Fitch Downgrades 5 and Affirms 2 Slovenian Banks, Outlook Negative

Fri Apr 5, 2013 12:12pm EDT

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(The following statement was released by the rating agency) WARSAW/LONDON, April 05 (Fitch) Fitch Ratings has downgraded Nova Ljubljanska Banka d.d. (NLB), Nova Kreditna Banka Maribor d.d. (NKBM), Banka Celje d.d. (BC), Gorenjska Banka (GB) and Probanka d.d.'s Long-term Issuer Default Ratings (IDRs). The agency has also affirmed Abanka Vipa d.d. and Banka Koper (BK)'s IDRs. The Outlooks on each of the banks' Long-term IDRs is Negative. The agency has also downgraded each of the banks' Viability Ratings (VRs), with the exception of BK. A full list of rating actions is at the end of this commentary. Fitch has simultaneously withdrawn GB's ratings, as the bank has chosen to stop participating in the rating process. Fitch has determined that GB's public disclosures are not sufficient to allow Fitch to maintain the ratings. Accordingly, Fitch will no longer provide ratings or analytical coverage for GB. KEY RATING DRIVERS: NLB AND NKBM'S SUPPORT RATINGS, SUPPORT RATING FLOORS AND IDRS The downgrade of NLB's and NKBM's Support Ratings (SRs) and Support Rating Floors (SRFs), and hence their Long-term IDRs to 'BB-' from 'BBB-', reflects continuing delays in the crystallisation and implementation of a clear and decisive solution for the problems in the Slovenian banking sector as a whole, and at NLB and NKBM in particular. This was cited as a rating driver when the banks' ratings were last reviewed in August 2012. Since then, a solution has become more pressing because of further deterioration in asset quality at NLB and NKBM and across the broader sector, and the continuing poor economic outlook for the country. Nevertheless, Fitch's base case expectation remains that sovereign support for NLB and NKBM will ultimately be forthcoming, and that the resolution of the two banks will not involve losses for senior creditors. This view is based primarily on the affordability of support for the sovereign (Fitch's base case expectation is that the two banks will require around EUR1.6bn of new capital, equal to 4.5% of 2013F GDP), the track record of incremental capital support for the two banks during 2011-Q113, and the agency's understanding that a bail in of senior creditors is currently not on the agenda of the Slovenian authorities. The ratings also take account of the banks' systemic importance and majority state ownership. Fitch's base case recapitalisation estimates assumes (i) that the non-performing loans (NPLs) ratio at each bank will peak at a level roughly half-way between the NPL ratio and total impaired loans ratio (categories C, D and E under the local regulatory classification) reported at end-2012; (ii) creation of total loan impairment reserves (including those on performing loans) equal to 80% of peak NPLs; and (iii) restoration of the Fitch Core Capital ratio to 10%. KEY RATING DRIVERS: ABANKA'S IDRS, SRF AND SR The affirmation of Abanka's SR and SRF, and hence also its 'B-' Long-term IDR, reflects Fitch's view that support from the Slovenian authorities remains possible, although this cannot be relied upon. The agency's view of possible support takes into account Abanka's systemic importance as the third largest bank in the country (an 8% market share by total assets). At the same time, there is no majority state ownership at Abanka and there has been no government capital support to date and this, along with its smaller size, drives the bank's lower SR and SRF compared with majority state-owned NLB and NKBM. Abanka has so far unsuccessfully tried to raise capital from private sources and, in the agency's view, the currently planned EUR90m equity issue will not by itself be sufficient to fully restore the bank's solvency. Fitch's base case expectation is that Abanka needs about EUR0.4bn of new capital, bringing the total requirement for the three largest banks to about EUR2bn, or 5.8% of 2013F GDP. RATING SENSITIVITIES: NLB, NKBM AND ABANKA'S IDRS, SRF AND SR The Outlooks on the three banks' Long-term IDRs are Negative, reflecting Fitch's view that the balance of risks remains on the downside. In particular, the ratings could be downgraded further if (i) the banks' recapitalisation needs prove to be substantially greater than currently anticipated, making a rescue significantly more onerous for the sovereign balance sheet; (ii) a lack of political consensus or other factors result in further, prolonged delays in the formulation and implementation of a recapitalisation plan; or (iii) there is any clear indication from the Slovenian authorities that the resolution of the banks could involve the participation of senior creditors. Tangible progress with recapitalisation measures sufficient to restore the banks' solvency could help to stabilise the ratings at their current levels. In the case of Abanka, such measures could result in an upgrade of the Long-term IDR from its current low level. KEY RATING DRIVERS: VRS OF ALL BANKS The downgrades of NLB, NKBM, Abanka, BC, GB and Probanka's VRs reflect varying degrees of further deterioration in the banks' standalone profiles, mostly due to continued growth in NPLs, weak performance and resulting pressure on already tight capital positions. The downgrades of Abanka and Probanka's VRs to 'cc', and of NLB and NKBM's to 'ccc', reflect their particularly acute capital needs and weak performance. Abanka's and Probanka's VRs are also negatively impacted by their tighter liquidity and greater refinancing risk. The affirmation of BK's 'bb' VR reflects the bank's considerably stronger standalone position compared with other Slovenian banks, based on its adequate capitalisation, only moderate asset quality problems and comfortable funding and liquidity positions. Fitch also regards the bank's risk management framework, credit underwriting and corporate governance as superior to peers, reflecting the influence of BK's owner, Intesa Sanpaolo ('BBB+'/Negative). Fitch expects the performance of Slovenian banks to remain at best weak in 2013, driven mainly by further loan impairment. All rated banks (with the exception of BK) were loss making in 2012, and further losses are likely in 2013. Pre-impairment performance is also set to remain under pressure from moderate interest rate spreads and the high levels of non-cash generating assets. In view of negative internal capital generation, capital ratios are likely to deteriorate further if these do not benefit from external support. Credit risk remains high at the banks, predominantly in corporate portfolios, notably due to exposures to the highly leveraged real estate/construction sector and holding companies, and low levels of reserve coverage of NPLs. In addition, further deterioration in the operating environment could result in a worsening of asset quality of currently performing exposures. Significant single-name borrower concentrations heighten these risks. The liquidity positions of the banks generally remain quite comfortable in light of their manageable refinancing needs in 2013 and 2014 and to date stable deposit bases. However, refinancing risk at Abanka and Probanka is heightened due to their modest liquidity buffers and material amounts of wholesale funding falling due in 2013. Banks' loan/deposit ratios also remain high, which reflects their substantial wholesale funding, albeit this is provided mostly by the Slovene Export and Development Bank and the ECB. RATING SENSITIVITIES: VRS OF ALL BANKS The VRs of NLB, NKBM, Abanka, BC and Probanka could be downgraded further should additional recognition of credit losses result in a further marked deterioration in capitalisation, or if a sharp tightening of liquidity threatens the banks' ability to service their near-term obligations. The VRs could be downgraded to 'f', indicating that the banks have failed, if the banks default or, in Fitch's view, have required external support in order to avoid default. Conversely, decisive measures to strengthen the banks' capitalisation could ultimately result in upgrades of VRs. BK's VR could be downgraded if the ongoing contraction of the economy results in a weakening of asset quality and capital. An upgrade of the VR is unlikely in the foreseeable future. KEY RATING DRIVERS AND SENSITIVITIES: BC, GB AND PROBANKA'S IDRS, SRs and SRFs The downgrades of GB, BC and Probanka's Long-term IDRs to 'B', 'B-' and 'CC', respectively, reflect the downgrades of the banks' VRs. The affirmations of the SRs at '5' and the SRFs at 'No Floor' reflect Fitch's view that support from the Slovenian authorities cannot be relied upon given the banks' private ownership and moderate market shares, and the absence to date of any government initiatives to inject capital into non-state-owned banks. BC's and Probanka's Long-term IDRs could be downgraded further in the case of downgrades of their VRs. KEY RATING DRIVERS: HYBRID CAPITAL INSTRUMENTS OF ABANKA AND NKBM The hybrid capital instruments were downgraded to the lowest rating level of 'C' due to Fitch's expectation of their poor recovery prospects and the downward revision of both banks' VRs. KEY RATING DRIVERS AND SENSITIVITIES: BK'S IDRS AND SR The affirmation of BK's Long-term IDR at 'BBB' and SR at '2' reflects Fitch's view that Intesa will continue to have a strong propensity to support its subsidiaries in the Central and Eastern Europe (CEE) region, notwithstanding its primary focus on the Italian market. The Negative Outlooks on BK's Long-term IDR mirrors that on Intesa. The Long-term IDR could be downgraded if the parent is downgraded, or if there is evidence of a reduced commitment on the part of Intesa to the CEE region. The rating actions are as follows: NLB Long-term foreign currency IDR: downgraded to 'BB-' from 'BBB-', Negative Outlook Short-term foreign currency IDR: downgraded to 'B' from 'F3' Support Rating: downgraded to '3' from '2' Support Rating Floor: revised to 'BB-' from 'BBB-' Viability Rating: downgraded to 'ccc' from 'b-' NKBM Long-term foreign currency IDR: downgraded to 'BB-' from 'BBB-', Negative Outlook Short-term foreign currency IDR: downgraded to 'B' from 'F3' Support Rating: downgraded to '3' from '2' Support Rating Floor: revised to 'BB-' from 'BBB-' Viability Rating: downgraded to 'ccc' from 'b-' Hybrid capital instrument: downgraded to 'C' from 'CC' Abanka Long-term foreign currency IDR: affirmed at 'B-', Negative Outlook Short-term foreign currency IDR: affirmed at 'B' Support Rating: affirmed at '5' Support Rating Floor: affirmed at 'B-' Viability Rating: downgraded to 'cc' from 'b-' Hybrid capital instrument: downgraded to 'C' from 'CC' Probanka Long-term foreign currency IDR: downgraded to 'CC' from 'CCC' Short-term foreign currency IDR: affirmed at 'C' Support Rating: affirmed at '5' Support Rating Floor: affirmed at 'NF' Viability Rating: downgraded to 'cc' from 'ccc' Banka Celje Long-term foreign currency IDR: downgraded to 'B-' from 'B+', Negative Outlook Short-term foreign currency IDR: affirmed at 'B' Support Rating: affirmed at '5' Support Rating Floor: affirmed with 'NF' Viability Rating: downgraded to 'b-' from 'b+' Gorenjska Banka Long-term foreign currency IDR: downgraded to 'B' from 'BB-', Negative Outlook, withdrawn Short-term foreign currency IDR: affirmed at 'B', withdrawn Support Rating: affirmed at '5', withdrawn Support Rating Floor: affirmed at 'NF', withdrawn Viability Rating: downgraded to 'b' from 'bb-', withdrawn Koper Long-term foreign currency IDR: affirmed at 'BBB', Negative Outlook Short-term foreign currency IDR: affirmed at 'F3' Support Rating: affirmed at '2' Viability Rating: affirmed at 'bb' Contact: Primary Analyst (NKBM, Abanka, BK, GB) Michal Bryks, ACCA Director +48 22 338 6293 Fitch Polska SA Krolewska 16, 00-103 Warsaw Primary Analyst (NLB, BC, Probanka) Lindsey Liddell Director +44 20 3530 1008 Fitch Ratings Limited 30 North Colonnade London E14 5GN Secondary Analyst (NLB, BC, Probanka) Michal Bryks, ACCA Director +48 22 338 6293 Secondary Analyst (NKBM, Abanka, BK, GB) Lindsey Liddell Director +44 20 3530 1008 Committee Chairman James Watson Managing Director +7 495 956 6657 Media Relations: Hannah Huntly, London, Tel: +44 20 3530 1153, Email: hannah.huntly@fitchratings.com. Additional information is available at www.fitchratings.com. The ratings above were solicited by, or on behalf of, the issuer, and therefore, Fitch has been compensated for the provision of the ratings. Applicable criteria, 'Global Financial Institutions Rating Criteria' dated 15 August 2012, 'Evaluating Corporate Governance' dated 12 December 2012, 'Rating FI Subsidiaries and Holding Companies' dated 10 August 2012 and 'Assessing and Rating Bank Subordinated and Hybrid Securities' dated 5 December 2012, are available at www.fitchratings.com. Applicable Criteria and Related Research Global Financial Institutions Rating Criteria here Evaluating Corporate Governance here Rating FI Subsidiaries and Holding Companies here Assessing and Rating Bank Subordinated and Hybrid Securities here ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.

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