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Slovenia: Banking Sector Still Prone to Risks

Published: March 14, 2014; 14:18 · (Vindobona)

The Slovenian banking sector is still prone to risks as the number of non-performing loans was not reduced substantially.

The corporate sector needs about EUR 5bn fresh equity, according to the Bank of Slovenia. / Picture: © BSI Bank of Slovenia

Slovenian banks' asset quality is still a risk despite the transfer of non-performing loans to the government-created "bad bank", Fitch Ratings says. Impaired loans have not reduced substantially as stricter loan classification has led to new inflows, even though official NPLs have fallen.

The Bank of Slovenia highlighted the decline in 90+ day arrears on Tuesday. These fell to 13.4% classified claims (including all on- and off-balance-sheet credit risk exposures) in December, from 17.4% at end-3Q13, largely due to the transfer of assets to the Bank Asset Management Company. But we believe asset quality remains weak due to the large amount of impaired loans and still high corporate leverage. The corporate sector needs about EUR5bn fresh equity, according to the Bank of Slovenia.

Impaired loans (categories C, D and E under the local regulatory classification) rose to 19.9% at end-2013, from 17.6% at end-3Q13. The EUR2.2bn drop in NPLs in December, reflecting transfers to the bad bank from NLB and NKBM, appears to have been effectively offset by around EUR1.9bn of new impaired loans. Most of these are likely to be restructured loans that are less than 90 days in arrears, and so are not reflected in NPL ratios. But they remain vulnerable to further credit deterioration in the weak operating environment. Fitch expects GDP in Slovenia to grow by only 0.3% in 2014 before growing 1.3% in 2015.

The 6.5pp gap that opened between impaired loans and the NPL ratio between end-1H13 and end-2013 largely reflects the asset-quality review conducted as part of the recapitalisation and bad bank process. The central bank has said that Slovenian banks now comply with the future harmonised credit risk definitions for EU banks. This is a positive step, as stricter loan categorisation enhances comparability and impaired loans should more accurately reflect the risks and business model differences between banks.

The divergence between impaired loans and NPLs highlights the risks of only focusing on the quantitative trigger of 90+ days past due. Analysing asset quality is challenging, especially because of the delay in banks' publishing audited financial statements. Fitch will resolve the Rating Watch Positive on the 'b- ' Viability Ratings of the three nationalised banks - NLB, NKBM and Abanka - after they publish annual reports for 2013.

Fitch expects to complete the review by end-2Q14 once the rating agency has assessed asset quality and capital levels after the asset transfers, strategy and performance prospects. The completion of the review of Abanka will also depend on the European Commission's state aid decision, and the timing of further recapitalisation and asset transfers.