Guy Norton in Zagreb -

As was widely expected Banka Celje lost its race against time to come up with €160m in fresh capital by April 25 and the bank now faces the ignominious prospect of becoming the sixth lender in Slovenia to be subject to a government rehabilitation plan. Attention will now turn to another small bank with a big question mark over its future, Gorenjska Banka.

As a recently published European Commission report notes, on the back of a cumulative 10% fall in real GDP since 2009, Slovenia's financially embattled banking sector has shrunk by a fifth, with assets falling to around €41bn (116% of GDP) at the end of last year, down from €52bn (146% of GDP) at the end of 2009. 

Given the parlous state of Banka Celje's finances – its losses quintupled last year – the attempt to raise new funds was widely regarded as a "Mission Impossible" for the country's seventh biggest commercial lender.

As a result, therefore, Banka Celje will to have to be recapitalised and nationalised by the state, while the bank's bad loans will be transferred to the Bank Asset Management Company, Slovenia's so-called "bad bank". Thus it will share the fate of the country's three biggest commercial lenders – Nova Ljubljanska Banka (NLB), Nova Kreditna Banka Maribor (NKBM) and Abanka Vipa – which the government took over and recapitalised last year, rather than that suffered by fellow banking minnows Probanka and Factor banka, which were placed in compulsory liquidation in 2013.

The €3.6bn cost of last year's rehabilitation of the banking sector was largely responsible for the fact that Slovenia's general government deficit is estimated to have almost tripled to €5.17bn or 14.7% of GDP in 20013, according to data released by Surs, Slovenia's statistics agency.

It would therefore have been ideal for the authorities in Ljubljana if Banka Celje could have attracted the necessary capital to rescue it from the ignominy and cost of a taxpayer-funded government bailout.  

But Banka Celje's principal shareholder is the country's leading lender NLB, which was rescued from extinction last year by the government, but whose own finances are less than healthy. In 2013 it notched up the unenviable record of losing €1.44bn – the biggest ever corporate loss in Slovenian history. Other major stakeholders largely comprise state-owned funds and companies whose own financial health is less than rosy. As such a cash-rich foreign investor was seen as the only likely saviour for the bank, which has a market share of roughly 5%.

Brave face

The bank's management had attempted to put a brave face on the bank's financial predicament, claiming in a press release accompanying its 2013 annual results: "The bank believes its advantages are its tradition [Banka Celje is celebrating its 150^th anniversary this year], well-established and recognized brand, and a stable customer base that includes over 125,000 individuals and more than 11,000 corporates and entrepreneurs."

No amount of positive spin, however, could gloss over the fact that last year Banka Celje's net losses soared fivefold versus 2012 to €126.3m on the back of growing write-offs and provisions that tripled to €214m. The bank's total assets dropped 20% on year to €1.8bn. Meanwhile, its Core Tier 1 capital ratio plummeted from 9.33% to 1.79% - well below the statutory 9% minimum. Under the findings of a financial stress test and asset quality review conducted last December, the bank faces a capital shortfall of €388m in a worst case scenario. As Banka Slovenije governor Bostjan Jazbec acknowledged to the Slovenia press in March there hasn't been a whiff of interest from a single outside investor to date. Any recapitalisation and nationalisation of Banka Celje will see the value of €51m of subordinated bonds issued by the bank wiped out under the terms of any bailout. That likelihood has already provoked protests from the VZMD Association of Small Shareholders whose members suffered grievous losses when roughly €440m of equity-related debt was wiped out with the state takeover of NLB, NKBM and Abanka last December.

Consolidation

The most likely scenario according to local analysts is that Banka Celje will eventually be folded into NLB, which may or may not maintain the 150-year brand in existence. If Banka Celje does disappear, that would form part of a consolidation trend which a Banka Slovenije report describes as a "a natural process" under which it expects the number of banks in Slovenia to slip to 15 or 16 by the end of 2015, down from 21 when the financial crisis struck Slovenia at the end of 2008. According to the central bank report, "The reduced number of banks will increase efficiency and contribute to economies of scale."

Another small bank with a big question mark over its future is Gorenjska Banka. Last year's stress tests revealed a potential capital shortfall of €328m and its biggest shareholder, Slovenian private sector conglomerate Sava, has financial problems of its own, which means it is unlikely to be able to come up with the requisite funds for Gorenjska Banka's recapitalisation. Although the government recently extended the deadline for shoring up the bank's capital base from June to December this year, that's unlikely to significantly reduce uncertainty hanging over the country's 10th biggest financial institution. As well as suffering from growing levels of non-performing loans like the rest of its peers, the bank's capital base was further eroded with the write-off of its 14% stake in the nationalisation of Abanka. Meanwhile its reputation has been tarnished by revelations that Slovenian police have been investigating a suspected €10m fraud involving Gorenjska officials in connection with the management buyout of building materials firm Merkur at the end of 2007.

Meanwhile, three foreign-owned banks have also to had to shore up their capital bases. The Slovenian unit of Raiffeisen Bank International (RBI) was recapitalised last December and although the Austrian lender will continue to operate in the country for the foreseeable future, it is nevertheless downsizing its operations. As RBI spokeswoman Ingrid Krenn-Ditz tells bne: "In November 2012 we decided to a rescale size of our network bank in Slovenia in terms of assets and number of employees. The bank will continue its re-scaling activities and will concentrate on those areas, where it is able to create added value." In effect that will mean servicing the banking needs of multinational corporates and high net worth retail clients.

Fellow Austrian lender Hypo-Alpe-Adria Bank has offloaded its bad debts into an internal bad bank, while its operations in Slovenia are likely to be run down or sold off as part of the planned privatisation of its Austrian parent. Italy's UniCredit Group has also covered a negligible capital shortfall of its Slovenian unit and along with its Italian counterpart Intesa SanPaolo, which owns Banka Koper, it is seen as potential buyer of banking assets that might come up for sale following the recent round of nationalisations.

Equally, France's Societe Generale, whose SKB Banka subsidiary has emerged relatively unscathed from the country's banking crisis has been touted as a potential player in the future consolidation of the Slovenian financial sector, which if successful will result in a leaner, fitter banking system better suited to address the needs of both retail and corporate customers. For the moment at least, however, life remains tough at the bottom of the food chain in Slovenia's banking ecosystem and survival and not revival generally remains the name of the game.