Cures hard to find for Slovenian banks’ capital problems

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By:
Nathan Collins
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Slovenia’s banks continue to suffer doubts stemming from their capital levels and ever increasing NPLs, the latest victim of the eurozone crisis.

Slovenia's little-known banking system is in the eye of the storm, following Moody’s downgrade of three of the country's banks yesterday. The country’s three largest banks: Nova Ljubljanska banka (NLB), Nova Kreditna banka (NKBM) and Abanka were all downgraded on Wednesday, with the ratings agency citing deterioration in the business climate and lack of government firepower to shore up banking solvency. Slovenian banks have been struck by increasing non-performing loan ratios, with the sector-wide average at year-end 2011 standing at 15.5%. Fitch warns that an increase to 25% is plausible. Slovenia’s economy has been hit particularly hard by the European crisis – figures from Moody’s show an 8% real GDP decline during 2009. The small gains made during 2010 are projected to be eliminated over the course of this year. Slovenia’s banks have been dogged by concerns about capitalization, with NLB receiving a €381 million capital injection from the sovereign last month. This, however, might prove too little to stem concerns about capitalization. “NLB needed at least €1 billion in extra capital before the injection, so this just isn’t enough,” says Saso Stanovnik, head of research at Ljubljana-based investment bank Alta Invest. The state-owned bank is unlikely to receive much support from 22% stakeholder KBC Bank: the Belgian bank has already pulled out of a capital increase once and has been forced to seek aid from the Belgian sovereign. Foreign investors seem unlikely to seek stakes in the banks. European banks have their own problems to deal with at the moment, even without adding the new ones that entry to a sector with soaring NPLs would bring. The government has thus far seen little interest in its plans to reduce its stake in NLB.

There has been talk of a merger between Abanka and the smaller, healthier looking Gorenjska banka – this would represent a substantial growth in size for the latter and would shore up capital concerns at the former. Gorenjska has had a strong performance over the past few years, but there are widespread doubts about the bank’s sustainability

 

Bank of Slovenia

“Abanka looked strong a few years ago, but then started to post heavy losses. Gorenjska banka may not be as good in reality as it looks on paper,” says Stanovnik As the Moody’s downgrade indicates, none of the three biggest banks is free from concerns about their capital levels and prospects for further capital injections from the state are unclear. Slovenia has been touted as the next potential recipient of an EU bailout and nine-year bond yields have headed north of 6.5%, putting the sovereign’s capacity to buoy up the banking sector into question. With government debt under 50% of GDP, Slovenia doesn’t tick the typical box of a struggling eurozone sovereign. Rather the problem rests in the country’s yawning budget deficit, which stood at 6.4% last year. The deficit is doing little to encourage nervous foreign investors. “Look at it from the perspective of an international investor,” says Stanovnik. “While the ratios are OK now, do they want to get involved with something that could be a second Greece in a few years time?”

Not only do things look bad now in Slovenia, it seems the worst is yet to come.