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Rating Action:

Moody's downgrades 2 Slovenian banks; affirms rating of 1 bank

20 Oct 2009

Rated subsidiary and hybrid debt also downgraded

Limassol, October 20, 2009 -- Moody's Investors Service has today concluded its review for possible downgrade of two Slovenian banks and of the Zurich-based subsidiary of one of these banks. The ratings of a third Slovenian bank were affirmed

Moody's downgraded: (i) the long-term deposit rating and bank financial strength rating (BFSR) of Nova Ljubljanska Banka (NLB) to A1 and C-, from Aa3 and C, respectively; (ii) the issuer rating of NLB InterFinanz (NLB's Zurich-based subsidiary) to Baa2, from A3; and (iii) the long term deposit ratings and BFSR of Nova Kreditna Banka Maribor (NKBM) to A2 and D+, from A1 and C-, respectively. All the three aforementioned ratings carry a stable outlook. In Addition, the rating agency affirmed the deposit ratings and BFSR of Abanka Vipa (Abanka) at A3/Prime-2 and D+, respectively, with a negative outlook. Today's rating actions conclude the review initiated on 28 April 2009 when the ratings of three of the four financial institutions were placed on review for possible downgrade.

The full list of rating actions and their specific rationale can be found below under the name of each reviewed bank.

Moody's review examined the vulnerability of Slovenian banks' capital position to increased loan defaults, and also assessed their financial flexibility more broadly, within the context of a recession in Slovenia and of an uncertain recovery. Moody's concluded that all rated Slovenian banks maintain adequate loss absorption capacity -- composed of capital, existing provisions and ongoing earning capacity -- to cope with the expected further deterioration in asset quality over the next few months. Moody's expectations incorporate the possibility that the current pace of non-performing loan growth could continue into 2010, and the rating agency's expectations were elaborated in the Special Comment entitled "Moody's Approach to Estimating Slovenian Banks' Credit Losses", published in October 2009.

As part of the ratings review, Moody's has also considered Slovenian banks' reduced financial flexibility -- reflected in depressed profitability and deteriorating asset quality -- as well as the rating agency's expectations of continued challenges to Slovenian banks' franchise growth, earning capacity and ability to replenish capital. These challenges are based on (i) modest ongoing profitability of Slovenian banks, (ii) considerable reliance, in recent years, on more volatile international funding, and (iii) elevated credit risk in Slovenia and neighboring markets.

In Moody's opinion, these considerations are better captured in BFSRs of C- for NLB of D+ for NKBM. Moody's said that these concerns apply equally to Abanka, adding that the decision to affirm the bank's ratings reflects the lower pre-existing rating level, which already captures these factors. Banks with similar franchises in neighboring countries that currently have higher BFSRs typically exhibit stronger recurring profitability and more comfortable funding metrics.

Moody's further notes the supportive attitude of the Slovenian government to the banking sector, reflected in direct and indirect liquidity support. This includes government guarantees for the issue of medium-term debt in international markets that was successfully accessed by both NLB (EUR1.5 billion in July 2009) and Abanka (EUR500 million in September 2009). Moody's believes that such support will continue to be made available for as long as necessary, and could extend to capital support, if required. Moody's assesses the likelihood of systemic support as high -- reflected in Slovenian banks' deposit ratings that incorporate four notches of uplift in the case of NLB and NKBM, and three notches of uplift for Abanka.

RATING ACTIONS IN DETAIL

Moody's has taken the following rating actions:

Nova Ljubljanska Banka (NLB)

NLB's BFSR was downgraded to C- from C mapping onto a Baseline Credit Assessment (BCA) of Baa2. The rating action was driven by the bank's reduced financial flexibility -- reflected in depressed profitability, rapidly deteriorating asset quality and reducing (albeit still strong) provision levels.

Although Moody's stress-testing exercise shows that the bank is adequately capitalised to cope with further deterioration in asset quality (under Moody's anticipated scenario), the rating agency gave considerable weight to (i) NLB's modest ongoing earning capacity and how this relates to higher levels of credit risk, within the context of an uncertain recovery, and (ii) possible franchise pressures arising from the bank's considerable dependence on international funding in recent years and the reduced availability of such funding at low prices.

The stable outlook on the rating signals that anticipated further weakening in NLB's financial strength over the coming months is adequately captured by the C- BFSR.

Moody's explains that the downgrade of the deposit rating to A1 from Aa3 is driven by the downgrade in the bank's stand-alone financial strength, expressed by the C- BFSR. Moody's reiterates its view on the very high likelihood of systemic support for NLB that results in the incorporation of four notches of uplift for the A1 deposit rating (from the Baa2 BCA).

The following debt of NLB was also downgraded to A2 from A1:

- EUR190.0 million subordinated loan

- EUR100.0 million perpetual subordinated floating rate notes

NLB InterFinanz

Moody's downgraded the issuer rating of NLB InterFinanz to Baa2 from A3. The company's issuer rating is based on an assessment of the company's stand-alone financial strength, but also incorporates some notches of uplift due to parental support, from NLB.

During the review Moody's assessed both the resilience of the company's intrinsic financial strength to the weak economic environment, and the changes to the level of parental support. Moody's concluded that although the asset quality of NLB InterFinanz has deteriorated, the company maintains sufficient capital and provisions to absorb a possible further increase in non-performing loans. However, the BFSR downgrade of the parent bank (NLB) to C- (equivalent to a BCA of Baa2) also represents the parent bank's reduced capacity to provide support, thereby constraining the rating uplift for NLB InterFinanz.

Nova Kreditna Banka Maribor (NKBM)

Moody's downgraded NKBM's BFSR to D+ (mapping onto a BCA of Baa3) from C- to reflect the bank's reduced financial strength -- manifested in depressed profitability, rapidly deteriorating asset quality and diminishing (albeit still strong) provision levels.

Although Moody's stress-testing exercise shows that the bank currently maintains enough capital and provisions to cope with further deterioration in asset quality (under Moody's anticipated scenario), the rating agency gave considerable weight to NKBM's modest ongoing earning capacity within an environment of higher levels of credit risk. Moreover, although the bank's funding position is more comfortable than that of its rated Slovenian peers, Moody's nonetheless considers that NKBM's franchise growth is challenged by the economic recession and uncertain recovery in Slovenia.

The stable outlook on the rating signals that anticipated further weakening in NKBM's financial strength over the coming months is adequately captured by the D+ BFSR.

The downgrade of the deposit rating to A2 from A1 is driven by the downgrade in the bank's stand-alone financial strength, expressed by the D+ BFSR. Moody's reiterates its view on the very high likelihood of systemic support for NKBM that results in the incorporation of four notches of uplift for the A2 deposit rating (from the Baa3 BCA).

The following debt of NKBM was also downgraded to A3:

- EUR50.0 million subordinated floating rate notes

- EUR100.0 million 7.02% subordinated loan participation notes

- EUR50.0 million subordinated floating rate Eurobonds

Abanka Vipa (Abanka)

Moody's affirmed Abanka's A3/Prime-2 deposit ratings and D+ BFSR with a negative outlook. At their current levels, the ratings adequately capture the impact of further asset quality deterioration on capital and of reduced financial flexibility.

By maintaining a negative outlook on the Abanka's ratings, Moody's signals that the bank's position within the D+ BFSR category is more vulnerable to worse-than-anticipated economic developments in Slovenia.

The following debt of Abanka was also affirmed at Baa3 with a negative outlook:

- EUR120.0 million preferred stock loan participation notes

PREVIOUS RATING ACTIONS AND METHODOLOGIES

Moody's previous rating action on Nova Ljubljanska Banka was on 28 April 2009 when all ratings were placed on review for possible downgrade.

Moody's previous rating action on NLB Interfinanz was on 28 April 2009 when the A3 issuer rating was placed on review for possible downgrade.

Moody's previous rating action on Nova Kreditna Banka Maribor was on 28 April 2009 when all ratings were placed on review for possible downgrade.

Moody's previous rating action on Abanka Vipa was on 28 April 2009 when the outlook to all ratings was changed to negative.

Headquartered in Ljubljana, Slovenia, Nova Ljubljanska Banka reported total consolidated assets of EUR18.64 billion as of 30 June 2009.

Headquartered in Zurich, Switzerland, NLB Interfinanz reported total consolidated assets of CHF816.44 million (EUR535.5 million) as of 30 June 2009.

Headquartered in Maribor, Slovenia, Nova Kreditna Banka Maribor reported total consolidated assets of EUR5.84 billion as of 30 June 2009.

Headquartered in Ljubljana, Slovenia, Abanka Vipa reported total consolidated assets of EUR4.07 billion as of 30 June 2009.

The principal methodologies used in rating these banks were Moody's "Bank Financial Strength Ratings: Global Methodology" (February 2007) and "Incorporation of Joint-Default Analysis into Moody's Bank Ratings: A Refined Methodology" (March 2007), and available on www.moodys.com in the Rating Methodologies sub-directory under the Research & Ratings tab. Other methodologies and factors that may have been considered in the process of rating these issuers can also be found in the Rating Methodologies sub-directory on Moody's website.

The rating for the subordinated debt and hybrid securities of these banks was assigned in line with Moody's existing methodology entitled "Guidelines for Rating Bank Junior Securities", dated April 2007. On 16 June 2009, Moody's released a Request for Comment, in which the rating agency has requested market feedback on potential changes to its rating methodology for bank subordinated capital. If the revised methodology is implemented as proposed, the rating on some of the above-mentioned hybrid securities may be negatively affected. Please refer to Moody's Request for Comment, entitled "Moody's Proposed Changes to Bank Subordinated Capital Ratings," for further details regarding the implications of the proposed methodology changes on Moody's ratings.

Limassol
Mardig Haladjian
General Manager
Financial Institutions Group
Moody's Investors Service Cyprus Limited
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

Limassol
George Chrysaphinis
Vice President - Senior Analyst
Financial Institutions Group
Moody's Investors Service Cyprus Limited
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

Moody's downgrades 2 Slovenian banks; affirms rating of 1 bank
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