LJUBLJANA (Slovenia), July 2 (SeeNews) – Fitch Ratings said it has upgraded the outlooks on Slovenia's Nova Kreditna Banka Maribor's (NKBM) and Abanka to positive from stable.
Fitch has also affirmed the banks' long-term issuer default ratings (IDRs) at 'BB+' and viability ratings at 'bb+', it said in a statement on Friday.
The rating action follows the announcement by NKBM on June 20 that it has signed a sale and purchase agreement with Slovenia’s sovereign holding company, SDH, for the acquisition of 100% of the shares of Abanka, with the completion of the acquisition subject to regulatory and other necessary approvals.
According to NKBM management, the merger of the two banks is expected shortly after the sale is completed Fitch noted, adding that the acquisition of Abanka is significant for NKBM in terms of size as the transaction would increase its total assets and risk-weighted assets (RWA) by around 70%.
“The positive outlook for NKBM reflects Fitch's expectation that the material strengthening of the bank's franchise following successful acquisition of and integration with Abanka, coupled with further improvements in asset quality and maintenance of solid capitalisation would likely lead to an upgrade of NKBM's ratings,” the rating agency added.
Abanka's positive outlook reflects Fitch's view that following the acquisition by NKBM and progress with the integration of the two banks, Abanka's and NKBM's credit profiles will become aligned given the plan to merge the two banks.
Fitch also said in the statement:
KEY RATING DRIVERS
IDRS and VRS
NKBM's and Abanka's IDRs are driven by the respective banks' standalone financial strength as expressed by the banks' VRs.
Abanka's acquisition by NKBM and subsequent merger, if completed will create the second-largest bank in Slovenia with a market share of around 22.5% (based on end-2018 data), only marginally smaller than the domestic operations of Slovenia's largest bank Nova Ljubljanska Banka d.d. (NLB, BB+/Stable).
We believe that the acquisition of Abanka fits well with NKBM's strategy given the banks' largely complementary businesses and geographical presence in Slovenia. We believe building critical mass is an important factor for sustainable performance in competitive markets such as Slovenia, where lending growth is moderate and interest rates are low. Benefits from the stronger franchise are likely to have a positive impact on our assessment of the merged bank's company profile, which however will take time to benefit the bank's performance given likely integration costs. Execution risks related to the acquisition and integration process are significant given the size of the two banks. However, these risks are mitigated by NKBM's record of acquisitions and the integration of two other banks in Slovenia as well as by Abanka's record of integration with Banka Celje.
In our view the impact of the transaction on NKBM's capitalisation and asset quality are key rating considerations. We estimate that the transaction will have a manageable impact on NKBM's Fitch Core Capital (FCC)/RWA ratio, with sizeable headroom over minimum regulatory CET1 and Tier 1 requirements likely to be maintained. Asset quality at NKBM has been on a positive trend and we expect this to continue in 2019. Abanka's acquisition should also be positive for the combined bank's asset quality given the bank's non-performing loan (NPL) ratio at end-2018 (4%) was significantly better than that of NKBM (10.4%).
We assume no fresh equity injection from NKBM shareholders, and therefore estimate the combined entity's pro-forma end-1H19 FCC/RWA ratio at around 14% compared with around 23% at end-2018 for NKBM. It is likely that closer to the completion of the transaction, capitalisation will further improve with internal capital generated by NKBM in 2H19. At the transaction close, capitalisation will also benefit from the one-off recognition of negative goodwill, which should bring the FCC/RWA ratio and CET1 ratio close to 16%.
Both banks have large liquidity cushions, with combined liquid assets at around EUR3 billion at end-2018, compared with combined customer deposits of around EUR6.7 billion and total assets of around EUR8.7 billion. Therefore, the impact of the acquisition payment of EUR444 million to SSH is not going to be material for the liquidity profile of the combined entity.
SUPPORT RATINGS AND SUPPORT RATING FLOORS
The Support Rating Floors of 'No Floor' and Support Ratings of '5' express Fitch's opinion that potential sovereign support for NKBM and Abanka cannot be relied on. This is because the EU's Bank Recovery and Resolution Directive, which provides a framework for resolving banks, 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 for NKBM from its private shareholders as in the agency's view such support cannot be relied upon in all circumstances.
RATING SENSITIVITIES
IDRS and VRS
An upgrade of NKBM's VR and IDRs would require a material strengthening of the bank's franchise, which should be achievable following the acquisition of Abanka. An upgrade would also be contingent on NKBM maintaining sound capital ratios with sizeable buffers over the required minimums, a further reduction of its legacy NPL stock without denting capitalisation, maintaining healthy funding and liquidity and a smooth integration of the acquired bank.
Both bank's ratings would come under pressure if asset quality deteriorates or if capitalisation or liquidity weakens, although these scenarios are viewed as unlikely by Fitch.
At the completion of the legal merger Fitch expects to equalise Abanka's IDR and VR with those of NKBM and withdraw Abanka's ratings.
SUPPORT RATINGS AND SUPPORT RATING FLOORS
An upgrade of the SRs and an upward revision of the SRFs would require a higher propensity of sovereign support. While not impossible, this is highly unlikely in Fitch's view.
Upon the completion of the acquisition by NKBM Fitch will reassess support available to Abanka. At the completion of the legal merger Abanka's SRF and SR will be withdrawn.
The rating actions are as follows:
Nova Kreditna Banka Maribor
Long-Term IDR: affirmed at 'BB+', Outlook revised to Positive from Stable
Short-Term IDR: affirmed at 'B'
Viability Rating: affirmed at 'bb+'
Support Rating: affirmed at '5'
Support Rating Floor: affirmed at 'No Floor'
Abanka d.d.
Long-Term IDR: affirmed at 'BB+', Outlook revised to Positive from Stable
Short-Term IDR: affirmed at 'B'
Viability Rating affirmed at 'bb+'
Support Rating: affirmed at '5'
Support Rating Floor: affirmed at 'No Floor'
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