December 21 (SeeNews) - Standard & Poor's said it has revised its outlook on Slovenia-based SID Bank (Slovene Export and Development Bank) to positive from stable, while affirming the bank's 'A/A-1' long- and short-term issuer credit ratings.
The outlook revision follows S&P's outlook revision on Slovenia, on December 16, to positive based on robust economic growth. S&P also affirmed Slovenia's A/A-1 long- and short-term sovereign credit ratings.
"We equalize our ratings on SID Bank with those on Slovenia because we consider that there is an almost certain likelihood of extraordinary government support for SID Bank in the event of financial distress", S&P said in a statement late on Tuesday.
The ratings agency also said in the statement:
"In accordance with our criteria for government-related entities, we base our view of the likelihood of support on SID Bank's:
- Critical role in implementing the government's economic policies, since SID Bank is Slovenia's flagship development and export promotion bank and was the country's fourth-largest financial institution in 2015. The government uses SID Bank to help achieve its economic policy goals, for instance through subsidized loan and insurance programs; and
- Integral link with the government, which fully owns SID Bank. The bank is governed on the basis of the Slovene Export and Development Bank Act, a specially designated law, and operates under the coordinated supervision of the Bank of Slovenia, the Ministry of Finance, and the Ministry of Economic Development and Technology.
In addition, SID Bank enjoys a state guarantee that is irrevocable and valid for all its debt obligations. The guarantee is the strongest applied under Slovenian law, and it supports our assumption of an almost certain likelihood of extraordinary government support.
SID Bank uses its shareholder capital and wholesale borrowing to channel financing‐‐over 50% through the commercial banking system‐‐for infrastructure, small and midsize enterprises, housing, and other projects in Slovenia that are not sufficiently serviced by the local banking market. In addition, the bank provides financing, insurance, and guarantees for Slovenian investors and exporters. Although SID Bank is not a deposit‐taking institution, in practice, it relies almost completely on long-term funding, in light of sovereign support and multilateral funding sources. SID Bank reported total assets of €3.2 billion at year-end 2015.
SID Bank is 100% owned by the government and it is a joint stock company under corporate law. The government determines the composition of the supervisory board, which in turn appoints the management board. In addition, the bank is defined as a financial institution and is therefore under the supervision of the Bank of Slovenia and the securities market agency. SID Bank's relatively large size led European authorities to classify it as a systemically important institution in 2014 (but not in 2015). Consequently, SID Bank was part of the European Central Bank's Asset Quality Review in 2014, which estimated SID Bank to have a comfortable capital ratio (common equity tier 1) of 14.45% in an adverse scenario. Marketable debt instruments issued by SID Bank are eligible for the Eurosystem's expanded asset purchase program.
SID Bank has remained profitable, albeit on a modest scale, with a return on equity of approximately 2% on average over the past five years. This is not surprising, given its public policy mandates, and is comparable with that of other development banks. Small profits have also kept the bank's capital base stable during the same period.
SID Bank's creditworthiness is linked to that of the sovereign. We don't assess a stand-alone credit profile for SID Bank because we view the likelihood of extraordinary government support for the bank as almost certain. However, we estimate that the bank's underlying credit quality, absent extraordinary support, is in the 'b' category. As such, we consider that the likelihood of government support is not subject to transition risk.
The positive outlook on SID Bank reflects that on Slovenia. We equalize our ratings on SID Bank with those on the sovereign. Consequently, any future outlook revision or rating action on the sovereign would result in a corresponding change in the outlook or ratings on SID Bank.
Beyond any sovereign rating action we may take, we could lower the ratings on SID Bank if, in our view, the bank's role for or link with the government had weakened. This could occur if we perceived that the bank's mission had become less important, or if there were any adverse statutory changes to SID Bank's operating framework or to the financial support mechanisms currently in place."