PRAGUE, April 16 (Reuters) - A stress test by Slovakia has shown its banks have sufficient capital buffers to withstand shocks, although their profitability could be severely hit as growth prospects worsen in the small euro zone member.
The sector’s capital adequacy was 15.7 percent at the end of 2012, the highest since 2005, and probably reached 16.6 percent after the anticipated retention of some earnings for the last year. The weakest bank showed a 12.3 percent capital buffer.
Under all three model scenarios, banks in the euro zone member would keep capital adequacy way above the 8 percent required by the Basel banking regulations implemented since the 2008 financial crisis.
The central bank said that under its baseline scenario, which sees 1.3 percent growth this year, no bank would require additional capital.
The bank itself, however, has already cut its forecast to 0.7 percent and under its “economic drop” scenario, assuming a deep fall in gross domestic product, the banking sector would need 7.6 million euros in extra capital to recapitalise one bank.
Under a scenario assuming a deepening of Europe’s sovereign crisis, the required capital would rise to 11.2 million euros, or just 0.23 percent of banking sector equity.
The average sector capital adequacy under the three scenarios would be 15.9, 16.3 and 15.5 percent.
Fellow eastern European euro zone member Slovenia is seeking funds to fix a banking sector hit by bad loans to consumers and companies who have been hurt by the economic downturn.
But Slovakia has seen little sign of weakness in the sector over the past year and tests showed the banking sector would generate profit of 600 million euros in 2013-2014. This would fall to 31 million under the second scenario and a loss of 245 million under the third scenario.
The sector showed a profit of 480 million euros last year, down 29 percent from 2011 mainly due to the introduction of a special banking tax, the central bank said.
The country’s biggest banks are VUB Banka, a unit of Italy’s Intesa Sanpaolo ; Slovenska Sporitelna, a subsidiary of Austria’s Erste Group Bank ; Tatra Banka, of Austria’s Raiffeisen Bank International ; and CSOB, of Belgium’s KBC. (Reporting by Jan Lopatka; editing by Patrick Graham)