LJUBLJANA (Slovenia), December 14 (SeeNews) – Standard & Poor's Global Ratings said on Friday it has revised its outlook on Slovenia's Nova Ljubljanska Banka (NLB) to positive from developing based on the partial privatization of the lender and its strong performance.
S&P has also affirmed its 'BB+/B' long- and short-term issuer credit ratings on the bank, it said in a statement.
“The positive outlook indicates that we could raise our ratings on NLB in the next 6-12 months, if industry risk conditions in Slovenia improve, or if the bank's standalone creditworthiness improves,” the rating agency explained
The outlook revision on NLB follows the successful listing of 65% of previously government-owned shares in the bank at the London and Ljubljana stock exchanges via an IPO in November 2018, S&P said, adding that the rating action also considers NLB's continued solid profitability in its core markets, ongoing reduction of nonperforming exposures, and tangible success of the bank restructuring.
S&P also said:
"The remaining 35% of shares are still owned by Slovenia, but we expect the government will sell more of its stake during 2019 until they own 25% plus one share as agreed within the binding restructuring plan with the European Commission in 2013. The success of the partial privatization is key to avoid negative intervention from the European Commission and disruptive measures to NLB's operations. [...]
We anticipate that, with the successful privatization, NLB will be free from key obligations that the Slovenian government agreed to on Aug. 10, 2018, as part of its amended commitments to the European Commission in relation to the €2.32 billion of state aid provided to NLB over 2011-2013.
The bank is no longer restricted to doing business outside Slovenia, and can continue to undertake cross-border business in South-Eastern Europe (SEE). Additionally, NLB is no longer obliged to substantially reduce its balance sheet. Most importantly, though, once the government sells another 10% of its stake, which we think it will do by Dec. 31, 2019, other key business restrictions will cease to apply.
We also acknowledge the bank's robust performance as shown in its recent disclosure of third-quarter 2018 financials. NLB's profitability was sound, with almost €160 million of profits after taxes in the first nine months of 2018, translating into a sound return on equity of 11.9%.
The bank's capitalization remained solid, with a common equity tier 1 ratio of 16.9% as of Sept. 30, 2018, which remains well above the minimum regulatory ratio of 13.4%. As we expected, NLB's asset quality improved further as indicated by the bank's nonperforming exposure (NPE) ratio declining to 5.3% as of Sept. 30, 2018, from 8.3% one year earlier, while maintaining a strong 75.3% NPE coverage ratio. NLB benefitted from a €19 million gain from high reversal of loan loss provisions (LLP; or 33 basis points of customer loans by our own measures) in the first nine months 2018, but we forecast a manageable increase in LLPs until 2020.
We do currently not expect that NLB's business strategy will change substantially as a result of the new shareholder structure. We continue to expect NLB's risk-adjusted capital (RAC) ratio will improve further close to, but below, 10% in the next 12-24 months after 9.0% in 2017.
We also expect a further reduction of the bank's NPE stock and moderate formation of new problem loans, reflecting intensive workout efforts and repayments, an active market for the sale of nonperforming loans, and sound economic growth in NLB's core regions. We expect that the bank's combined funding and liquidity position will remain a neutral factor for its credit ratings. We consider NLB's funding profile similar to that of other Slovenia-based banks that are benefitting from solid inflows of new retail deposits, but we continue to consider NLB's liquidity profile strong compared with peers, which is a result of its high liquidity buffers and the low reliance on short-term wholesale funding.
The positive outlook reflects that we could raise our long- and short-term ratings on NLB in the next 6-12 months, if industry risk conditions in Slovenia improve as indicated by our positive trend in our Banking Industry Country Risk Assessment for the country (see "Economic Risk Affecting Slovenia's Banking Sector Likely To Reduce Amid Robust Domestic Growth Expectations," published on July 31, 2018). We currently see a one-in-three possibility that we could improve our industry risk score during the next six to 24 months.
In addition, the outlook reflects that accelerated improvements of NLB's franchise, asset quality or capital buildup over the next year could led us to assess that the bank's stand-alone creditworthiness had improved.
A faster-than-expected sustainable increase of NLB's RAC ratio above 10% and an ongoing convergence of the bank's financial and risk metrics to higher rated banks could also lead to a positive rating action. Precondition would include an ongoing reduction of NPE and the bank's unchanged stance toward prudent lending and underwriting standards in generating new loans. We also note that a positive rating action would hinge on contained risks in NLB's foreign operations in SEE. We could revise the outlook to stable within the next 6-12 months if we saw a halt in the positive industry trend of Slovenian banks or in NLB's remaining restructuring process. We could also revise the outlook to stable if the bank's capitalization or asset quality were to weaken from an unexpected deterioration in operating conditions of NLB's core regions, SEE in particular."