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Fitch upgrades Slovenia’s NLB to BB+, outlook stable

Fitch upgrades Slovenia’s NLB to BB+, outlook stable Fitch (Author: License: all rights reserved.

LJUBLJANA (Slovenia), November 23 (SeeNews) – Fitch Ratings said on Friday it upgraded the long-term issuer default rating (IDR) of Slovenia's biggest lender, Nova Ljubljanska Banka (NLB) to ‘BB+’ from ‘BB’ and removed it from rating watch evolving (RWE).  

The outlook of the bank is stable, the ratings agency said in a statement.

The upgrade reflects a significant improvement of NLB’s financial profile in 2017- first half of 2018 due to an extended track record of legacy impaired loan recoveries, stronger performance and solid capital and liquidity buffers, Fitch explained.

In Fitch’s view, NLB’s credit profile has remained largely stable over the past six months and commensurate with a BB+ rating.

Earlier this month, NLB shares were admitted to trading on the stock exchanges in Ljubljana and London following a successful public offering.

The public offering came in response to the commitment of Slovenia undertaken as part of the restructuring plan of NLB agreed with the European Commission under state aid procedure in 2013. Back then, the Slovenian government stepped in to recapitalise NLB and two other lenders - NKBM and Abanka, narrowly avoiding an international bailout. The same year, Slovenia committed to the European Commission to sell part of NLB within four years.

Fitch also said in the statement:

"The IDRs of NLB are driven by its intrinsic credit strength, as expressed by its VR. The resolution of RWE on NLB's ratings follows the privatisation of a majority equity stake in NLB, in accordance with its and the Slovenian government's commitment to the European Commission (EC) (see 'Fitch Maintains Nova Ljubljanska Banka on Watch Evolving' dated 18 October 2018 on Earlier this month the Slovenian authorities sold a 59% stake in NLB through a public offering of shares, with an option of extending the offer to 65%.

The upgrade of NLB reflects a significant improvement of its financial profile in 2017-1H18 due to an extended track record of legacy impaired loan recoveries, stronger performance and solid capital and liquidity buffers. In Fitch's view, NLB's credit profile has remained largely stable over the past six months and commensurate with a BB+ rating. Risks of financial costs or operational restrictions due to a breach of original privatisation commitments contained in NLB's restructuring agreement from 2011-2013 have also materially diminished. 

At end-1H18 NLB's headline impaired loans ratio equalled a moderate 9.9% (end-2017: 10.8%) and were 70% covered with loan loss allowances (LLA). Fitch believes that impaired loans are conservatively defined and should be quite similar to Stage 3 loans under IFRS 9. We believe that NLB's impaired loan ratio adequately captures the magnitude of asset quality risks and do not expect any downside to asset quality in the medium term. This view is based on the strong quality of NLB's largest loans and non-loan exposures and a track record of limited impairment of newly issued loans in the recent years, reflecting a combination of more conservative underwriting criteria and a strong cyclical upswing of the Slovenian economy.

At the same time, around 30% of group assets are located in the south east European (SEE) markets, with weaker economic and regulatory environments than Slovenia's. Fitch understands from management that NLB plans to gradually increase the SEE exposure, particularly in SME and retail lending, as the interest margins on these markets are higher. It should support performance, but at a cost of higher asset quality risks due to significantly greater cyclicality of these markets and generally weaker asset quality in SEE.

Fitch expects the bank to post a strong return on average equity (ROAE) in 2018 (1H18: 12.4%) although we expect this to moderate to single-digits in the next few years. NLB's bottom line results should be viewed in light of one-off benefits from recent loan recoveries and related loan impairment reversals related to the bank's legacy impaired loan portfolio. NLB's pre-impairment profit remains pressured by a low interest rate environment and was a moderate 2.5% of average gross loans in 2017-1H18, providing the bank with only moderate loss absorption capacity. 

Due to the lack of meaningful loan growth in the past several years, NLB has accumulated solid capital and liquidity buffers, which are rating strengths. NLB's Fitch Core Capital (FCC) ratio equalled a high 20.5% at end-1H18 and unreserved impaired loans equalled only a moderate 12% of FCC. At end-1H18 NLB was predominantly deposit-funded (94%) and liquidity was ample as expressed by a low 76% gross loans-to-deposits ratio.

NLB's Support Rating Floor of 'No Floor' and Support Rating of '5' reflect Fitch's opinion that potential sovereign support for the bank cannot be relied on, despite NLB's high systemic importance as expressed by the bank's high 23% domestic market share. This view 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 or ahead of a bank receiving sovereign support.

NLB's ratings are primarily sensitive to changes in the bank's asset quality. A continued reduction of legacy impaired loans or their stronger coverage with LLAs may lead to moderate rating upside. Conversely, renewed asset quality pressure may lead to a downgrade, although this is currently not expected by Fitch, given the currently favourable Slovenian economic environment. A significant increase of NLB's exposure to SEE markets could also be credit-negative.

The rating actions are as follows: 

Nova Ljubljanska Banka d.d.
Long-Term IDR: upgraded to BB+ from BB; off RWE, Outlook Stable
Short-Term IDR: affirmed at 'B'
Viability Rating: upgraded to bb+ from 'bb'; off RWE
Support Rating: affirmed at '5'
Support Rating Floor: affirmed at 'No Floor'