Six years after the banking crisis hit Slovenia, the country’s financial sector has returned to reasonable health, with important acquisitions taking place in 2019 that should further aid the sector. Still, with the domestic economy tied heavily to global developments, fears of a general worldwide slowdown are leading to renewed caution.
In mid-October, the Bank of Slovenia, the country’s central bank, said that unfavourable conditions in the international environment have started to “noticeably spill over to the Slovenian economy”, with growth of just 0.2% in the second quarter of 2019. Shortly after, the central bank said it would impose restrictions on consumer loans, in an attempt to curb “excessive” credit growth and protect borrowers from over-indebtedness.
Still, those involved in the banking sector see a markedly different landscape than before the financial crisis, and believe that banks are far better positioned to handle any economic downturn.
“The Slovenian economy, at this point, is in a completely different shape when it comes to the health of the capital structure than it was in the years 2005 to 2008,” says Blaž Brodnjak, chief executive of Slovenia’s largest lender, Nova Ljubljanska Banka (NLB). “The banks are in incomparably better shape, since they have been strongly capitalised, mainly core Tier 1 capital, with significant buffers above regulatory minimum thresholds, which have also increased dramatically in the past few years,” he adds.
Financial collapse
The 2008 financial crisis came late to Slovenia, but when it arrived it hit hard, requiring, among other things, the government to step in to bail out the country’s largest banks. In 2013, Slovenia’s government spent an estimated €3.5bn recapitalising the three largest lenders, NLB, Nova KBM and Abanka, wiping out shareholders and bondholders in the process. At the same time, two smaller banks, Factor Banka and Probanka, were wound down.
“The 2008 global financial crisis hit Slovenia with a delay, but it exposed huge weaknesses that had built up in the majority state-owned banking system,” says Lucyna Stanczak-Wuczynska, EU banks director at the European Bank for Reconstruction and Development (EBRD).
According to Ms Stanczak-Wuczynska, while the nationalisation saved the banking sector and restored liquidity, it took several years before lending recovered. “Meanwhile, the cost of the banking sector bailout increased government debt from 22% of gross domestic product [GDP] in 2008 to almost 84% in 2015, before it started to decline in 2016 thanks to fiscal adjustment and economic recovery,” she says.
Between 2006 and 2008, loans to the non-banking sector in Slovenia surged by almost two-thirds, financed mainly by banks securing financing from foreign lenders. Lending then contracted by more than one-third between 2010 and 2016, with banks focusing their attention on deleveraging in order to pay back their foreign loans. Total assets of the banking sector peaked at more than €50bn in 2010, but dropped to €37bn six years later. As of August 2019, total assets were €40.7bn, up from €38.8bn at the end of 2018.
Bad bank, key pillar
As part of efforts to clean up balance sheets, between 2013 and 2014 domestic banks transferred more than €1bn of exposures, 98% of which were loans, onto the balance sheet of the Bank Asset Management Company (BAMC), a ‘bad bank’ created to take over non-performing assets. BAMC was created at a time when the share of corporate non-performing loans in the Slovenian banking sector stood at almost 30%.
Matej Pirc, the chief executive of BAMC, describes his organisation as one of the key pillars for the rebound of Slovenia’s financial sector. It is also been a profitable one; as of September, BAMC had cumulatively generated almost €1.7bn of inflows from the management of its assets, representing more than 80% of the initial asset transfer value, with over €750m of assets still to be disposed of.
BAMC is expected to wrap up in 2022, and Mr Pirc says that most of the restructuring cases will be closed by then. “Even with the tail assets not being cashed, BAMC will cover its financing and operating costs and provide more than the repayment of the initial investment to the state,” he adds.
A private push
The process of recapitalising the banks left the Slovenian government controlling more than half of the total banking sector at its peak. Recent sales have seen that figure drop to just 12%, with the state retaining a minority share in NLB and a majority share in SID Banka, the state development bank.
Privatisation has been a key focus in recent years. In June, Slovenian Sovereign Holding (SSH) successfully completed the sale of 10% of NLB to institutional investors, for €109.5m, leaving the state with a 25% plus one share stake in the bank. At the time, SSH described it as one of the largest and the most demanding privatisation processes in Slovenia, and pointed out that NLB will now be able to operate at full capacity in both the domestic and south-east European markets, after operating under restrictions for a number of years tied to receiving state aid.
“This gives us freedom in terms of strategic choices, so that we are once again able to address opportunities that have been unavailable to us, such as cross-border lending, which we have been already doing, and also leasing, factoring and certain acquisition options,” says Mr Brodnjak. NLB saw its net profits fall 10% year on year to €94.3m in the first half of 2019, despite higher interest and non-interest income. Total assets of the bank rose by 5% to €13.16bn.
In June, it was also announced that Nova KBM had agreed the purchase of the country’s third largest bank by assets – state-owned Abanka – for €444m, with the transaction expected to be completed in early 2020. Combined, the two lenders will have a market stake of 22.5%, second only to NLB, which has about 23%. Nova KBM is 80% owned by US investment fund Apollo Global Management, with the EBRD holding the remaining 20%.
Positive news
In the aftermath of the announcement, Moody’s Investors Service upgraded Nova KBM’s long-term deposit ratings from Baa3 to Baa2, while maintaining a 'positive' outlook, while Fitch Ratings revised its outlook from 'stable' to 'positive', adding that in terms of size the merger would increase the bank’s total assets and risk-weighted assets by about 70%.
Nova KBM posted a net profit of €75.5m in 2018, up more than 50% year on year, with a return on equity after tax of 10.6% and a capital adequacy ratio of 19.59%. Abanka, meanwhile, saw its consolidated net profits drop from €40.4m in the first half of 2018 to €26.2m in the same period of 2019. Total assets rose from €3.7bn to €3.8bn.
“Subject to regulatory approvals, the merger of Nova KBM and Abanka will give us even greater access to clients all over Slovenia, strengthening our market position,” says John Denhof, chief executive of Nova KBM. "We are convinced that this will have positive impact for Slovenia and its economy and – most importantly – for the clients of the future merged bank.”
While the number of banks operating in Slovenia has fallen from 20 to 15, further consolidation is expected, with economic pressure remaining on the smaller banks. NLB’s Mr Brodnjak says Hungary’s OTP Bank – which purchased a majority stake in fourth largest lender SKB Banka in May, from French banking group Société Générale – has signalled that it has further interest in growing via acquisitions. This “could potentially help drive further consolidation of the banking sector in Slovenia, which might, besides NLB and NKBM/Abanka, lead to three pillars in the banking sector and a couple of mid-size and saving banks,” he says.
“I think this is the target situation,” he adds. “With clients still getting the enhanced and competitively priced client experience, but no ridiculous one-off inferiorly priced or structured campaigns with players under significant distress.” SKB Banka generated a net profit of €57.6m in 2018, up 32.7% year on year.
Low-interest effect
According to Boštjan Vasle, the governor of the Bank of Slovenia, the low interest rate environment that has prevailed over the past few years has altered the behaviour of banks in Slovenia, resulting in an increase in loan volumes and fee incomes, with the number of mortgage loans up 21% since 2014 and consumer loans up 27%. At the same time, non-interest income has increased substantially, from 20% of overall bank income before the crisis to more than 40% in late 2019.
Slovenian banks saw their net profits grow 15.5% year on year during the first eight months of 2019, hitting €425.3m, with net interest income up 1.4% to €451.1m and net fee and commission income rising 5.3% to €224.3m. Operating costs also rose, by 4.8% to €452.8m, while the non-performing exposure ratio continued to decline. “There are still many challenges ahead, which can be addressed also through further consolidation,” says Mr Vasle, who points out that almost all of Slovenia's banks are targeting the same segments of the market, namely individuals and small enterprises.
Mr Vasle adds that in the short term there is room for banks to optimise their operating costs – to simplify processes and automate services and assessments of creditworthiness – but to generate revenues, banks must further develop payment products and retail lending instruments. “Slovenian banks offer a modest list of basic products and services, while savings based on mortgage bonds or pension savings remain non-existent,” he adds.
The EBRD’s Ms Stanczak-Wuczynska says: “For successful further development, it will be crucial to develop or expand into new, lucrative services and products. Future opportunities to expand will be driven by the digital agenda and it is crucial that the Slovenian banks do turn this to their advantage.”
Darkening clouds
Slovenia’s dependency on exports is a source of both strength and concern, with about 80% of the country’s products being exported, mainly to other EU states, notably Germany and Italy. While Slovenia’s GDP grew by more than 4% in both 2017 and 2018, economic growth is slowing. In early November 2019, the central bank reported that the economy will grow by less than the 3.2% it forecast in June for the whole of 2019. The European Commission has also cut its prediction for Slovenia for 2019, from 3.2% in July to 2.6% in November.
“The slowdown in 2019 could reflect a larger drag from net export and investment growth coming off its close to double-digit heights, somewhat lower but still solid consumption, and the absence of the boost from inventories experienced in 2018,” says Marco Esposito, chief executive of UniCredit Banka Slovenija. He adds that the main challenge is to contain expenditures in a context of a slowing economy, with related pressure on revenues. “On a positive note, the government reaffirmed its commitment to stick to the fiscal rule in 2019 and 2020,” says Mr Esposito.
In October, Slovenia’s central bank announced that it would impose restrictions on consumer loans, in an attempt to curb “excessive” credit growth and protect borrowers from over-indebtedness. According to the bank, consumer loans grew 11.7% year on year in August 2019, with the overall stock fast approaching pre-crisis levels. Restrictions include consumer loans having a maximum maturity of seven years, and the ratio between a borrower’s annual debt costs and their net income not exceeding 67%, including for real estate loans. “The purpose of this is to prevent excessive crediting, to prevent taking on excessive debt and to prevent the easing of credit standards,” Primoz Dolenc, deputy governor of the Bank of Slovenia, told a news conference at the time.
In good shape
However, some observers in both the banking sector and the government feel the central bank is being overly cautious, and the party of prime minister Marjan Sarec has asked it to reverse the restrictions, saying that the policy will hurt many Slovenians.
At the same time, in late October, Slovenia’s parliament passed legislation requiring the Bank of Slovenia to cover all possible repayments for those who lost investments as a result of the 2013 bailout of the banking sector. The state aid helped avoid an international bailout, but resulted in an estimated 100,000 people losing their shares, with many of them now suing. However, the country’s upper house vetoed the proposal a few days later, after a strong push back from the Bank of Slovenia and other parties.
After a challenging period, Slovenia’s banking sector appears to be in good shape; macro stress tests conducted by the central bank earlier in 2019 found that the banking system was stable and had appropriate capital adequacy rates. As such, those in the sector believe it is well placed to handle any upcoming challenges.
“Slovenian banks’ capital adequacy is much higher than the average in the EU, so I believe that we are ready for any coming storm,” says Nova KBM’s Mr Denhof, pointing to a total capital ratio on a consolidated basis of 18.1%, level with the euro area average, and a common equity Tier 1 capital ratio almost 3 percentage points higher than the euro area average. “The economy may slow but conditions are still healthy and I remain an optimist when it comes to business prospects,” he adds. “Even if a storm comes, the Slovenian banks will weather it.”
