With an economy badly impacted by the eurozone crisis and severe troubles in the construction sector, Slovenia’s banks have been struggling. Indeed the latest International Monetary Fund (IMF) country report in May criticises the banks for being thinly capitalised, with deteriorating profits and asset quality. But as recovery gets under way a different story may emerge.
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In The Banker’s Top 200 EU banks published in September, the highest bank from a new entrant country was Slovenia’s Nova Ljubljanska Banka (NLB), ranked at 116 with Tier 1 capital of $1.33bn. Other Slovenian banks to do well in the ranking were Abanka Vipa at 159, Gorenjska Banka at 169, Nova Kreditna Banka Maribor (NKBM) at 175 and Banka Celje at 188. For a small country, Slovenia’s banking sector has the potential to punch above its weight but first it needs to solve its crisis-related problems. A further sign that this outcome is some way off came in September when Fitch downgraded all seven domestically owned Slovenian banks which it rates along with the sovereign’s debt.
NLB struggles
The first port of call for an explanation of the poor state of the Slovenian banking sector must be the country’s largest bank, NLB. State owned and with assets some three times those of its nearest competitor. NLB posted losses of E183m in 2010, which dragged Slovenia’s whole banking sector from profitability into loss.
“If you look at NLB and Slovenia, our market share is more than 30% and basically NLB is as good as the Slovenian economy,” says the bank’s chief financial officer, Uros Cufer. The Slovenian economy has been one of the hardest hit by the various crises in Europe since 2008. Real gross domestic product (GDP) plummeted by more than 10% before the economy struggled back to growth in 2010, when it grew by 1.2% for the year.
In September, the Bank of Slovenia downgraded its 2011 GDP growth forecast to 1.3% from 1.8%, citing low domestic demand. The central bank forecasts 1.7% growth for 2012.
“The only thing that is dragging us down is the quality of our asset portfolio,” says Mr Cufer’s of NLB’s performance, which saw a charge to 2010’s profit and loss account for provisions and impairments of E377m. “Without that, things are quite stable,” he adds.
If you look at NLB and Slovenia, our market share is more than 30% and basically NLB is as good as the Slovenian economy
NLB’s non-performing loans (NPL) ratio hit 10% at the end of 2010, largely as a result of severe troubles in Slovenia’s highly leveraged construction sector and financial holding companies. The bank also has large equity holdings in Slovenian companies, notably supermarket Mercator and beverage producer Lasko, which it seized as collateral. With Slovenia’s stock market down by more than 75% from its 2007 peak and currently very illiquid, write-downs have dealt painful blows to the bank’s profit and losses.
NLB did manage to turn its losses around in the first half of 2011 to make a small profit of E1.2m, but Mr Cufer says that this does not mean the bank has turned the corner. Instead he expects losses again for the full year, citing a worsening of the construction industry’s problems as the main factor. The bank’s NPL ratio now stands at about 15%, one of the highest in the eurozone.
Faring better
The second largest bank in Slovenia, and the other state-owned bank, is NKBM. NKBM’s CEO, Matjaz Kovacic, is happy with the fact that the bank has remained profitable throughout the crisis, and that it has not had to rely on any state aid. Net profits in 2010 were E9.4m, representing a 4.1% return on equity (ROE). NPLs have also been a problem for NKBM, which has a ratio of 10.8%, again mainly as a result of problems within the construction sector and financial holding companies.
Mr Kovacic says that NKBM is aiming to improve its ROE to 8% to 10% by 2013, an achievable aim, he claims: “With a cost-to-income ratio of 53% and risk premiums above 150 basis points [bps] or 200bps, you can see that the issue is to control the risk in the bank. By 2013, five years from the beginning of the crisis, if the risk premium goes down to a reasonable 100bps, which is almost double what it was before the crisis in say 2006-07 when it was 50bps to 60bps, I think the target is achievable.”
Slovenia’s fifth largest bank is SKB Banka, owned by Société Générale. Despite the crisis, SKB posted record profits of €27m in 2010 and followed that with an increase in half-yearly pre-tax profits of 22.7% this year. Gerald Lacaze, SKB’s new CEO, appointed in August, says: “I would say that the results in 2011 are quite good, but not as good as we would like. Banking income is not progressing so well because there are not so many companies with new projects, and when there are good ones, there is fierce competition between the banks which means the margins are very low.”
Flagging corporate sector
One of the reasons for the dearth of projects looking for financing is the highly leveraged state of the Slovenian corporate sector. With a debt-to-equity ratio of some 140%, deleveraging is limiting the demand for borrowing as well as constraining economic growth.
Another internationally owned bank with a high regional profile in Slovenia is Raiffeisen Banka. Raiffeisen, which has been operating in Slovenia since an acquisition in 2002 and is now the 11th largest bank in the country, sees itself as a bank still in the process of restructuring. Its CEO Klemens Nowotny explains, “Originally the plan was to become one of the five biggest banks [in Slovenia] but that would have cost a lot of money. It would have been easy to be more aggressive and to buy in market share, but, with low margins, we said it made no sense economically, and therefore it made more sense to switch to organic growth.”
“We have to double our client base in the next three to five years to have a sufficient, balanced portfolio. That means small and medium enterprises and affluent customers, those with more complex needs where we can advise,” says Mr Nowotny.
We [Raiffeisen Banka] have to double our client base in the next three to five years to have a sufficient, balanced portfolio. That means small and medium enterprises and affluent customers, those with more complex needs where we can advise
Raiffeisen’s current goal is to capture 5% of the market and increase its branch network from 15 to 25 or 30. In line with this expansion, the bank plans to reduce its cost-to-income ratio from a currently high 70% to a more reasonable 55%. Mr Nowotny does not rule out an acquisition if the right deal comes along, but points out that most of Slovenia’s banks are regionally based, whereas Raiffeisen would look for a fit with a network spread over the country.
Regional focus
One example of a predominantly regional bank is Banka Celje, based in Celje, Slovenia’s third largest city. Despite its concentration in the Celje region, it is still Slovenia’s sixth largest bank, with assets of €2.6bn at the end of 2010 and a countrywide market share of 5%. The bank has remained profitable throughout the crisis but has seen profitability fall in each of the past three years, with €4.5m net profits in 2010, as opposed to €20.8m in 2007. It posted €2.8m net profits in the first half of 2011.
Although the bank has spread to the major cities outside the Celje region in recent years, with branches opening in Ljubljana, Maribor and most recently Koper, CEO Dusan Drofenik says that its strategy does not focus on further expansion outside its home region where it is the clear market leader. Instead it is looking to grow its volume of operations by such measures as offering a more comprehensive service and increasing cross-selling.
Weak capitalisation
So far in 2011 some action has already been taken to address the issue of weak capitalisation. Slovenia’s two largest banks were included in the European Banking Authority's (EBA's) EU-wide stress testing this year, and both increased their capital: NLB raised €250m in March, and NKBM €104m via an secondary public offering in April.
NKBM’s core Tier 1 (CT1) ratio jumped from 7.4% to 9.6% after listing on the Warsaw stock exchange in May this year. “We are well capitalised,” says Mr Kovacic, “as shown by the European stress test which showed that we are in the top 40% of banks.” Under the EBA’s adverse scenario, NKBM came out with a 2012 CT1 ratio of 8% against the ECA’s benchmark of 5%. NLB also passed the test, but barely, with a 2012 adverse scenario CT1 ratio of 5.3%.
NLB adopted a new strategy last year that commits the bank to concentrating on its core activities, which it classifies as banking business within the countries of the former Yugoslavia, and thus to divesting itself of its now non-core businesses: many of the NLB Group’s 50 subsidiaries are banks outside this area and leasing and factoring companies.
Mr Cufer explains that this strategy of divesting non-core companies will ensure adequate capitalisation on a five-year horizon. But he states that the stress test and other factors point to a capital shortfall in the short term, and so the bank has announced that it needs a further €400m capital this year.
However, there has been no agreement to date among the bank’s owners about how to raise this money. If the capital is not increased in the foreseen amount and by the planned deadline, warns NLB’s supervisory board, the strategy of the NLB Group will have to be amended.
