Slovenian banks need fresh capital, asset quality likely to worsen - Fitch

“The outlook for the Slovenian banking sector remains negative, in light of the high level of credit risk in banks' corporate loan portfolios, their weak and diminishing capital buffers and recessionary pressures in the country," the ratings agency said in its 2013 Outlook: CEE Banks report.

"Reduction of risk-weighted assets and the partial absorption of additional impairment charges by pre-impairment operating profit mean that the sector's capital needs may have reduced slightly since August, when Fitch estimated that a further 3.5 billion euro [$4.6 billion] of equity was needed. However, required injections remain sizable," the report said.

Fitch estimates that the two largest - and state-owned - banks, Nova Ljubljanska Banka and Nova Kreditna Banka Maribor, will require material capital injections in 2013. In Fitch's view, decisive steps to recapitalise these banks will be required, however the initial focus is likely to remain on cleaning up balance sheets, and there is still the unresolved question of the possible privatisation of state-owned banks.

Non-performing loans (NPLs) in the Slovenian banking sector are high, with notable concentrations in the construction and financial holdings sectors and Fitch expects NPLs to rise further in light of the weak economic outlook in Slovenia and Europe and the high level of indebtedness among Slovenian corporates.

The ratings agency considers the reserves coverage of existing NPLs as low - end-September at 50%, reflecting the banks high reliance on largely illiquid real estate and equities collateral, and making further sizable loan impairment charges likely. In Fitch's view, the proposed “bad bank” may help to clean up banks' balance sheets, although this will require transparent asset valuation mechanisms and a readiness of banks to recognise further losses on some exposures.

($=0.7548 euro)