July 14, 2011 -
PRLog -- Tough Recovery Ahead It is expected to be another tough year for the Slovenian banking sector in 2011, with growth hampered by stagnant domestic demand and capital hikes by the largest lenders. Rising non-performing loans (NPLs)
will remain a problem for banks' balance sheets at least to mid-2011, while household and corporate deleveraging will ensure that credit growth remains limited in real terms. We hold to our view, however, that the government will continue to provide the necessary support to the system to ensure solvency. Data from the Bank of Slovenia show that 2010 was the toughest year on record for the Slovenian banking sector. Growth in assets and lending decelerated further, both marking record lows in local currency terms. Banking system assets contracted in 2010 for the first time in Slovenian history, falling by 0.6% year-on-year (y-o-y). Lending growth fell to just 0.3% y-o-y, a marked deceleration from the 2.8% and 15.7% outturns recorded in 2009 and 2008 respectively. Deposits also declined, falling by 3.3% y-o-y, as households and businesses drew down savings alongside rising unemployment and weak profitability across the economy. The trends in assets and lending were part of a much broader weakening of Slovenian banks, with rising NPLs pushing the country's largest lenders into losses. Nova Ljubljanska Banka (NLB), the country's biggest bank, is a case in point, having posted a net loss of EUR202mn for 2010, more than double the losses recorded in 2009. 2011 Outlook: Not Much To Look Forward To Our core view is for stabilisation of the Slovenian banking sector, with performance expected to improve over the year. We maintain that 2010 will be the trough for major banks in the system, with assets, lending, deposits and profitability all forecast to grow. We stress, though, that this will not be a quick and rapid recovery. The years of double-digit growth for the Slovenian banking system are over and while there will be improvement, 2011 will still be marked by underperformance compared to regional peers. Notably, NLB continues to anticipate additional loan loss provisions in 2011, with the bank expecting to add EUR180mn to impairments following the increase of EUR477mn in 2010. Required capital hikes to meet new regulatory requirements will also weigh on the ability of banks to increase their loan portfolios. The government announced in January 2011 that NLB will issue new shares worth EUR250mn in the year ahead to lift its Tier 1 capital ratio to 7.3%. The country's second largest lender, Nova Kreditna Banka Maribor (NKBM), is also making plans to raise capital, with local media reports suggesting that it will be around EUR130mn. Slovenia Commercial Banking Report Q2 2011 © Business Monitor International Ltd Page 30 The broad macroeconomic outlook is hardly conducive for a quick bounce in banking system growth in 2011. Domestic demand is expected to improve but remain weak amid a poor labour market, fiscal austerity measures and continued deleveraging across much of the economy. Ultimately, we expect households, businesses and the banks themselves to remain focused on balance sheet repair and not aggressively re-expanding leverage to finance new investments and consumption. The public sector is also expected to be in less of a position to support demand for new credit. Fiscal stimulus has been a major factor propping up demand in Slovenia, though we maintain that austerity will become an increasing policy focus for the government this year. As a result, we have grown increasingly cautious about its willingness to continue supporting new bank lending through loan guarantees and labour market support measures. This is especially the case as pressure from the rest of the eurozone to rein in the deficit to within the 3.0% of GDP Maastricht limit by 2013 will be pronounced this year. However, we highlight that while the government will be less likely to stimulate aggregate demand, its underlying support for banking sector solvency and recapitalisation will remain in place for the foreseeable future. We expect the state to play a significant role in the capital raising by NLB and NKBM, with the public sector stake for NLB in particular likely to rise above 50%. As a result, we hold to our core view that a major bank failure in Slovenia is unlikely.
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