LJUBLJANA (Slovenia), June 26 (SeeNews) – Standard & Poor's said it has raised its long- and short-term credit ratings on Slovenia's SID Bank to ‘AA-/A-1+' from 'A+/A-1' following sovereign action, affirming its stable outlook.
“We equalize our ratings on Slovenia's export credit bank SID Bank (Slovene Export and Development Bank) with our ratings on Slovenia, based on our expectation of an almost certain likelihood of extraordinary government support for the institution if needed,” S&P said in a statement last week.
"The stable outlook on SID Bank reflects that on Slovenia," S&P added.
Earlier this month, S&P said it has raised its long- and short-term foreign and local currency sovereign credit ratings on Slovenia to 'AA-/A-1+' from 'A+/A-1’, with a stable outlook, based on strong gross domestic product (GDP) and employment growth, alongside fiscal and external surpluses.
S&P also said in the statement:
SID Bank is actively involved in supporting the export activities of Slovenian companies and providing financing to small and midsize enterprises. In recent years, SID Bank's focus has been shifting from traditional export credit agency activities to its development bank role. As a result, the bank exited its short-term marketable insurance business in 2018 following the sale of its specialized subsidiary SID-PKZ. At the same time, SID Bank still retains a strong presence in the nonmarketable insurance segment, where it operates on behalf of the government. The bank's lending activities, on the other hand, have been expanding, especially through the direct channel, to finance major infrastructure and municipalities' projects. At the end of 2018, the loan book was balanced between direct and indirect lending. 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.
The size of the SID Bank group's balance sheet has been declining consistently over the past few years. The SID Bank group's total assets stood at €2.36 billion at year-end 2018 (about 5% of GDP)--a decline of over 40% from their peak in 2012, when the bank expanded its countercyclical activities due to Slovenia's banking crisis. As the economy bounced back, the demand for financing from financial institutions declined as they strengthened their balance sheets. At the same time, many insurance companies returned to operate in previously unserved market niches, reducing the scope for SID Bank's presence.
As a result, SID Bank's public policy role has been evolving, with a few new policy functions added to its mandate. In 2017, the Ministry of Economic Development and Technology appointed SID Bank manager of funds that will handle €253 million of EU cohesion funds. The first tranche of these funds (€28 million) was placed through financial intermediaries for the purposes of research, development, and innovation at companies of all sizes, and microloans to small-to-midsize enterprises and sole traders. At the same time, the bank's direct loan book has also been expanding, in the form of mezzanine and long-term financing, up to €707 million. Consequently, the bank's loan exposure to the financial sector has been declining in recent years, and accounted for slightly over 50% in 2018.
At the same time, the bank's core function for export support remains unchanged: SID Bank Group's insurance covered 20% of Slovenian exports in 2018. Moreover, we believe the bank stands ready to resume its unique countercyclical policy role, if needed.
SID Bank is 100% owned by the Slovenian government and 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, 2017, and 2018. Consequently, SID Bank was part of the European Central Bank's asset quality review in 2014, which estimated that SID Bank would 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 reported return on equity of approximately 3% on average over the past six years. This rate is not surprising, given the low interest rates, 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 do not 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 stable outlook on SID Bank reflects that on Slovenia. Any rating action 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 Slovenian government had weakened. This could occur if the bank's public policy role for the government were to diminish 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. However, we view such developments as unlikely over the next two years.
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