Slovenia’s bank sector sees better times ahead

By bne IntelliNews April 7, 2015

Clare Nuttall in Bucharest -


Two years ago Slovenia’s banking sector was in crisis, and the country looked odds-on favourite to become the sixth Eurozone member to require an international bailout. Better results from 2014 show a recent turnaround, and the state is gradually easing out of the sector, which should lead to increased competition. 

Several of Slovenia’s largest banks posted encouraging results for 2014. Among the state-owned banks Nova Ljubljanska Bank (NLB) announced positive results for the first time since 2008, reporting a net profit after tax of €62.3mn. The chairman of the bank’s supervisory board, Gorazd Podbevsek, told journalists on February 27 that 2014 marked a “pivotal change in the operations of the NLB Group”. Nova Kreditna Banka Maribor (NKBM) also rebounded from a €648.4mn loss in 2013 to a €35.9mn profit in 2014. In the private sector, the country’s largest foreign-owned bank, UniCredit Slovenia, also closed 2014 with a small profit, a result the bank’s chief financial officer Guenter Friedl says was “clearly driven by our tight cost management”.

Both NLB and NKBM were among the banks recapitalised by the Slovenian government in 2013 in order to avoid having to apply for an international bailout. In 2013 and 2014 Ljubljana spent over €3.5bn to support the sector, as well as setting up the Bad Assets Management Company (BAMC), a “bad bank”. Today, the government is looking to sell its holdings in the country’s three largest banks that were taken over during the bailout. The Bank of Slovenia also set up a special fund for bank resolution at the end of March.

A good year

As banks work through their legacies of bad loans and resolve capital adequacy issues, the better performance of the sector is expected to continue in 2015. “We have seen a lot of progress over the last 18 months, but there are still some challenges, such as privatising nationalised banks, improving corporate governance and continuing with corporate restructuring,” the European Bank for Reconstruction and Development's (EBRD) Slovenia country economist, Bojan Markovic, tells bne IntelliNews.

A March 27 report from Fitch Ratings says that while the health of Slovenia's banking sector “remains fragile”, it “believes the risks posed by the financial sector to government finances and the economy have reduced significantly.”

NLB and NKBM were both among the 25 European banks revealed to have capital shortfalls in an assessment published by the European Central Bank (ECB) on October 26. An ECB spokesperson tells bne IntelliNews that the banks were required to fill any holes within six to nine months, and they would continue to be monitored as part of the bank’s general supervision activities.

At the time, the Slovenian central bank pointed out that steps had already been taken to increase capital adequacy. In its February 27 statement, NLB said it was “fully meeting the ECB's capital plan which the Bank prepared in the scope of comprehensive assessment of capital adequacy in the autumn of 2014.” Meanwhile, the chairman of NKBM’s supervisory board, Peter Kukovica, said on March 6 that its 2014 results “removed any doubts about the appropriate level of capital adequacy of Nova KBM that arose after last year´s stress tests. Nova KBM is now a highly liquid bank with a strong capital position.”

Slovenia has also made progress in tackling non-performing loans (NPL). The share of bad loans has already dropped from 18.1% in November 2013 to 11.6% in January 2015, partly as a result of the creation of the BAMC. “Non-performing loans are still high but are coming down. In terms of resolving NPLs, Slovenia is ahead of other countries in the region,” says Markovic. “A large share of NPLs was transferred to the BAMC, and new legislation including the adoption of the INSOL [International Association of Restructuring, Insolvency & Bankruptcy Professionals] guidelines should ease coordination among banks. There has also been some discussion of setting up [special purpose vehicles] to collate and restructure remaining NPLs.”

Lending continued to decline in 2014, with January-November data from the Institute of Macroeconomic Analysis and Development of the Republic of Slovenia showing a 19.6% decrease in loans, partly due to the transfer of bad loans to the BAMC. However, UniCredit’s Friedl expects lending to revive in 2015, in line with the general strengthening of the economy. The EBRD forecasts GDP growth of 1.6% this year – up from an earlier forecast of 1.0%, though still below the 2.7% expansion in 2014. “Competition for good clients will prevail in 2015. A lot of banks are chasing them, but we want to have the right clients with the right ratings, and not to pursue growth at any price,” Friedl says.

While UniCredit “started 2015 quite successfully”, Friedl also sounds a note of caution. “Going forward, we will be very cautious in terms of risk awareness as we assess new business opportunities. We see a danger in the mispricing of risks. Some banks have returned to their former behaviour, which is not a good development from our perspective. We cleaned up our balance sheet in 2013 and 2014, and do not want to create new problems.”

Legacy issues

The Slovenian economy’s return to growth in 2014 was mainly driven by the better performance of its trading partners in the Eurozone, especially Germany. However, both Slovenia and neighbouring Croatia have been slower to recover from the global economic crisis than other countries in Southeast and Central Europe, and still have legacy issues to work through.

Alberto Bagnai, associate professor of economic policy at the Gabriele D'Annunzio University in Pescara, points out that while most eastern European economies made an earlier and stronger recovery than the mainly southern European “PIIGS” – Portugal, Ireland, Italy, Greece and Spain – in some ways the pattern followed by Croatia and Slovenia is closer to their peers in southern Europe. “The countries of the former Yugoslavia are increasing their external indebtedness while decreasing their per-capita GDP. They are falling behind in the convergence of real income, while at the same time taking on more debt. This is the situation the PIIGS countries have been in for four years, and it is a worrying sign,” Bagnai tells bne IntelliNews.

Despite the positive forecasts for Slovenia in 2015 from international financial institutions, a slowdown in the Eurozone could put the country’s growth at risk, which would have knock-on consequences for the banking sector.

Meanwhile, the Slovenian government is moving forward with plans to increase the competitiveness of the sector by selling off its stakes in banks nationalised during the bailout. NKBM is reportedly in the final stages of talks with US investment fund Apollo, which is believed to have topped an offer from Hungarian bank OTP. Slovenia Sovereign Holding (SDH) declined to comment on the ongoing sale process. Ljubljana also plans to exit its 75% stake in NLB as well as finding a buyer for the country’s third largest bank, Abanka, following its planned merger with the smaller Banka Celje.

The three banks are included in the list of 15 major companies earmarked for privatisation, most of which are expected to be sold by the end of this year. Despite popular opposition to the process, Prime Minister Miro Cerar’s government is planning to press ahead with more sales after 2015. “We expect a lot more companies to be put up for privatisation. By the end of April, Slovenia is expected to draw up a set of criteria to define companies of strategic importance, with all other state-owned companies to be eligible for privatisation,” says the EBRD’s Markovic.

He adds that the EBRD might may get involved in privatisations in Slovenia, where it is “pursuing many opportunities in banking and other sectors, including among the 15 large companies on the parliament-approved list for privatisation.”

Alongside the privatisations of nationalised banks, consolidation within Slovenia’s over-populated banking sector is also expected with more mergers to follow that of Abanka and Celje. “Slovenia is highly over-banked and margins are getting smaller. We have not yet arrived at the consolidation of the banking sector that we expect to see as the bigger banks merge in the coming years. The number of banks will be reduced in the not-too-distant future,” says UniCredit’s Friedl.

Markovic agrees that Slovenia has a large number of banks compared to its size. “Privatisation will increase competition, but the sector would also benefit if this was accompanied by more consolidation. Some of the smaller banks are already contemplating mergers.”

Two international banks, Austria’s Raiffeisen Bank International and Russia’s Sberbank, are also considering an exit from the market. Raiffeisen, which expects to make another full-year loss in 2015, said in a March 25 conference call that it would make a decision on its Slovenian operations within the next few weeks. Russian business daily Vedomosti reported in March that Sberbank would decide by July 1 on which of its mainly East European branches to put up for sale. The bank’s press office did not respond to a request for confirmation.


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