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(Updates with details of Bank of Slovenia report)
By Marja Novak
LJUBLJANA, Jan 10 (Reuters) - Lending by Slovenian banks to the corporate sector will fall further in 2017 while banks' combined profits will also decline from 2016's level, the central bank said on Tuesday.
The Bank of Slovenia -- the central bank -- said profit would decrease due to low interest rates and a drop in business volumes, adding joint balance sheet assets of local banks will increase only in 2018 and even then growth will be weak.
The central bank said earlier on Tuesday that banks had a joint pre-tax profit of 362 million euros ($383 million)in the first 10 months of 2016, 54 percent higher than in the same period of 2015, mainly thanks to lower provisions for bad loans.
It also said shadow banking in Slovenia is estimated at 5.5 billion euros or 8 percent of the financial system. On the other hand banks' joint balance sheet assets amounted to 36.3 billion euros at the end of September, down 2.7 percent compared to December 2015.
"The development of lending outside banking is welcome because it increases the diversity of the financial system," the central bank said.
Slovenian bank lending has been falling for years after the country in 2013 narrowly avoided an international bailout for its lenders. That year the previous government had to pour more than 3 billion euros into local banks to prevent them from collapsing because of bad loans.
Loans to corporations and non-financial institutions fell by 11 percent year on year in November, the government's macroeconomic institute reported earlier on Tuesday.
It added banks increased the amount of loans to households by 2.5 percent in the same period while loans to the state were up by 0.2 percent.
"The cost of borrowing at Slovenian banks is less favourable than in (the rest of) the euro zone. As a consequence clients are seeking alternative financial resources. Corporations are increasing short-term debt abroad," the institute said in its monthly report.
Lending continues to fall although banks reduced the percentage of bad loans to 6.3 percent of all loans in October. The country returned to growth in 2014 and expects its economy to expand by 2.9 percent this year.
Some of the biggest Slovenian banks are still state-owned so the government controls about 45 percent of the banking sector.
A number of foreign banks are also present in the country, including France's Societe Generale, Italy's Unicredit and Intesa Sanpaolo, Russia's Sberbank and Austria's Sparkasse and Addiko Bank. ($1 = 0.9441 euros) ($1 = 0.9441 euros) (Reporting by Marja Novak; Editing by Alexandra Hudson/Keith Weir)