July 9, 2014 / 4:37 PM / 4 years ago

Fitch Upgrades 2 Slovenian State-Owned Banks' VRs; Affirms Banka Koper; Abanka on RWP

(The following statement was released by the rating agency) WARSAW/LONDON, July 09 (Fitch) Fitch Ratings has upgraded Nova Kreditna Banka Maribor (NKBM) and Nova Ljubljanska Banka's (NLB) Viability Ratings (VR) to 'b' from 'b-', and removed them from Rating Watch Positive (RWP). The banks' support-driven Long-term Issuer Default Ratings (IDR) have been affirmed at 'BB-' with Negative Outlooks. At the same time, Fitch has maintained Abanka Vipa's (Abanka) 'B-' Long-term IDR on RWP pending further expected recapitalisation measures by the Slovenian government. Banka Koper's Long-term IDR has been affirmed at 'BBB', reflecting support from the bank's 100% owner, Intesa San Paolo (BBB+/Stable). A full list of rating actions is at the end of this commentary. KEY RATING DRIVERS: NKBM AND NLB's VRs The upgrades of NLB and NKBM's VRs follow Fitch's review of the impact of state aid measures (see "Fitch Upgrades VRs of 3 Slovenian Banks; on Rating Watch Positive" dated 23 December 2013 at www.fitchratings.com). In particular, the upgrades reflect the banks' increased loss absorption capacity following their recapitalisation by the Slovenian government in December 2013. The VRs are also supported by the banks' comfortable liquidity positions. However, the ratings are constrained by the banks' still weak asset quality and expected subdued performance. At end-1Q14, NKBM's and NLB's impaired loans ratios, defined by Fitch as loans in regulatory categories C, D and E, stood at 47% and 41%, respectively. Loans overdue by 90 days or more stood at 28% at NKBM and 18.6% at NLB. The still high levels of problem exposures after the transfers of bad assets to the state-owned Bad Asset Management Company (BAMC) in December 2013 reflect the fact that some impaired loans were not eligible for transfer (such as loans originated after September 2012 or below EUR500,000) and banks' decisions to work out some eligible exposures themselves. In Fitch's view, any improvement in asset quality is likely to be slow given moderate growth prospects for the economy and high levels of corporate debt. However, the agency believes a further marked increase in impaired loan recognition as a result of the 2014 Asset Quality Review or Stress Tests is unlikely, given the review which the banks were subjected to in 2013. NKBM and NLB's Tier 1 ratios were 19.4% and 16%, respectively, at end-1Q14. Fitch calculates that at that date the banks could have increased specific reserve coverage of impaired loans to 67% from 45% (NKBM), and to 63% from 51% (NLB) before their Tier 1 ratios would have fallen to 10%. This represents significant loss absorption capacity in the agency's view, although the banks' solvency could still come under pressure in case of weak recoveries on impaired exposures and/or a moderate further increase in bad debts. The banks' internal capital generation capacity is likely to be modest at best as a result of revenue and asset quality pressures in the difficult operating environment. The banks' annualised 1Q14 pre-impairment profit was equal to 1.5% (NLB) and 1.6% (NKBM) of average assets, although interest income accrued but not received in cash was moderate, suggesting reasonable quality of reported revenues. Both banks expect limited (but positive) net income for 2014 as pre-impairment results will largely be channelled into strengthening loan provisions. Liquidity buffers are robust representing over one-third of total assets at end-1Q14 at both banks, and comfortably covered both banks' refinancing needs to end-2015. NLB's and NKBM's improved liquidity positions partly reflect the ECB-eligible debt securities (issued by the BAMC and guaranteed by the Slovenian sovereign), which they received in return for transferred assets. RATING SENSITIVITIES - NKBM AND NLB's VRs Renewed deterioration in asset quality, and hence solvency of the banks could put the VRs under downward pressure. Upgrades would likely require significant progress with work outs of problem loans. KEY RATING DRIVERS: ABANKA'S IDRS AND VR Abanka's IDRs are driven by its intrinsic strength, as reflected in its VR. The RWP on these ratings reflects expected improvements in the bank's asset quality and solvency following completion of the planned second stage of the bank's recapitalisation by the Slovenian government. This will include a further equity injection and the transfer of problem assets to the BAMC, which Fitch understands are likely to be completed in 3Q14. The agency calculates that the bank's pro-forma (post BAMC transfer) impaired loans ratio should fall to about 30% (end-2013: 60%), assuming a transfer of about EUR1bn gross bad debts. The Tier 1 capital ratio should exceed 20% (end-2013: 9%) assuming about EUR240m capital injection (initially agreed with the European Commission). Consequently, the bank should be able to increase specific reserve coverage of impaired loans to around 75% before its Tier 1 capital ratio level would breach 10%. Performance and liquidity metrics are likely to be broadly in line with those of NLB and NKBM, in Fitch's view. RATING SENSITIVITIES: ABANKA'S IDRS AND VR If the support measures go through as currently planned, Fitch is likely to upgrade Abanka's VR to 'b+' and its Long-term IDR to 'B+'. The higher VR, relative to NLB and NKBM, would reflect the bank's significantly better loss absorption capacity, reflected in a somewhat lower impaired loans ratio, a higher capital ratio and greater ability to provision problem exposures. Any subsequent changes to the bank's ratings would likely be driven by trends in asset quality, capital and performance ratios. KEY RATING DRIVERS AND SENSITIVITIES: IDRS (NLB, NKBM), SUPPORT RATINGS AND SUPPORT RATING FLOORS (NLB, NKBM, ABANKA) The Long-term IDRs of NKBM and NLB and Support Ratings (SR) and Support Rating Floors (SRF) of NKBM, NLB and Abanka continue to be driven by potential support from the Slovenian authorities. This reflects their full state ownership, systemic importance (somewhat lower for Abanka) and their current restructuring in accordance with state aid procedures. The Negative Outlooks on NKBM's and NLB's Long-term IDRs reflect the likelihood of their SRs and SRFs being respectively downgraded to '5' and revised downwards to 'No Floor' within the next one to two years. Consequently, both banks' Long-term IDRs will most likely be downgraded to the level of their VRs. This is based on further progress being made in implementing the legislative and practical aspects of enabling effective bank resolution frameworks, which is likely to reduce implicit sovereign support for banks in the EU. This is likely to occur through national implementation of the provisions of the Bank Recovery and Resolution Directive (see Fitch Revises Outlooks on 18 EU State-sponsored Banks to Negative on Weakening Support, dated 26 March 2014 and Rating Paths for EU State-Sponsored Banks, dated 14 April 2014, all available at www.fitchratings.com). NKBM's and NLB's IDRs, SRs and SRFs, and Abanka's SRF, could also be revised in case of their privatisation, which is embedded in their restructuring plans approved by the European Commission (approval is still pending in the case of Abanka). Fitch understands that NKBM is more likely to be put up for sale first. However a divestment of the sovereign's stake in any state-owned bank is likely to be challenging in the near term, due to the ongoing restructuring process at the banks and the only fragile economic recovery in Slovenia. KEY RATING DRIVERS: BK's VR The affirmation of BK's 'bb' VR reflects the bank's adequate capitalisation, only moderate asset quality problems and deposit growth, which has strengthened the bank's funding and liquidity. The VR also reflects the bank's superior risk management framework, credit underwriting and corporate governance compared with peers, in part due to its ownership by Intesa. RATING SENSITIVITIES: BK's VR There is still some downside risk to the VR in light of the weak and uncertain operating environment in Slovenia, particularly in view of the bank's significant single-name concentrations. BK's VR could be downgraded in the event of a material deterioration in asset quality that erodes capital. An upgrade of the VR is unlikely in the foreseeable future. KEY RATING DRIVERS AND SENSITIVITIES: BK'S IDRS AND SUPPORT RATING The affirmation of BK's Long-term IDR at 'BBB' and Support Rating at '2' reflects Fitch's view that Intesa Sanpaolo S.p.A. (Intesa; BBB+/Stable) 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 revision of the Outlook on BK's Long-term IDR to Stable from Negative mirrors the rating action on Intesa (see "Fitch Affirms Five Large Italian Banks" dated 13 May 2014 at www.fitchratings.com). The upgrade of BK's Short-term IDR to 'F2' from 'F3' also reflects the change in Outlook on Intesa, and the strength of potential support from the parent, underpinned by the latter's own robust liquidity. The rating actions are as follows: Nova Kreditna Banka Maribor Long-Term IDR: affirmed at 'BB-' Outlook Negative Short-Term IDR: affirmed at 'B' Viability Rating upgraded to 'b' from b-', removed from RWP Support Rating: affirmed at '3' Support Rating Floor: affirmed at 'BB-' Nova Ljubljanska Banka Long-Term IDR: affirmed at 'BB-' Outlook Negative Short-Term IDR: affirmed at 'B' Viability Rating upgraded to 'b' from b-', removed from RWP Support Rating: affirmed at '3' Support Rating Floor: affirmed at 'BB-' Senior Unsecured Debt Long-term Rating: affirmed at 'BB-' Abanka: Long-Term IDR: 'B-', maintained on RWP Short-Term IDR: affirmed at 'B' Viability Rating: 'b-', maintained on RWP Support Rating: affirmed at '5' Support Rating Floor: affirmed at 'B-' Banka Koper: Long-term foreign currency IDR: affirmed at 'BBB', Outlook revised to Stable from Negative Short-term foreign currency IDR: upgraded to 'F2' from 'F3' Support Rating: affirmed at '2' Viability Rating: affirmed at 'bb' Contact: Primary Analyst (Abanka, NKBM) Michal Bryks, ACCA Director +48 22 338 6293 Fitch Polska SA Krolewska 16, 00-103 Warsaw Primary Analyst (BK, NLB) Lindsey Liddell Director +44 20 3530 1008 Fitch Ratings Limited 30 North Colonnade London E14 5GN Secondary Analyst (BK, NLB) Michal Bryks, ACCA Director +48 22 338 6293 Secondary Analyst (Abanka, NKBM) Lindsey Liddell Director +44 20 3530 1008 Committee Chairperson James Watson Managing Director +7 495 956 6657 Media Relations: Elaine Bailey, London, Tel: +44 203 530 1153, Email: elaine.bailey@fitchratings.com. Additional information is available on www.fitchratings.com Applicable criteria, 'Global Financial Institutions Rating Criteria' dated 31 January 2014, are available at www.fitchratings.com. Applicable Criteria and Related Research: Global Financial Institutions Rating Criteria here Additional Disclosure Solicitation Status 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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