Moody's Says Downgrades Two Slovenian Banks, Affirms Rating of Another Bank

Moody’s issued the following statement:

“Moody's downgraded: (i) the long-term deposit rating and bank financial strength rating (BFSR) of Nova Ljubljanska Banka (NLB) to A1 and C-, from Aa3 and C, respectively; (ii) the issuer rating of NLB InterFinanz (NLB's Zurich-based subsidiary) to Baa2, from A3; and (iii) the long term deposit ratings and BFSR of Nova Kreditna Banka Maribor (NKBM) to A2 and D+, from A1 and C-, respectively.

All the three aforementioned ratings carry a stable outlook. In Addition, the rating agency affirmed the deposit ratings and BFSR of Abanka Vipa (Abanka) at A3/Prime-2 and D+, respectively, with a negative outlook. Today's rating actions conclude the review initiated on 28 April 2009 when the ratings of three of the four financial institutions were placed on review for possible downgrade.

The full list of rating actions and their specific rationale can be found below under the name of each reviewed bank.

Moody's review examined the vulnerability of Slovenian banks' capital position to increased loan defaults, and also assessed their financial flexibility more broadly, within the context of a recession in Slovenia and of an uncertain recovery.

Moody's concluded that all rated Slovenian banks maintain adequate loss absorption capacity -- composed of capital, existing provisions and ongoing earning capacity -- to cope with the expected further deterioration in asset quality over the next few months.

Moody's expectations incorporate the possibility that the current pace of non-performing loan growth could continue into 2010, and the rating agency's expectations were elaborated in the Special Comment entitled "Moody's Approach to Estimating Slovenian Banks' Credit Losses", published in October 2009.

As part of the ratings review, Moody's has also considered Slovenian banks' reduced financial flexibility -- reflected in depressed profitability and deteriorating asset quality -- as well as the rating agency's expectations of continued challenges to Slovenian banks' franchise growth, earning capacity and ability to replenish capital.

These challenges are based on (i) modest ongoing profitability of Slovenian banks, (ii) considerable reliance, in recent years, on more volatile international funding, and (iii) elevated credit risk in Slovenia and neighboring markets.

In Moody's opinion, these considerations are better captured in BFSRs of C- for NLB of D+ for NKBM. Moody's said that these concerns apply equally to Abanka, adding that the decision to affirm the bank's ratings reflects the lower pre-existing rating level, which already captures these factors.

Banks with similar franchises in neighboring countries that currently have higher BFSRs typically exhibit stronger recurring profitability and more comfortable funding metrics.

Moody's further notes the supportive attitude of the Slovenian government to the banking sector, reflected in direct and indirect liquidity support. This includes government guarantees for the issue of medium-term debt in international markets that was successfully accessed by both NLB (EUR1.5 billion in July 2009) and Abanka (EUR500 million in September 2009).

Moody's believes that such support will continue to be made available for as long as necessary, and could extend to capital support, if required. Moody's assesses the likelihood of systemic support as high -- reflected in Slovenian banks' deposit ratings that incorporate four notches of uplift in the case of NLB and NKBM, and three notches of uplift for Abanka.”