July 10, 2017 / 2:47 PM / 18 days ago

UPDATE 1-Slovak central bank raises countercyclical capital buffer to 1.25 percent

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(Adds background, central bank quote, analyst quote)

BRATISLAVA, July 10 (Reuters) - The Slovak central bank increased the capital buffer that banks must maintain for tough times to 1.25 percent of assets from 0.5 percent, effective August 2018, the bank announced on Monday.

In 2016, the central bank became the first and so far the only one in the euro zone to introduce a so-called counter-cyclical capital buffer. Banks must meet the initial 0.5 percent requirement starting in August this year. It hinted at an increase in the buffer in April, when it released data showing economic growth and low interest rates had led to the fastest growth among European Union states in loans to households, including mortgages and consumer loans .

Slovakia is part of the euro zone, whose central bank is keeping monetary policy ultra-loose. With interest rates low, banks have tried to increase lending.

In the first quarter of 2017, loans to households in Slovakia grew by 13.9 percent year on year, following an average 14-percent annual growth in 2016.

"The buffer is not meant to slow down lending. We aim to improve the resilience of the banking sector," said Marek Licak, head of the central bank's macroprudential section.

The buffer, in combination with stricter rules on lending that will come into effect next year, should eventually slow lending, Slovenska Sporitelna analyst Maria Valachyova said.

"Loan growth in 2017 does not seem to slow down much as compared to 2016," Valachyova said. "In 2018, new measures by the NBS (National Bank of Slovakia) including loan-to-value limits and stricter rules for loan granting should help slow down the retail loan growth to around 10 percent."

Slovakia's banks, including Slovenska Sporitelna, VUB, Tatra Banka, CSOB and UniCredit, are largely foreign-owned and have held up well in recent years. Average capital adequacy has increased from 17.8 percent in 2015 to 18.0 percent in 2016

The counter-cyclical buffer also means they will have to reassess their dividend policy. Between 2012 and 2015, the banks paid out dividends equivalent to 65 to 75 percent of profits. That will have to fall below 50 percent in 2016-2018 to meet their capital requirements, the central bank said last year. (Reporting by Tatiana Jancarikova; Editing by Jan Lopatka)

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