S&P upgrades Slovenia's NLB to BB, revises BICRA to group 6

LJUBLJANA (Slovenia), May 15 (SeeNews) - Standard & Poor's said it has raised its long-term counterparty credit rating to 'BB' from 'BB-' on Slovenia-based Nova Ljubljanska Banka D.D. (NLB), affirming its positive outlook.

At the same time, S&P affirmed the short-term counterparty credit rating at 'B', while lifting the issue rating on NLB's senior unsecured debt to 'BB' from 'BB-', the ratings agency said in a statement late on Friday.

"The rating action follows our review of the Slovenian banking sector and reflects our view of reduced economic risks and improved operating conditions for banks domiciled in the country", S&P said.

It noted that it has also revised its Banking Industry Country Risk Assessment (BICRA) for Slovenia to group '6' from group '7' (on a scale from '1' to '10', where group '1' represents the lowest-risk banking systems and group '10' the highest), on the back of robust domestic growth, a rapid decrease of nonperforming loans, and a faster-than-expected decline of credit costs.

S&P also said in the statement:

"We observe reduced economic imbalances in the Slovenian banking system, prompting us to revise our economic risk score to '6' from '7'. Our assessment of industry risk remains at '6', indicating our view of relatively high risks. The revised BICRA group score results in a stronger anchor, our starting point in assigning an issuer credit rating, for NLB, which is now 'bb+' versus 'bb' previously.

Slovenia has the highest GDP per capita in Central and Eastern Europe. We estimate that the economy will grow by 2.7% in 2017 and 2.4% in 2018 thanks to increasing domestic consumption and solid net exports.

The nonfinancial corporate sector is still going through a strong deleveraging and derisking period after the financial crisis hit Slovenia in 2009. Even though some industries remain highly leveraged, the consolidated corporate debt-to-GDP ratio has plunged to 50% in 2016 from a peak of 85% in 2009.

On aggregate, private-sector lending continues to shrink and underpins our assessment of an ongoing correction of Slovenia's credit cycle. Positively, nationwide inflation-adjusted real estate prices have bottomed out since 2015, and credit losses reached a record low of 0.4% of systemwide domestic loans in 2016. We see the correction phase nearing an end and deem the remaining impact on Slovenia's banking sector as limited.

We continue to expect that macroeconomic imbalances in the economy will keep decreasing as the correction period phases out and new lending resumes. Further supporting our assessment are the abating corporate indebtedness, continued decline of nonperforming loans (NPLs), an improvement of governance standards in some of the corporate sectors, as well as the government's ongoing privatization efforts.

Although we continue to see industry risk as relatively high, we now view positively that, since the handover of banking regulation to the Single Supervisory Mechanism in 2014, we believe that Slovenia's banking system will benefit from the supervisor's more proactive approach to reducing looming imbalances and system risks.


As of year-end 2016, 45% of NLB's exposure is to foreign countries, most of which have a similar or weaker economic environment than Slovenia's. The weighted economic risk score for NLB is weaker than that of a pure domestic bank, but not to an extent that it weighs on our initial assessment. While we don't expect a material change in NLB's geographical footprint over the next 12 months, we highlight that our overall assessment of NLB's credit quality would be sensitive to expansion in higher risk countries.

We continue to view NLB's business position as adequate, reflecting its dominant domestic market position and a strengthened presence in South Eastern Europe (SEE). The bank's management is implementing several restructuring measures, including improved risk management and governance standards since the large-scale state intervention in 2013. In our view, the planned partial privatization of NLB within 2017-2018 via an initial public offering is likely to bolster the bank's business position in the long term, but we don't anticipate a material impact on the bank's profile in the next two years.

We assess NLB's capital and earnings as adequate, indicating our assumption that our risk-adjusted capital (RAC) ratio before adjustments for the bank will remain at 9%-10% over the next 12-18 months. NLB's adjusted RAC ratio reached 9.6% in 2016 from 6.9% in 2015. This marked improvement was largely thanks to a reduction of highly risk-weighted NPLs. Our RAC projection incorporates the bank's objective to be more aggressive with dividend payouts and targeted growth in SEE countries, which we consider to be of higher risk.

NLB's risk position remains moderate, reflecting our view that its asset quality continues to compare poorly with that of its peers operating in countries with similar economic risks, despite progress in the workout of legacy NPLs and noncore assets, as well as an improvement of risk management and lending and governance standards. The bank's reported gross NPLs stood at 13.8% of total loans as of Dec. 31, 2016, having decreased from 19.3% a year earlier, on the back of recoveries, write-offs, and sales of nonperforming claims. We expect further reduction of the NPL stock, reflecting the economic recovery in Slovenia, intensive workout efforts, repayments, and active market for NPL sales.

We regard NLB's funding as average, reflecting the bank's strong domestic retail franchise, which mainly comprise a stable and diversified retail deposit. The funding profile is similar to other Slovenia-based banks that experience excessive inflows of new retail deposits.

We now view NLB's liquidity position as strong thanks to the bank's reduced reliance on short-term wholesale funding and its high liquidity buffer, which mainly consists of cash and well-diversified liquid debt securities. Our ratio of broad liquid assets to short-term wholesale funding reached 7.5x as of end-2016. The ratio is stronger than the majority of banks we rate, pointing to our view that NLB will withstand adverse market shocks without access to wholesale funding in the next 12 months. We believe that NLB's subsidiaries in SEE are also well equipped with strong liquidity and preserve a self-funded profile.


The positive outlook on NLB reflects our continued positive assessment of economic prospects in Slovenia that could support further improvement of NLB's asset quality and internal capital generation capacity over the next year, contributing to the improvement of the bank's credit profile. In our view, there is at least a one-in-three likelihood that we could upgrade NLB over the next 12 months.

We anticipate that further derisking of the corporate sector in Slovenia will enhance NLB's overall asset quality and income generation for its loan business. We expect a further rundown of NLB's NPL stock and noncore assets that enables new capacities for lending and profit generation.

We could take a positive rating action if economic risks in Slovenia diminish further, supporting a healthy operating environment, and in turn, NLB's business position. A faster-than-expected increase of NLB's capitalization or a significant drop in nonperforming assets, which translated into a sustainable increase in its RAC ratio beyond 10%, could also lead to an upgrade.

We note, however, that a positive rating action would hinge on contained risks in NLB's foreign business.

We could revise the outlook to stable within the next 12 months if we saw a material deterioration of the operating environment in Slovenia or in NLB's main foreign markets. This would hamper NLB's earnings performance and heighten risks of a renewed build-up of problem loans. We could also revise the outlook to stable if NLB were to expand aggressively into riskier SEE countries."