The privatisation of Nova KBM (NKBM) Slovenia’s second largest bank, is being seen as a turning point for the country’s banking sector, which had to be bailed out by the state in 2013.
On June 30 Apollo Global Management and the European Bank for Reconstruction and Development (EBRD) signed an agreement to acquire NKBM from the state for €250mn, with Apollo acquiring 80% of the bank and EBRD the remaining 20%.
In December 2013, Slovenia’s government had to prop up three local banks, including NKBM, at a cost of €3bn, to prevent a collapse of the banking sector because of the large quantities of bad loans. As a result, at end-2014 the Slovenian state controlled 60% of the banking sector.
Apollo, the New York-based private equity group, and EBRD were selected as the preferred buyer after a competitive bidding process headed by the Slovenian Sovereign Holding (SDH), which is in charge of the privatisation of Slovenia’s state-owned assets.
“We believe that in Apollo and EBRD, we have found investors who are able to take NKBM to its next level of development,” said Matej Runjak, project leader and member of the management board at SDH, after the deal was announced, pointing out Apollo’s reputation as a global alternative investment manager and the EBRD's commitment to progress and economic stability. “We are optimistic about the future of NKBM under their ownership," he added.
However, the cost of the deal highlights the state of the bank – Slovenia’s oldest, with more than 1,700 employees. “The low sale price, reported in the press to be 40% of book value, highlights the bank's weak profile, weighed down by a very high level of impaired loans, many of which could still require additional provisioning,” ratings agency Fitch said in a statement on July 6.
In late May this year, NKBM reported that its consolidated net profit dropped 25% year-on-year to €12.3mn in the first quarter of 2015, as income fell and bad loan impairments increased.
The restructuring of NKBM, which Apollo has vowed to complete, will likely take several more years considering the bank’s significant exposure to highly indebted companies, with impaired loans representing 42% of total loans at the end of March.
Fitch’s statement did, however, suggest that the sale provides a small indication that stability is gradually returning to Slovenia's troubled banking sector.
Those involved in the deal see opportunities in the country’s banking sector in near future. “Slovenia is one of the strongest countries in the Balkans, with a small market but strong economic growth potential,” Lucyna Stanczak-Wuczynska, EBRD director for EU banks, told bne Intellinews.
While she agrees that Slovenia has gone through a turbulent period, she points out that a lot of restructuring has already taken place, and that as a bank NKBM is of systematic importance to Slovenia’s banking sector, and also for supporting local SMEs. “In our view this deal is confirmation that prospects for the sector are there in Slovenia,” she added.
Those behind the deal at Apollo see other opportunities. “Comparatively speaking, we believe the Slovenian market is over-fragmented for its size, and we believe consolidation is imminent. We were looking at one of top three players in the market,” Michele Raba, Principal at Apollo Global Management, told bne Intellinews.
She added that Slovenia is an attractive market, as it is part of the eurozone, foreign exchange risks are lower, economic growth is picking up, and the general economic situation is improving.
“We aspire to build a strong industry champion in the Slovenian banking market and ensure that serving NKBM clients remains the first and most critical priority of the bank,” she added.
According to Raba, the overall deal took around 18 months to complete. “As with any privatisation, there was a great deal of due diligence and negotiations between the parties involved in the deal process,” she said.
The sale of NKBM could be followed shortly by the sale of Abanka Vipa, potentially in the fourth quarter of 2015, once the bank completes its merger with state-owned Banka Celje (which would make the combined bank the second largest in the country). The government has also promised the European Commission that it will sell 75% of the country’s top lender, Nova Ljubljanska Banka (NLB).
Yet there is still much to be done before Slovenia’s banking sector becomes profitable. In 2014, the total net loss of Slovenia’s banks dropped sharply to a revised €114mn, from €3.59bn in 2013, but mainly as a result of the end-2013 government bailout programme that allowed domestic banks to transfer bad assets to the newly created bad bank, the Bank Assets Management Company (BAMC).