Slovenia Finance Profile 2012

Though the sole Slovenian bank measured in the EU banking sector stress test passed in July 2010, the results highlighted ongoing weakness in the sector. Asset and loan growth are forecast to remain very weak by historical standards through to 2014 and further losses for major banks should be expected. More government-supported capitalisation efforts are also likely. The banking sector stress tests by the Committee of European Banking Supervisors (CEBS) in July had few surprises for the Slovenian banking sector. Nova Ljubljanska Banka (NLB) was the only Slovenian bank measured, passing the adverse macroeconomic scenario and sovereign shock tests with estimated Tier 1 capital ratios of 7.4% and 6.3% respectively. The minimum pass mark set by the CEBS at 6.0% and we note that NLB was among the lowest rated passing banks, indicating that significant stresses remain for the country's system as a whole. The results reinforced our view of the Slovenian banking sector. While we maintain that a systemic crisis is unlikely, a weak demand environment and low capitalisation will continue to undermine stability, profitability and asset expansion. NLB is a case in point. The most recent financial statement for the company for Q210 showed a third consecutive quarterly loss, with net losses totalling EUR31.82mn. Loan impairments were the key factor, rising from EUR65.19mn in Q110 to EUR94.36mn in the second quarter. That asset quality for the country's largest bank, which accounts for close to 35% of total sector assets, continues to deteriorate even as the macroeconomic recovery in Europe picks up bodes particularly poorly. The fragile state of banking sector assets and capital ratios suggests that systemic risks to stability will remain a major concern at least through H210. To that end, further capitalisation and support measures by the government should be expected and this will ensure that a major solvency crisis is avoided. Ahead of the release of the stress test results, Slovenian Prime Minister Borut Pahor had already pledged to guarantee the stability of the country's banks in the event of another major deterioration of international credit conditions. NLB said on July 21 2010 that it would raise an extra EUR400mn in capital to ensure its capital requirements met tougher EU standards and we expect the government to offer any support necessary to ensure that the recapitalisation process goes smoothly.