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Moody's upgrades Slovenia's NLB deposit ratings to Baa2, outlook remains positive

Moody's upgrades Slovenia's NLB deposit ratings to Baa2, outlook remains positive NLB Banka Beograd headquarters in Belgrade Source:

LJUBLJANA (Slovenia), December 5 (SeeNews) – Moody's said it has upgraded its long-term local and foreign-currency deposit ratings on Slovenia's largest lender Nova Ljubljanska Banka (NLB) to "Baa2" from " Ba1", with a positive outlook.

The rating action reflects Moody's assessment of further material progress made in terms of privatization of the bank in line with the European Commission's (EC) approval of the revised deadline for the bank's restructuring and privatisation lifting material uncertainty about the bank's viability, the rating agency said in a press release on Tuesday.

The rating reflects also moderate reduction of legacy problem loans, while maintaining a strong problem loans coverage and strong capital cushion which Moody's expect the later to remain strong, despite some dilution ahead given the bank's resumption of loan growth and NLB's dividend payout targets, the statement added.

“The positive outlook on the long-term deposit ratings expresses Moody's expectation that the bank will further strengthen its risk profile by continuing reducing its still elevated problem loans as well as improve its core earnings generation capacity while maintaining a strong capital base,” the rating agency noted.

Moody's also said in the statement:



The upgrade of NLB's BCA to ba1 from b1 reflects Moody's re-assessment of the bank's overall credit profile following the successful initial public offering on November 14, 2018 and the reduction in government ownership to 35%. Furthermore, the re-assessment considers ongoing gradual improvements in asset quality and maintenance of strong capital adequacy and liquidity profile.

As of September 2018, the bank's problem loans ratio improved to 7.6% from 10.9% as of year-end 2017 (2016: 15.0%) with good loan loss provisioning coverage at 76%. Moody's anticipates further asset quality improvements, supported by the favourable economic environment in Slovenia with Moody's economic growth forecast of 4.3% in 2018 and 3.5% in 2019.

As of the third quarter, NLB's Tier 1 capital ratio stood at 16.9% and its Tier 1 over total assets ratio at 11.4% post dividend payout, but including first half year earnings. The strong capitalisation provides an important risk mitigant against remaining asset risk including from exposures to countries in more volatile South Eastern Europe (SEE) as well as forms a solid base to accommodate future loan growth. Based on NLB's medium-term capital plan, Moody's expects some dividend pay-outs and a diversification of the bank's capital which is currently fully composed of core equity Tier 1. The resulting modest dilution of the capital base is already factored in the rating agency's assessment.

NLB reported a return on assets of 1.7% as of the third quarter versus 1.9% in 2017 with the decline mostly attributable to a reduction in the release of credit impairments. Moody's anticipates that improving core earnings due to lending growth will mostly offset the declinging benefits from loan-loss provisioning reversals in the context of further problem loans reduction.

The successful privatisation and therefore compliance with European state aid rulings has lifted material uncertainties for the bank's future. As a result, Moody's has removed previously applicable constraining qualitative adjustments within the assessment of NLB's BCA, thereby contributing to the overall three notch upgrade of the bank's BCA to ba1 from b1.


The two-notch upgrade of NLB's long-term deposit ratings to Baa2 from Ba1 was driven by: (1) the upgrade of the bank's BCA and adjusted BCA by three notches to ba1 from b1; and (2) maintenance of two-notch rating uplift for deposit ratings from Moody's Advanced Loss Given Failure (LGF) analysis; and (3) no rating uplift (formerly one) from unchanged assumptions of moderate government support.

Despite the reduction in state ownership in NLB to a minority state, Moody's continues to maintain a moderate likelihood of government support in the event of failure due to NLB's systemic importance as the country's largest bank. However, this does not result in further rating uplift to the deposit ratings on the back of the Slovenian sovereign rating level (Baa1 stable).


The positive outlook on NLB's long-term deposit ratings reflects Moody's expectation of continuing gradual improvement of the bank's level of problem loans as well as core earnings, resulting in an improvement of the bank's credit profile over the next 12-18 months with only modest reduction in the bank's capital levels.


A further improvement in the bank's financial performance, in particular a sustainable improvement in core earnings generation while maintaining the trend of reducing problem loans and its strong capital levels and liquidity position could have positive rating implications. An improvement in the operating environment and related change in Slovenia's Moderate + Macro Profile which would further boost the bank's business opportunities and financial performance could also result in an upgrade of bank's BCA.

A weakening in the bank's solvency due to a reversal of current asset quality trends, lower capital ratios on the back of more aggressive lending growth than currently anticipated and/or material dividend payments and weakening of sustainable profitability may result in downward pressure on the bank's BCA and ratings.

Further, a change in the bank's liability structures may change the uplift provided by Moody's Advanced LGF analysis and lead to a higher or lower notching from the bank's adjusted BCAs, thereby affecting deposit ratings.


Issuer: Nova Ljubljanska banka d.d.


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Outlook Action:

Outlook remains Positive