The rating agency has affirmed the bank's A3/P-2 long- and short-term Counterparty Risk Ratings (CRR) and its A3(cr)/P-2(cr) long- and short-term counterparty risk assessments, Moody's said in a statement.
The outlook on the long-term deposit ratings remains stable, Moody's said.
Moody's also said in the statement:
--UPGRADE OF THE BCA AND ADJUSTED BCA
The upgrade of the bank's BCA and Adjusted BCA to baa3 from ba1 is driven by the improvement in the bank's solvency, mainly in terms of asset quality and profitability, and a sustained sound liquidity profile, while also incorporating the agency's view of some remaining tail-risks for the group related to significant exposures in economically, institutionally and politically less stable countries than its home market Slovenia.
NLB's asset quality has been broadly resilient despite the challenging macroeconomic environment in recent years, with the ratio of problem loans to gross loans at 2.2% as of September 2023. Although the rating agency anticipates some deterioration in asset quality over 2024, the bank is well buffered with a high coverage ratio of 104% as of September 2023.
NLB's credit profile is supported by its good capitalization with a Common Equity Tier 1 (CET1) capital ratio of 14.7% and total capital adequacy ratio of 18.7% as of September 2023 and its significantly improved organic capital generation. Benefitting from the high interest rates, the bank's profitability improved to an annualized return on assets of 2.1% for the first nine months of 2023. Despite some moderation owing to higher credit and operational costs, Moody's expects NLB's profitability to remain strong.
NLB has a generally defensive funding structure, largely consisting of retail deposits paired with a high share of liquid assets. The rating agency's assessment of a baa3 BCA continues to incorporate some residual vulnerability in NLB's funding base, particularly considering its operations in more volatile and higher risk countries across Southern Eastern Europe.
--AFFIRMATION OF THE DEPOSITS, CRRs, AND CR ASSESSMENTS
The affirmation of the bank's deposit ratings, CRRs and CR Assessments incorporates the upgrade of its BCA and Adjusted BCA to baa3, unchanged three notches of rating uplift following the application of Moody's Advanced Loss Given Failure (LGF) and no uplift to the deposit ratings despite the agency's unchanged assumption of a moderate likelihood of support in case of need from the government of Slovenia. The elimination of the one notch of rating uplift from government support is because the outcome for the deposit ratings prior to government support is already at the same level as the government rating.
--RATIONALE FOR THE STABLE OUTLOOK
The outlook on NLB's long-term bank deposit ratings remains stable reflecting the agency's expectation that the bank's standalone credit profile will remain unchanged over the next 12-18 months. The stable outlook also reflects the agency's expectation that the bank will maintain its existing amounts of bail-in-able debt which buffer depositors.
FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS
NLB's ratings could be upgraded following an upgrade of its BCA and Adjusted BCA. The BCA could be upgraded in case of an improvement of its funding profile or further improvement of its solvency, or through a reduction of tail risks from weaker economic regions or an increase in NLB's exposure to stronger operating environments.
NLB's ratings could be downgraded if the BCA is downgraded or if the volume of outstanding debt instruments in relation to NLB's balance sheet materially falls, such that the loss severity increases for more senior instrument classes.
The bank's BCA could be downgraded following a significant reversal of the positive asset quality trends, a material worsening in capitalization or a significant deterioration of its funding profile.
The principal methodology used in these ratings was Banks Methodology published in July 2021 and available at https://ratings.moodys.com/rmc-documents/71997. Alternatively, please see the Rating Methodologies page on https://ratings.moodys.com for a copy of this methodology.
For further specification of Moody's key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. Moody's Rating Symbols and Definitions can be found on https://ratings.moodys.com/rating-definitions.
For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security 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 credit rating action on the support provider and in relation to each particular credit 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 issuer/deal page for the respective issuer on https://ratings.moodys.com.
For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit 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."
