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Rating Action:

Moody's upgrades three Slovenian banks' long-term ratings

30 Jan 2014

Actions follow the successful completion of the government-led bank recapitalisations

London, 30 January 2014 -- Moody's Investors Service has today upgraded the long-term deposit ratings of Nova Ljubjanska banka d.d. (NLB) and Nova Kreditna banka Maribor d.d.'s (NKBM) to Caa1 from Caa2, and Abanka Vipa d.d.'s (Abanka) to Caa2 from Caa3. The outlook on the ratings of NLB and NKBM has been changed to stable, while the outlook on Abanka's long-term deposit ratings is positive.

Concurrently Moody's has raised the banks' baseline credit assessments (BCAs) within the E BFSR category to caa2 from ca for NLB, caa2 from caa3 for NKBM and to caa3 from ca for Abanka. Each banks' E BFSR was affirmed.

The upgrade of the long-term ratings reflect the higher BCAs. The raising of the banks' standalone BCAs follows a bank recapitalisation programme launched by the Slovenian government (Ba1 stable) in December 2013. As part of the recapitalisation programme, NLB and NKBM completed the transfer of a large portion of their non-performing loans to a government-owned Bad Asset Management Company (BAMC). For Abanka, this process is expected to be completed by end-Q1 2014.

Following these state-aid measures the banks were fully nationalised.

RATINGS RATIONALE

--- LONG-TERM DEPOSIT RATINGS

Moody's continues to incorporate one notch of uplift in the supported long-term deposit ratings for NLB and NKBM at Caa1, and for Abanka at Caa2, from their current BCAs. This is based on Moody's assessment that some degree of systemic support will be available to each bank on an on-going basis after the recapitalisation and balance-sheet clean-up.

However, at the same time, Moody's notes that any future large-scale state-aid will be significantly constrained by (1) the Slovenian government's more limited capacity to use its balance sheet to absorb further losses; and (2) increasing regulatory pressure at the European level, restricting the use of taxpayers' money to resolve failing banks.

As a result, Moody's considers that the current one-notch of uplift for each bank's long-term rating reflects these medium-term uncertainties and constraints. The uplift also takes into account the planned privatisation of these banks, which was announced by the Slovenian government as part of the bail-out conditions.

--- STANDALONE BCAs OF NLB AND NKBM

Moody's says that the raising of NLB's and NKBM's BCAs to caa2 reflects (1) the completion of the government-led balance-sheet clean up from an unsustainable burden of non-performing loans; and (2) recapitalisation through a combination of cash capital injections and a transfer of assets to the BAMC. In addition, as part of the process, all the hybrid capital and subordinated debt instruments of the banks were bailed-in to aid the recapitalisation. These instruments have therefore been fully written-down and cancelled.

Following these measures, Moody's expects that NLB and NKBM will report substantially improved year-end Tier 1 capital ratios in the range of above 15% and 16%, respectively. Before the recapitalisation, the ratios were below the regulatory minimum guidelines.

As the result of the clean-up, both banks' asset-quality ratio has improved substantially, with net non-performing loans (non-performing loans adjusted for provisions) reduced to low single-digit levels. Similarly, funding positions have also improved, with loan-to-deposit ratios below 100%, from around 116% before the recapitalisation.

However, at the same time Moody's notes that these banks recurring profitability remains weak, with the average cost-to-income ratio of 70%-80% and average net interest margin at 1.7% and with medium probability of them remaining loss-making in 2014 and slow recovery thereafter. In addition, Moody's notes that the corporate sector in Slovenia remains highly indebted and its deleverage and recovery may take some time to emerge.

Therefore, the likelihood of these banks achieving a sustainable recurring profitability remains low during 2014, in light of the limited growth opportunities and ongoing recessionary environment in Slovenia. These considerations constrain the BCAs in the caa range until more clarity emerges regarding the operating environment, lending opportunities improve accordingly and internal bank restructuring challenges are addressed.

--- STANDALONE BCA OF ABANKA

Due to the still-pending transfer of its non-performing loan portfolio, Abanka has so far benefited only from the capital injection, with its Tier 1 ratio at 9% by year-end 2013. Abanka expects to complete the clean-up by April 2014, by which point its capital and asset-quality ratios would be similar to the other two banks. This explains the positioning of Abanka's standalone BCA, at one notch below its peers, with a positive outlook at this stage.

WHAT COULD MOVE THE RATINGS UP/DOWN

Upward pressure could develop on the ratings in the short to medium-term if the banks show (1) signs of returning to a sustainable business model, with reasonable growth opportunities and comparable profitability; and (2) the maintenance of sufficient capital buffers and robust asset-quality trends.

Downward pressure is unlikely to develop in the near term, given (1) the current already low BCA levels and limited uplift in the long-term ratings; and (2) substantially improved capital and asset quality ratios which can absorb further moderate volatility in the banks' performance.

PRINCIPAL METHODOLOGY

The principal methodology used in these ratings was Global Banks published in May 2013. Please see the Credit Policy page on www.moodys.com for a copy of this methodology.

REGULATORY DISCLOSURES

For ratings issued on a program, series or category/class of debt, this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the rating action on the support provider and in relation to each particular rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this rating action, and whose ratings may change as a result of this rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

Irakli Pipia
Vice President - Senior Analyst
Financial Institutions Group
Moody's Investors Service Ltd.
One Canada Square
Canary Wharf
London E14 5FA
United Kingdom
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

Yves Lemay
MD - Banking
Financial Institutions Group
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

Releasing Office:
Moody's Investors Service Ltd.
One Canada Square
Canary Wharf
London E14 5FA
United Kingdom
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

Moody's upgrades three Slovenian banks' long-term ratings
No Related Data.
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