Moody's says Slovak bank levy to hit profits, loans, credit

BRATISLAVA, Oct 1 (Reuters) - The Slovak government's decision to double a levy on bank deposits will hurt banks' profitability and creditworthiness and eventually dent their loan capacity, credit rating agency Moody's said on Monday in a special report.

The levy, introduced by the previous government in January at 0.2 percent of corporate deposits only, was extended to include retail deposits and increased to 0.4 percent from Monday. The government also imposed an additional one-off tax amounting to 0.1 percent of banks' taxable profits.

The euro zone's second-poorest member has pledged to bring its fiscal deficit below the European Union's 3 percent limit next year, down from 4.6 percent targeted this year, and the centre-left government has said it will make corporate and wealthy Slovaks pay the most to achieve its goals.

"In our opinion the rising tax cost will further dampen banks' profit-generating capacity, their internal capital generation and, eventually, their capacity to provide new loans," Moody's Investors Service wrote.

The banking sector in the central European country remains healthy, with own capital adequacy of 15.3 percent and Tier 1 ratio of 14.1 percent, central bank data for the first half of the year showed last month.

The levy is designed to create a cushion for possible banking crises in the future.

Finance Minister Peter Kazimir said in July the tax would be halved once it has raised 500 million euros for a resolution fund, which he expected would occur by the end of 2014.

He said the tax should be abolished once it pumps 1 billion euros into the fund. Moody's expected this to happen around 2019.

Moody's said Slovakia's weak and uncertain economic environment and rising pressure on interest margins due to greater market competition were likely to exert pressure on Slovak banks' profitability over the medium term.

Banks' profits fell by almost 40 percent to 275.5 million euros in the first half of the year, the central bank said in September, but added the drop would amount to only 25 percent if adjusted for positive one-off effects seen in 2011.

The country's biggest banks are VUB Banka, a unit of Italy's Intesa Sanpaolo , Slovenska Sporitelna, of Austria's Erste Group Bank , Tatra Banka, of Austria's Raiffeisen Bank International , and CSOB, of Belgium's KBC .

(Reporting by Martin Santa; editing by Jane Baird)

(( 2 3231 0254)(Reuters Messaging: