May 8 (SeeNews) - Fitch Ratings said it has upgraded the long-term issuer default rating (IDR) of Slovenia-based Abanka d.d. to 'BB+' from 'BB', and thе ratings of Nova Kreditna Banka Maribor (NKBM) and Nova Ljubljanska Banka d.d. (NLB) to 'BB' from 'BB-'.
At the same time, the agency has downgraded Banka Intesa Sanpaolo d.d.'s (Banka Intesa) long-term IDR to 'BBB-' from 'BBB'.
The outlooks on all four banks are stable, Fitch said in a statement late on Friday.
Fitch also said in the statement:
"The IDRs of Abanka, NLB and NKBM are driven by their standalone financial strength, as expressed by their Viability Ratings (VRs). NLB's senior unsecured debt rating is in line with its Long-Term IDR.
The upgrades of the VRs and IDRs of Abanka, NLB and NKBM reflect: an improvement in Slovenian economic environment coupled with ongoing restructuring of the corporate sector; reduced downside asset quality risks given the banks' extended track record of gradual recoveries of substantial legacy non-performing loans (NPLs, loans 90 days overdue plus otherwise impaired loans) and only modest new NPL generation; considerable capital buffers further supported by de-leveraging and very modest growth; and banks' robust funding and liquidity profiles.
However, the VRs of all four banks including Banka Intesa reflect still high stocks of legacy NPLs (more limited at Banka Intesa) and only moderate profitability given low interest rates and limited loan growth potential.
The downgrade of Banka Intesa's Long- and Short-Term IDRs follows a similar rating action on its parent, Intesa Sanpaolo S.p.A. (ISP; BBB/Stable/bbb), as Banka Intesa's IDRs are driven by support from ISP. For more details see "Fitch Downgrades 5 Italian Banks' Following Sovereign Downgrade" dated 27 April 2017 at www.fitchratings.com.
Banka Intesa's IDRs and Support Rating of '2' reflect Fitch's view that ISP will continue to have a strong propensity to support its subsidiaries in central and eastern Europe (CEE), given its majority ownership, strategic commitment to CEE markets and high level of integration, notwithstanding ISP's primary focus on the Italian market. The Stable Outlook on Banka Intesa mirrors that on the parent.
The affirmation of Banka Intesa's VR reflects the absence of major changes in its financial profile over the last 12 months.
VRs
Abanka's VR is one notch higher than those of the other three banks, mainly due to a significantly stronger capital buffer, comfortably covering unreserved NPLs. The other reviewed banks' capital positions (if adjusted for unreserved NPLs) are largely similar to each other, justifying the same rating level for the VRs.
The banks' stocks of legacy NPLs are significant, at around 10% of end-2016 gross loans for Banka Intesa, around 16% for NLB and Abanka, and a substantial 30% for NKBM, but these seem reasonably covered by impairment reserves, with Abanka at 76%, NLB 70%, NKBM at 66% and Banka Intesa 60% (all figures rounded). In Fitch's view, any additional credit losses related to legacy NPLs should be moderate.
Asset quality risks are also mitigated by banks' reduced risk appetite and an extended track record of limited origination of new NPLs (the difference between NPLs plus write-offs divided by average gross loans), which was only marginal for Abanka and negative for the other three banks in 2016.
Capitalisation is solid at all four banks, as expressed by high Fitch Core Capital (FCC) ratios of around 32% at Abanka, 26% at NKBM and 19% at Banka Intesa and NLB. We estimate that all four banks now have sufficient loss-absorption capacity to fully reserve their legacy NPLs and still maintain strong FCC ratios of 29% at Abanka, 18% at NKBM and 15% at Banka Intesa and NLB (all figures rounded).
Internal capital generation remains only moderate (single digits for all four banks) due to modest core profitability resulting from low interest rates large pools of low-yielding liquid assets. However, capitalisation is supported by divestments of non-core assets and limited organic loan growth in the low single digits for Banka Intesa and Abanka, and negative for NLB and NKBM. The latter may pick up in the next few years but Fitch expects it to stay in low single digits.
Robust liquidity buffers and healthy funding structures are a rating strength for all four banks. The banking sector continues to receive a steady inflow of granular and cheap retail deposits, and funding profiles remain dominated by customer funding (around 90% of total liabilities at each of the banks). The banks also managed to accumulate large liquidity cushions due to limited new lending opportunities. At end-2016 liquidity buffers were robust at Abanka and NKBM (over 50% of total liabilities), followed by NLB (40%) and Banka Intesa (27%).
SUPPORT RATING AND SUPPORT RATING FLOORS -ABANKA, NLB and NKBM
The Support Rating Floors of 'No Floor' and the Support Ratings of '5' for Abanka, NLB and NKBM express Fitch's opinion that potential sovereign support for the banks cannot be relied on. This is underpinned by the EU's Bank Recovery and Resolution Directive, which provides a framework for resolving banks that is likely to require senior creditors participating in losses, if necessary, instead of or ahead of a bank receiving sovereign support.
Fitch does not incorporate any potential support available to NKBM from its new majority owner Apollo Global Management LLC based on the view that extraordinary support from private equity investors in all circumstances usually cannot be relied on.
RATING SENSITIVITIES
IDRS AND SENIOR DEBT
Abanka, NKBM and NLB's IDRs and NLB's senior unsecured debt long-term rating are sensitive to changes in their VRs.
Banka Intesa's IDRs would be likely to move in tandem with those of ISP. Banka Intesa's IDR could also be downgraded if there is evidence of a reduced commitment by the group to support its subsidiary banks in CEE, which Fitch views as unlikely.
VRs
Further upside potential for the VRs of all four banks may emerge if they manage to: improve performance, achieve substantial additional progress in NPL workouts, and maintain solid capital and liquidity buffers. The upside potential for Abanka's VR is more limited than for the other three banks because it is already one notch higher and will probably require further improvements in the operating environment, a gradual pick-up in loan growth and increased scale.
Negative rating pressure for all four banks' VRs could stem from renewed capital pressure driven by additional credit losses on legacy problem exposures or high NPL generation in new lending. However, in Fitch's view this scenario is unlikely in the near term.
The rating actions are as follows:
Banka Intesa Sanpaolo d.d.:
Long-Term IDR: downgraded to 'BBB-' from 'BBB', Outlook Stable
Short-Term IDR: downgraded to 'F3' from 'F2'
Support Rating: affirmed at '2'
Viability Rating: affirmed at 'bb'
Abanka d.d.:
Long-Term IDR: upgraded to 'BB+' from 'BB', Outlook Stable
Short-Term IDR: affirmed at 'B'
Viability Rating upgraded to 'bb+' from 'bb'
Support Rating: affirmed at '5'
Support Rating Floor: affirmed at 'No Floor'
Nova Kreditna Banka Maribor
Long-Term IDR: upgraded to 'BB' from 'BB-', Outlook Stable
Short-Term IDR: affirmed at 'B'
Viability Rating upgraded to 'bb' from 'bb-'
Support Rating: affirmed at '5'
Support Rating Floor: affirmed at 'No Floor'
Nova Ljubljanska Banka d.d.
Long-Term IDR: upgraded to 'BB' from 'BB-', Outlook Stable
Short-Term IDR: affirmed at 'B'
Viability Rating upgraded to 'bb' from 'bb-'
Support Rating: affirmed at '5'
Support Rating Floor: affirmed at 'No Floor'
Senior unsecured debt Long-Term rating: upgraded to 'BB' from 'BB-'"
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