Slovenia’s banks are in a state of flux. Since the outbreak of the global financial crisis in 2008 and Slovenia’s domestic banking crisis in 2013, much has changed. A domestic bail-in and a bail-out of three of the country’s largest financial institutions required the government and Slovenian taxpayers to shoulder a large bill, while a newly established bad bank took much of the non-performing loan (NPL) burden.
As of 2016, despite still-high problem assets, the banking sector has largely recovered and is well capitalised, but further change is waiting in the wings. Buzzwords include private equity, consolidation and privatisation, with some familiar topics, centring on the resolution of NPLs and adaption to the eurozone’s ultra-low interest rate environment, also surfacing.
A new chapter
Following the upheaval caused by the Slovenian banking crisis and the subsequent December 2013 bail-out of the country's three largest lenders – Nova Ljubljanska Banka (NLB), Nova Kreditna Banka Maribor (NKBM) and Abanka – Slovenia’s banking sector started a new chapter. Already at the time of the bail-out the preconditions of the €3.01bn rescue package were geared towards privatisation: commitments made to the European Commission were for the government’s stake in NLB to be reduced to no more than 25% plus one share, while the holdings in NKBM and Abanka were to be sold off entirely.
Two years later, NLB is still in public hands but a sale is in the works. Slovenia’s sovereign holding fund, SDH, has been tasked with exploring the option of an initial public offering (IPO) for the near-75% government stake to be sold in the country’s largest bank. “At the moment we only have approval to work on an IPO to privatise the stake, but we are asking the government if we are allowed to explore different [options],” says Marko Jazbec, president of the management board at SDH. “The government then has to go through the parliamentary procedure to get approval.”
Mr Jazbec adds that SDH is hoping to conclude the privatisation process by the end of 2017.
“I am of the very clear opinion that the privatisation of NLB is important,” says Janko Medja, who was until February 2016 the chief executive at NLB. He adds that the bank has made an effort to lower its NPL burden and that he would prefer to see it sold sooner rather than later.
Privatising the country’s largest bank is not an uncontroversial topic in a country where privatisation has not moved at the same pace as in neighbouring countries and where voices against ownership changes are still loud in political circles. Still, finance minister Dušan Mramor says that there is “no question” of whether or not the NLB privatisation should happen, adding that it is simply a question of “how”.
A new threat?
At the country’s second largest bank, NKBM, the privatisation process has almost reached a conclusion – and attracted what some may consider a controversial new player in the market in the shape of a private equity investor.
The sale of NKBM was still pending at the time The Banker went to press, but US private equity firm Apollo Global Management was set to buy 80% of the bank, with the European Bank for Reconstruction and Development (EBRD) buying the remaining stake in the bank, for a combined price of €250m. The transaction was announced in mid-2015. Apollo has since also agreed to buy Raiffeisen Bank’s Slovenian subsidiary, the country’s 12th largest bank by assets, in December 2015.
“At NLB [we] don’t see consolidation as a huge negative,” says Mr Medja. “We see it as a competitive threat but also as a means to restructure the banking sector, which will introduce owners who make more rational, market-based decisions.”
Apollo is seen to be actively consolidating the Slovenian banking sector. Through its purchase of NKBM it also acquired a stake in Poštna Banka Slovenije, and was rumoured to be considering bids for other banks. While critics say private equity investors are not in it for the long term, others argue that such investors usually help make operations more cost-efficient and profitable.
Boštjan Jazbec, governor of Bank of Slovenia, the country's central bank, is of the view that this new development needs to be embraced. “Today, the focus [has shifted] from traditional banking structures to more complicated ones, including private equity,” he says. “Every new development brings new issues, and I am sure that those issues are fully taken into account in the regulatory and supervisory framework, which allows for the owners of banks to be different from 10 to 20 years ago.”
Consolidation drive
A third beneficiary of Slovenian state aid, Abanka, is also playing an active role in the consolidation of the country's banking sector. In October 2015, the bank, which was given the smallest share of the bail-out package, merged with Banka Celje, the country’s ninth largest institution by assets. The merged bank kept the name Abanka and focuses on retail banking and small and medium-sized enterprises (SMEs), but also seeks to provide a full range of banking services for larger firms.
Abanka is now the third largest Slovenian bank by assets. It remains on the list to be privatised, but has a longer time horizon over which to achieve this. SDH’s Mr Jazbec expects the project to be completed by 2019.
This is not the only merger and acquisition activity witnessed in the Slovenian banking market. In January, the finance ministry took the decision to merge Factor Banka and Probanka, two institutions that are in winding-down processes, into Slovenia’s Bank Asset Management Company (BAMC), the ‘bad bank’ created to take on board non-performing assets.
Furthermore, since January, Gorenjska Banka, the 10th largest Slovenian bank by assets as of year-end 2014, has a new investor in Serbia’s AIK Banka. AIK took part in Gorenjska’s €13m capital raising efforts and now holds about 14% of the bank’s shares. Gorenjska’s largest shareholder remains local finance and tourism company Sava, but it has been ordered by the Bank of Slovenia to sell its 38% stake as it lacks the financial strength to support Gorenjska sufficiently.
And further consolidation is possible. Bankers suggest that Russia-based Sberbank might be interested in selling its operations in the country, but the bank’s chairman of the managing board, Gašpar Ogris-Martič, was unable to comment on this matter.
This consolidation is purely driven by the market: from a regulator’s point of view, there is no requirement or call for further consolidation, according to Bank of Slovenia’s Mr Jazbec. “The sheer size of the banking industry should always be a reflection of the market environment,” he says. “For us, as a regulator, it is only important for banks to be adequately capitalised and to comply with all regulatory and supervisory requests.”
And capital is something that the banks now have.
The cost of capital
After Slovenia’s central bank laid out requirements to raise additional capital in December 2013, capital adequacy levels in the domestic banking system jumped above the EU average by year-end 2014 – from 13.7% to 17.9%, according to Bank of Slovenia data. While data for 2015 was not yet available, in its banking sector risk overview, the regulator said that capital adequacy improved further in the first three quarters of 2015, a result of the banking system's positive performance and recapitalisation of certain banks.
While a large capital base makes the banks safer, in the current eurozone environment of ultra-low interest rates, this can prove very costly.
“The main challenge to the banking sector is to compensate the expected lower net interest income with other income and to be strict... on the cost side,” says Sberbank’s Mr Ogris-Martič, pointing at income on commissions and treasury as potential areas to compensate.
“The liquidity situation is costing banks a lot of money,” says François Turcot, chief executive at SKB, Slovenia’s subsidiary of Société Générale. “We currently have €250m of liquidity, half of which is placed at -0.3% at the central bank, the other half at 0% at Société Générale. We are losing money but some other banks are losing even more.” He adds that as long as banks have a high level of liquidity and Euribor levels stay low, there will be pressure on profitability within the banking sector and competition will increase.
SKB is the country’s fourth largest bank by assets. It decided to offer competitively priced 25-year fixed-rate mortgage loan deals with an interest rate of 3.05%, a move which it hoped would also see customers switch their salary accounts to the bank.
A lull in lending
In Slovenia’s case, the high cost of holding capital is being met with an ongoing contraction in lending – but, the country’s central bank governor is quick to add, this is not a result of banks' unwillingness to lend, but rather a lack of credit demand.
This contraction in lending – 13.7% in the 12 months to November 2015 – carries with it the risk that banks will underbid each other on the rates they offer to customers, which further diminishes margins and puts pressure on profitability. “We are sometimes worried that banks are offering loans under the cost of risk,” says Mr Medja, suggesting that some banks are following a market-share strategy.
Another difficulty is that a fall in new lending, by the rules of pure mathematics, adds fewer performing loans to banks’ ratios, causing little to no positive effect on banks’ NPL burden. And there is yet another issue related to dwindling loan demand: large capital reserves and non-performing exposures, as Stefan Vavti, chief executive at UniCredit Slovenia, points out. “We now have the phenomenon of shrinking loan books across the board, while we have an abundance of liquidity. We have too little demand for loans, which bears the risk and potential of some banks lowering their criteria on credit quality to get some business,” he says.
UniCredit focuses on banking for high-net-worth individuals, as well as SMEs and corporates, and aims to set itself apart from the pack by offering cross-border services for international clients through its network in central and eastern Europe as well as Austria, Germany and Italy.
NPLs back again?
The risk of a reduction in credit quality across Slovenian institutions is one that bankers are aware of. Among those concerned about the situation is SKB’s Mr Turcot, who says he noticed several instances where companies, which had loans rejected at SKB, managed to get funding from other institutions. Such an erosion of credit quality raises concerns that Slovenia’s unresolved issue of NPLs could flare back up.
A concern highlighted by the Organisation for Economic Co-operation and Development in 2013, NPLs have since contracted – thanks largely to the creation of the country's national ‘bad bank’, BAMC. In December 2013 and 2014, six domestic banks transferred some €1.6bn of exposures – 98% of which were loans, the remainder equities and other securities – onto the balance sheet of BAMC.
From its inception until June 2015, BAMC generated some €311m of revenues. “So far, BAMC has signed restructuring agreements in 70% of the cases suitable for restructuring, and it is actively involved in finding reasonable solutions for the rest,” says Imre Balogh, chief executive at BAMC. “Overall, our recently extended lifetime until 2022 provides [us with] sufficient room for manoeuvre for BAMC to choose the optimal timing for putting our assets to the market.”
Aside from the already transferred exposures and remaining assets that had not yet been liquidated in the winding-down processes of Probanka and Factor Banka – which were due to be merged into BAMC in February – there are no more plans for further transfers of non-performing assets to BAMC, according to Mr Balogh.
This means that while the transfer of assets to BAMC provided relief for some banks from their NPL burdens, problem exposures still require further attention, especially as those related to foreign debtors were not included in the possible transfers to BAMC.
Dealing with SME NPLs
Of what remains on banks’ balance sheets, the majority of NPLs relate to lending to SMEs. That, and the population’s historical disapproval of changes in ownership structures, leaves banks reluctant to exercise debt to equity swaps, making the workout of NPLs especially difficult (see Q&A with governor of Bank of Slovenia).
For these reasons, many institutions are seeking alternative solutions.
Sberbank’s Mr Ogris-Martič expects Slovenia’s positive economic performance to help some companies with outstanding loan payments to recover from their problems. “We saw a good development in some NPL cases in 2015, because companies were performing better,” he says. “This can give us positive expectations and significant improvements in the solving of NPL cases in the future.”
Still, it is obvious that this will not work for all non-performing exposures, which is why banks are also selling some loan packages or indeed single loans. Yet, in Slovenia’s comparably small banking sector, many loans are syndicated, further complicating the workout process, as it requires all lenders to agree to the specific solution found.
Opposing workout visions but also different price expectations and levels of provisioning across banks can cause issues, as SKB’s Mr Turcot points out. “One of the problems we face in Slovenia when we want to sell NPLs is that often the levels of provisions are different among lending banks,” he says. “In some cases deals were blocked because, while SKB would have retrieved some provisions through the sale, other banks would have had to increase their provisions.”
Mind the gap
The difference in provisions booked against the bad syndicated loans to be sold can see entire sale processes falter, as can inflated return expectations, warns Jolanta Gabriel, head of the EBRD’s Slovenia office. “Often there is a large gap between the price expectations and reality,” she says, adding that the NPL issue is often taken too lightly, and that there still is a significant need for higher provisions and a reduction of problem assets.
Data for November 2015 published in Bank of Slovenia’s January 2016 Financial Stability Review indicates a slight improvement in the quality of the banking sector’s lending portfolio, with the share of classified claims more than 90 days in arrears at 10.3% – 0.5 percentage points lower than in October.
UniCredit’s Mr Vavti says that while NPLs are still elevated, the net level of NPLs should be where the focus lies rather than the gross figure, as “the elevated level of NPLs isn’t felt dramatically in Slovenia – it doesn’t have an impact on lending”.
And, with an expected ongoing improvement in Slovenia's economy, hopes are strong for an increase in demand for credit going forward, as well as a natural reduction in NPLs. This, coupled with the banking sector's consolidation and privatisation drive, makes for an interesting future.
