LJUBLJANA (Slovenia), June 21 (SeeNews) – Global rating agency Standard & Poor's has revised its outlook on Slovenia's SID banka from stable to positive, the lender said on Thursday.
SID banka's rating remains unchanged at A+/A-1, it said in a Ljubljana bourse filing.
In a separate statement published by S&P earlier this week, it said that the outlook revision on the lender follows its outlook revision on Slovenia on June 15, 2018.
"We base our ratings on SID Bank on our opinion of its status as a government-related entity (GRE) with an almost certain likelihood of extraordinary support from the Slovenian government in the event of financial difficulties," S&P noted. "Accordingly, we equalize our ratings on the bank with those on Slovenia."
The ratings agency also said:
"In accordance with our criteria for government-related entities, our view that there is an almost certain likelihood of extraordinary government support is based 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 sixth-largest financial institution in 2017. 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 according to 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, the bank benefits from an irrevocable state guarantee against 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 60% through the commercial banking system--for infrastructure, small and midsize enterprises (SMEs), housing, and other projects in Slovenia that are not sufficiently serviced by the local banking market. In addition, the bank provides direct and indirect financing, insurance, and guarantees for Slovenian investors and exporters, mostly in the non-marketable segment. 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's total assets stood at €2.45 billion at year-end 2017 (about 6% of GDP).
However, the group's assets have been shrinking in recent years, including a 20% drop in 2016, and a further 3.8% decline in 2017. This can be attributed to the economic recovery in Slovenia, as SID Bank plays an important role as a countercyclical policy tool. The bank therefore expanded its activities in the aftermath of Slovenia's banking crisis until 2012, mostly providing indirect funding through financial institutions, but has since shrunk its balance sheet. This comes both from reduced demand from financial institutions as the financial sector recovered, and the overall withdrawal of SID Bank from the market. We view this shift in focus as aligned with the economic cycle in Slovenia and we think that the bank would be ready as a countercyclical crisis intervention tool if needed. The bank is mandated to act in a non-competitive way, by providing services in unserved market niches; as the banks returned to these markets, the scope for SID Bank reduced.
On the other hand, we understand that the public policy role in the bank's development business could be evolving over the coming years; the potential sale of the insurance subsidiary (Prva kreditna zavarovalnica) fits into this plan. The government and the bank might be looking for other business niches with market gaps. In this vein, in November 2017 the Ministry of Economic Development and Technology appointed SID Bank as manager of the fund of funds, which will handle €253 million of EU cohesion funds; these funds are earmarked for promotion and financing of economic growth. At the same time, the bank's core function for export support remains unchanged: SID Bank Group's insurance covered around 15% of Slovenian exports in 2017, which underpins its importance for the country's highly export-dependent economy, in which exports amount to over 80% of the country's GDP.
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 and 2017 (but not in 2015 and 2016). 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. In 2015, the Bank of Slovenia identified SID Bank as an "other systemically important bank" under the Slovenian Banking Act.
SID Bank has remained profitable, albeit on a modest scale, with a reported return on equity of approximately 2.7% on average over the past six years. This is not surprising, given the low interest-rate environment, SID Bank's gradual withdrawal from the market, and 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. 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 because we equalize our rating on SID Bank with that of the sovereign. Any rating actions on the sovereign would result in a corresponding action 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 the bank's public policy role for the government were to weaken as a result of shifts in the bank's long-term strategy or business model, or if there were any adverse statutory changes to SID Bank's operating framework."
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