On 28 November the
management of Slovenia’s largest bank, the state-owned bank NLB (Nova
Ljubljanska banka d.d.), announced that the bank’s supervisory board, in a
meeting held on the previous day, had voted to call a general meeting of
shareholders for 29 December in order to consider a proposal to increase the bank’s
share capital by € 375 mln.
As of 30 September 2012 the bank’s capital consisted
of 12,548,930 shares, and as of 30 June 2012 the book value of
shares was € 90.3 per share. As of 30
September the bank's largest shareholders were the Slovenian government
(40.21%), the Belgian bank KBC Bank (22.04%), the national pension fund
Kapitalska družba (9.99%), and the national remuneration fund Slovenska
odškodninska družba (9.00%). At 30 September 2012 NLB's market share in Slovenia
Sources:
NLB official announcement: Sporočila
za javnost - 40. redna seja Nadzornega sveta NLB (2012-11-28)
NLB financial statements for 3Q 2012: Medletno poročilo -
september 2012
Later that same day
(28 November), the Minister of Finance, Janez Šušteršič, stated publicly that
the Slovenian government does not have € 375 mln to spare to recapitalize NLB,
and that in fact it might be in the state’s interest to sell its share in the
bank. Nevertheless, analysts note that recent
results of NLB’s second-largest shareholder, the Belgian bank KBC, have not
been positive enough that KBC would be able to invest any large part of the €
375 mln being sought. Because Slovenia
Also on 28
November, the government of Slovenia
In another sign of
Slovenian banking woes, on 30 November the commercial bank Probanka (Probanka,
d.d., Maribor) published a brief summary of its financial results for 9M 2012, in
which it indicated a net loss for the period (čisti dobiček/čista izguba
poslovnega obdobja) of € 30.23 mln, in marked contrast to the modest net profit
of € 1.70 mln earned in the year-earlier period. While both interest income and income from
fees/commissions were down from the year-earlier period, the major part of the
loss came from provisions for impaired assets, which totaled € 36.66 mln during
9M 2012, four times the provisions in the year-earlier period (€ 9.16 mln).
On 30 September 2012 the bank’s total assets were
€ 1,077 mln – 2.3% of the total assets of the Slovenian banking system – down
from € 1,155 in the year-earlier period.
Sources:
Ljubljana Stock Exchange filing: PROBANKA, d. d.,
Maribor: Objava podatkov poslovanja banke v obdobju januar – september 2012.
leta (2012-11-30 15:55 )
In other news, on
29 November the International Monetary fund published a short informational
notice and a lengthy (56 pp.) country report on Slovenia
On November 21, 2012 , the Executive Board of the
International Monetary Fund (IMF) concluded the Article IV consultation with Slovenia
Background
With a loss of more than 8
percent of GDP, Slovenia
The performance of Slovenian
banks deteriorated markedly in recent years as a result of the unfavorable
operating environment. Bank asset quality worsened substantially since 2007,
especially in publicly-owned banks. Of particular concern are loans to the
over-indebted corporate sector. The increase in non-performing loans (NPLs)
resulted in substantial impairment charges, leading to system-wide bank losses
in the last two years and repeated downgrades of bank ratings. Although capital
adequacy improved in 2011, many banks will need further capital increases. The
loan-to-deposit ratio remains high, and banks have replaced lost external
commercial funding with government deposits and ECB financing. Alongside an
external assessment of the size of bank losses, the government is creating an
asset management company to deal with NPLs and is elaborating a strategy to
reform governance of publicly-owned banks.
The headline deficit is set to
drop to around 3½ percent of GDP in 2012 from 4.3 percent of GDP in 2011
(excluding capital injections to publicly-owned banks and corporations), and
the 2013 headline deficit target is 2.8 percent of GDP in spite of
weaker-than-expected economic activity. The authorities target a
structurally-balanced budget by 2015, with adjustment frontloaded in 2012 and
2013. Under the staff’s baseline scenario, which conservatively assumes a debt
increase of about 11 percent of GDP in connection with bank restructuring, the
debt-to-GDP ratio would peak around 70 percent of GDP around 2016 and gradually
fall thereafter. However, Slovenia Slovenia
Executive Board
Assessment
Executive Directors noted that
Slovenia
Directors welcomed the
proposed establishment of a Bank Asset Management Company to address the
build-up of nonperforming loans, stressing that timely implementation will be
of the essence. Directors noted that publicly-owned banks may need more
capital, while the corporate sector is highly leveraged. They encouraged the
authorities to move decisively to restructure, recapitalize and ultimately
privatize banks and corporations, which will also help strengthen governance.
Directors welcomed the authorities’ efforts to implement the FSAP
recommendations. In particular, they emphasized the importance of strengthening
the regulatory and supervisory framework and improving macroprudential
oversight and crisis contingency arrangements.
Directors commended the
progress with fiscal consolidation and the efforts to strengthen the fiscal
framework. They supported the front-loaded, expenditure-based consolidation as
necessary to bolster market confidence. They encouraged focusing on structural
rather than on nominal targets, and endorsed the goal of a structural balanced
budget by 2015 net of bank restructuring costs. Directors called for a
strengthening of the quality of adjustment and fiscal governance, including
through a constitutional structural balance rule with a debt brake and enhanced
medium-term fiscal planning.
Directors
emphasized the importance of structural reforms to ensure fiscal
sustainability, enhance competitiveness, and spur growth. They considered the
current pension reform proposals to be a step in the right direction, but
observed that more decisive measures will be needed to ensure medium-term
fiscal and debt sustainability. Directors welcomed the engagement with social
partners on labor market reform, which is essential to reduce market
segmentation and improve competitiveness. They also called for improvements to
the business climate to attract foreign investment.
Source: Public Information
Notice: IMF Executive Board Concludes 2012 Article IV Consultation with the
Republic of Slovenia (2012-11-29)
Below are excerpts
from the country report, which enters into considerably greater detail than the
informational notice (emphasis as per original):
C. Financial
Sector: Dealing with NPLs and Improving Bank Governance
11. The performance
of Slovenian banks deteriorated markedly in recent years as a result of the
unfavorable operating environment and weak governance. Bank asset quality worsened
substantially since 2007, with a heavy concentration in the large
publicly-owned banks. Of particular concern are loans to the over-indebted
corporate sector, which is facing sluggish domestic and external demand. The
largest firms, especially in the construction sector (mostly infrastructure),
have been the worst hit. The increase in NPLs resulted in substantial
impairment charges, leading to system-wide bank losses in the last two years
and repeated downgrades of bank ratings with the largest publicly-owned banks
losing investment grade.
12. Although
capital adequacy improved in 2011, many banks will need further capital increases. The aggregate
total capital adequacy ratio stood at 12 percent as of December 2011, up from
11.3 percent in 2010, mainly due to capital injections in six banks for €458
million and deleveraging. However, banks’ continuing losses are eroding their
capital. To meet EBA requirements, the largest publicly-owned bank Nova
Ljubljanska Banka (NLB), was recapitalized again by €383 million in June 2012,
and further recapitalization of this and some other banks may be needed after
the planned restructuring. While the recent capital injection included €320
million through a contingent convertible bond, the ECB has noted that it generally
prefers issuances of shares against cash contributions for financial stability
reasons. The authorities have taken note of this preference and plan to act
accordingly.
13. Despite some deleveraging, banks are still heavily dependent on
wholesale funding from abroad, and increasingly on the ECB. Although banks
have lost access to external commercial funding since 2009, the loan-to-deposit
ratio remains high at 137 percent at end-March 2012. Banks have replaced external
funding with government deposits and ECB financing, which increased by €3.4
billion mostly as result of LTROs. Target2 liabilities have increased to over
€5.0 billion. The ratio of domestic deposits to GDP has been broadly stable so
far, and the government’s deposits are mostly long term. Thanks to the large
use of the LTRO facility and the ample availability of ECB-eligible collateral,
the bank liquidity position is still comfortable. However, further downgrades
of the sovereign could reduce the pool of eligible assets and domestic deposits
may decline in relation to GDP.
14. The authorities are moving to strengthen the financial sector
broadly in line with FSAP recommendations. The FSAP noted that the
risks to systemic financial stability stemmed mainly from the negative
macroeconomic outlook and the high dependence of banks on external funding.
With real estate being a major form of collateral, the real estate price risk
is of particular concern.
15. The authorities
announced a comprehensive plan to address financial sector vulnerabilities. The authorities
have moved to obtain an external assessment of the size and distribution of
bank losses, to create an asset management company, and to define a strategy
for capitalizing and restructuring troubled banks and non-financial corporates.
· Diagnostic
process. According to the standard definition used by the
Bank of Slovenia (i.e. assets with more than 90 days arrears) total NPLs were €
6.3 billion as of June 2012 (13.2 percent of classified claims). Based also on
due diligence exercises (already completed for NLB and to be completed by the
end of the year for Nova Kreditna Banka Maribor and Abanka), the government
intends to transfer up to €3 billion of assets from the banks to the new asset
management company (see below), comprising both non-performing and highrisk ones.
· Bank
Asset Management Company (BAMC). In October, the parliament
voted the law on financial stability creating the BAMC as a public agency,
which is subject to oversight by the supreme audit institution and the
parliament. The new agency should be operational by the end-2012 or early-2013.
The BAMC can issue a maximum €4 billion of governmentguaranteed bonds (about 11
percent of GDP). The acquisition price for impaired assets will be the “real
long-term value,” following the EC State Aide guidelines. The BAMC will have
the instruments and the power to seek a quick resolution of the impaired
assets, be it by restructuring the corporate or by liquidating it and selling
its collateral and assets. Bankruptcy procedures where the BAMC is involved are
to be concluded within six months. The BAMC is to be wound down after five years,
at which point the remaining assets will be establishing BAMC is to privatize
the banks once they have been cleaned up and recapitalized. While public debt
will increase when the BAMC’s bonds are issued, this debt should be partially
repaid with the proceeds from the liquidation of assets, including the privatization
of the banks and other corporations that end up in the BAMC’s portfolio.
· Bank
capitalization and restructuring. Banks needing recapitalization
after selling their impaired assets to the BAMC will have to prepare a
restructuring plan, which will be submitted to the EC within six months of
receiving recapitalization. The government estimates that banks may need to be
recapitalized for up to € 1 billion (2¾ percent of GDP) to cover the losses due
to the difference between the book value of the transferred assets net of
provisions and the actual price paid by the BAMC as well as future losses
deriving from the possible worsening of the bank assets in the future.
· The
SSH. Also in October, the parliament passed a law to create the SSH to
unify the management of all publicly owned corporations, clean up their
finances, and define a strategy that includes the target stakes in different
types of corporations and sectors, including full and partial privatizations.
Addressing the financial weakness of the corporate sector is a necessary
complement to the restructuring of the banks.
16. Yet the
implementation of the plan as well as some of the FSAP recommendations will
need the authorities’ strong effort. The steps taken thus far are
substantial, but are just the initial ones.
· Bank
recapitalization and restructuring. The authorities and staff
agreed that the BAMC should be independent and free of political pressures,
appropriately funded, able to hire the best talent, fully accountable for its
actions, transparent, and subject to external professional auditing. Staff
noted that bringing banks back to a healthy state requires addressing the corporate
sector debt overhang, possibly through debt to equity swaps. They should move
at once to transfer the impaired assets out of the troubled banks and to
subsequently recapitalize those banks. To determine capitalization needs in
addition to those arising from the below-book value asset transfers to the
BAMC, staff recommended thorough stress tests on the banks’ remaining assets.
Staff welcomed the clear and short deadlines set in the law for the acquisition
of the assets and their subsequent sale, as well at the provisions to reinforce
the transparency of its governance. Staff also encouraged the authorities to
engage at least one international expert in the board of the BAMC to ensure its
effectiveness and the adoption of solid international practices.
·
Bank privatization and
governance. Staff also encouraged the authorities to move quickly to
privatize banks to bring about the needed change in their governance and
commercial cultures. The changes in the management of the two largest banks may
not be enough to end the public sector’s interference with the commercial
orientation of banks. The authorities agreed that privatization is important
but noted that reducing public ownership to below the blocking minority share
of 25 percent requires broader political support.
·
Crisis preparedness. Staff recommended a prompt discussion and
adoption of the draft Banking and Recovery and Resolution Acts, which enhance
the powers and resources of the Bank of Slovenia to deal effectively with
financial sector crises. These drafts provide adequate legal protection of bank
supervisors in civil and criminal court proceedings, and empower the Bank of
Slovenia to define the requirements for major acquisitions by banks, subjecting
them to its approval. In addition, staff recommended periodic stress tests to
monitor the quality of bank assets as well as capital adequacy as economic
conditions continue to be challenging.
Mark Pleas
[contact]
