swiftly without in-depth checks as to the borrowers' creditworthiness.
"Average maturity of new long-term retail loans was almost seven years last year. This is a length of time that may see a turn in the economic cycle and a deterioration in the debtors' creditworthiness."
Dolenc added that a much slower growth in housing loans suggested that such lending would not fuel the growth of real estate prices further.
Banka Slovenije is closely monitoring these price trends because it would not want a potential drop in real estate prices cause troubles for bank balance sheets again.
Corporate crediting by domestic banks has also been increasing, however, companies have improved their creditworthiness and rely more on own funds.
"This is good because it reduces the need for loans, but it is also a significant challenge for you bankers and us as regulator," the governor said.
He warned the bankers that the aspirations to make investments more profitable and increase lending market shares should not lead to a decline in crediting standards.
Fresh lending and the high and stable economic growth have been contributing to an improvement in the quality of bank credit portfolios.
Exposure to non-performing loans has been reduced to EUR 2.2bn, mainly to the sector of small and medium-sized businesses.
"The release of impairments and provisions in the past year contributed positively to banks' profitability, but the effect will peter out," Dolenc said.
Given a positive lending activity, he expects the volume of impairments and provisions to start increasing again, but considering greater prudence on the part of banks and stiffer crediting standards, it should not exceed that seen in the first years after the most recent crisis broke out.
Outgoing Finance Minister Mateja Vraničar Erman noted that bad loans were on decline across the EU, but still the European Commission had presented in spring a package to reduce them and prevent a pile-up.
The minister said that her ministry supported the measures, while her address focused on the European Banking Union. She noted the differences over a joint deposit guarantee system, whose creation would make the union operational.
The conference, hosted by the Slovenian Bank Association, will conclude with a panel debate on the banks’ lending activity in the afternoon, featuring the chairmen of NLB and Gorenjska Banka, among others.