February 8 (SeeNews) - Moody's Investors Service has upgraded the long-term local and foreign currency bank deposit ratings of Slovenia's Nova Ljubljanska Banka (NLB) [LJE:NLBR], to A3 from Baa1, with a stable outlook, the ratings agency said.
The upgrade reflects the bank's issuance of more subordinated debt in order to comply with Minimum Requirement for own funds and Eligible Liabilities (MREL), reducing loss severity for junior depositors, Moody's said in a statement on Tuesday.
At the same time, Moody's has affirmed the the ba1 Baseline Credit Assessment (BCA) and Adjusted BCA, the A3/P-2 long- and short-term local and foreign currency Counterparty Risk Ratings (CRRs) and the A3(cr)/P-2 (cr) long- and short-term Counterparty Risk Assessments (CR Assessments) of NLB.
Today's rating action also reflects the improvement in NLB's financial performance and Moody's expectation that the bank's solvency, mainly asset quality and capitalisation, will remain at current levels despite the worsening environment, while its profitability will further improve benefitting from the increased interest rates across the markets it operates.
Moody's also said:
"RATING RATIONALE
--RATIONALE FOR UPGRADING THE LONG-TERM DEPOSIT RATINGS
The upgrade of NLB's long-term bank deposit ratings to A3 from Baa1 reflects: the affirmation of the bank's BCA and Adjusted BCA at ba1; the result from Moody's Advanced LGF analysis leading to three notches of uplift for the deposit ratings from previously two notches; and Moody's assessment of an unchanged moderate likelihood of support from the Government of Slovenia (A3, stable), which continues to result in one notch of rating uplift for the deposits ratings from government support.
The additional notch of rating uplift results from NLB's issuance of additional volume of more subordinated debt to meet its MREL requirement that has been set at 31.38% of the bank's total risk weighted exposure amount as of 1 January 2024. In addition the bank must satisfy the applicable combined buffer requirement. The additional debt volume buffer depositors and indicates a meaningful reduction of loss severity for this instrument class and therefore an increase in the rating uplift to the maximum of three notches, according to Moody's Advanced LGF analysis.
-- RATIONALE FOR AFFIRMING THE BCA
The affirmation of NLB's ba1 BCA reflects a joint strengthening of the bank's solvency through an improvement in the bank's asset quality and its capitalization during the past two years, but also risks from an unseasoned loan book. The latter arises from significant loan growth over recent years, both organically and through acquisitions, which will likely drive an increase in delinquencies as these loans season amid weaker operating conditions. The affirmation takes into account the banks recovered strong profitability, after a drop during the pandemic and a defensive funding structure, largely consisting of deposits paired with a high share of liquid assets.
-- RATIONALE FOR AFFIRMING THE CRRs and CR Assessments
The affirmation of the CRRs and CR Assessments is driven by the affirmation of the bank's ba1 BCA and Adjusted BCA and unchanged three notches of uplift following the application of Advanced LGF and one notch of uplift following Moody's assumption of a moderate likelihood of support from the Government of Slovenia.
--RATIONALE FOR THE STABLE OUTLOOK
The outlook on NLB's long-term bank deposit ratings remains stable. This reflects Moody's expectation that the gradual strengthening of NLB's credit profile that could result in an upgrade of its BCA would be offset by a reduced government support uplift for the deposit ratings, because these instruments are currently aligned with the Government of Slovenia's own rating.
FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS
The bank's ratings could be upgraded in case of a multi-notch upgrade of the bank's BCA, which however is unlikely. A single notch upgrade of the bank's BCA would not lead to an upgrade of its ratings that are at the same level or above that of the Government of Slovenia, because the one notch of uplift owing to government support that is now embedded in the ratings would no longer be applicable.
The bank's BCA could be upgraded following improvements in its profitability while maintaining its current solvency metrics, mainly its capitalization and NPL ratio and demonstrating unchanged risk appetite.
NLB's ratings could be downgraded if the bank's BCA were to be downgraded, which could be caused by a significant reversal of the positive asset risk trends, a material worsening in capitalization or a significant deterioration of profitability levels, which would negatively affect NLB's internal capital-generation and risk-absorption capacity.
The ratings could also be downgraded 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."