LSI supervision report 2024

The shift in the interest rate environment has helped less significant institutions (LSIs) to improve profitability and capital levels over the past two years thanks to higher net interest margins. At the same time, there are persistent issues in parts of the LSI sector, such as pressure to modernise banking business models, decreased credit demand, increased funding costs and an expected deterioration in credit quality. Regarding the latter, real estate and small and medium-sized enterprise (SME) lending portfolios - both relevant areas for LSIs - have started to experience rising non-performing loan (NPL) levels and thus higher provisioning needs. All these threats will likely lead to somewhat weaker profits in the coming years. Considering that LSIs are largely retail or diversified lenders and thus subject to high and increasing competition in the light of technological innovations, the positive developments on the profitability and capital side might support the sector's investments in digitalisation. In the same context, the market consolidation trend for these business models is expected to continue. This report examines the structural features of the LSI sector, its key developments and major supervisory activities aimed at addressing challenges from the authorities' perspective.