S&P upgrades Slovenia’s NLB credit rating to “BBB”

LJUBLJANA (Slovenia), May 12 (SeeNews) – Standard & Poor’s Global Ratings has announced that it has upgraded the credit rating of issuer Nova Ljubljanska Banka (NLB) from ‘BBB/A-2’ to ‘BBB-/A -3’, with a stable outlook, he said.

S&P also upgraded the bank’s resolution counterparty ratings from “BBB+/A-2” to “BBB/A-2,” it said in a statement.

“NLB and its subsidiaries are making progress in strengthening their additional loss-absorbing capacity (ALAC) buffers, which provide protection to senior creditors in a resolution scenario,” the agency said.

S&P also said:

“S&P Global Ratings today raised its long-term and short-term credit ratings on Nova Ljubljanska Banka (NLB) from “BBB/A-2” to “BBB-/A-3”. The outlook is stable. We have also raised the We have confirmed the rating of the long-term resolution counterparty to “BBB+” from “BBB” We have confirmed the rating of the short-term resolution counterparty to “A-2”. confirmed our issue ratings on NLB’s Tier 2 subordinated instrument at “BB”.

In our revised base case, NLB effectively operates in a multiple entry point (MPE) resolution framework. The upgrade is based on our view that NLB and its subsidiaries have made good progress on the resolution strategy and build-up of bail-in reserves. Although we continue to believe that some South East European (SEE) countries need a transition period until the National Competent Authorities (NCAs) have put in place an effective and binding resolution regime , we are convinced of the
the readiness and effectiveness of NLB’s MPE resolution concept, which protects larger bonds. We therefore view the banking group as operating within a well-defined MPE resolution framework, including plans and their execution, should the need arise. Within this framework, the group would fragment into several resolution subgroups if parts of it became unviable.

We understand that most of the subsidiaries have accumulated sufficient buffers to absorb losses, while the Slovenian resolution group is already solvent with sufficient debt that can be bailed out, meeting the minimum requirements for own funds and eligible liabilities (MREL) as part of the recovery plan and Resolution Directive II.

We understand that the MPE strategy complies with the regulations of the Single Resolution Board (SRB) and the Bank of Slovenia. The Slovenian Resolution Group’s resolution entity (NLB dd and other Slovenian non-bank entities) received ANCs of MREL targets, which are binding in two stages after January 2022 (intermediate target) and January 2024 (fully loaded). On a fully loaded basis and as a final requirement, the MREL of the resolution group must exceed 31.38% of the total risk exposure
(excluding combined buffer requirements) and 9.97% leverage ratio. However, in these aggregate ratios, the Slovenian resolution group is allowed to include non-subordinated MRELs as it has no subordination requirement. NLB is already meeting the MREL interim targets given the current level of senior debt.

NLB’s ALAC buffers result in a rating upgrade despite certain concentrations of eligible instrument maturities. We assess the loss absorbency and potential improvement of the ALAC for the Slovenian resolution group. Since we have moved to an analytical MPE approach, we now focus on the Slovenian subgroup of NLB as defined in the resolution scope instead of the consolidated banking group. We include all the junior instruments of the Slovenian subgroup in our ALAC measure because, over our projection period, we believe they have the capacity to absorb losses without triggering a default on senior liabilities. At the same time, we reflect negatively on the relatively high maturity concentrations of eligible ALAC debt over our projection horizon, given that NLB has larger volumes of unique instruments outstanding that need to be replaced over the next few years. . We are therefore increasing the relevant ALAC threshold by one percentage point to 4.0% from the standard 3.0% and by two percentage points to 8.0% from 6.0%. Double leverage, i.e. the extent of the Slovenian entity’s capital investments in SEE subsidiaries that would be available for recapitalization in place, is immaterial and not a relevant factor for our review of the ALAC.

The rise in ALAC takes into account future NLB issuance plans and growth in risk-weighted assets (RWA) in Slovenia. As announced in January 2022, the bank plans to issue a €300 million Tier 2 bond once market conditions are deemed more suitable. We expect this issuance to take place in the second half of 2022 and consider the Tier 2 instrument to be ALAC eligible. The bank’s announced issuance plan is credible, in our view, and as such we expect more subordinated debt issuance to replace maturing instruments to meet the bank’s fully loaded MREL requirements. by 2024. Based on 2021 year-end data, the ALAC ratio was 3.7%. We expect the Slovenian subgroup’s ALAC relative to S&P Global Ratings RWAs to be between 6.0% and 7.0% by the end of 2024. Our projections reflect an annual increase in RWAs by 5.0% until 2024, including the impact of the acquisition of Sberbank in February 2022.

For subsidiaries, the MPE framework means even weaker intragroup interdependencies and possibly easier separability in an acute crisis scenario. Under the MPE resolution approach, the non-Slovenian resolution subgroups of NLB are responsible for building up their own bail-in buffers. We therefore see a somewhat weaker financial and operational interconnection between the resolution group in Slovenia and its subsidiaries in South-Eastern Europe. Indeed, the MPE resolution approach envisages that the group can be split up and resolved individually if one of the subsidiaries reaches the point of non-viability. While we still consider NLB to be a likely very supportive parent, we view this greater separability as also allowing more flexibility to separate from subgroups in a recovery phase if the group faced significant stress. We understand that the bank’s MREL instruments will only be available as bailable buffers for the Slovenian resolution group. We believe that NLB would allow its SEE subsidiaries to fail in the unlikely event of non-viability, if the recapitalization and loss-absorbing buffers of the self-funded subsidiaries were not sufficient to offset the losses incurred.

The privatization of NLB in 2018 and the effective implementation of its bail-in framework reflects the success of the transformation under the current management since the bailout in 2013. We believe that the transition to an effective bail-in regime is a new step important to NLB. The bank was bailed out by the government with €2.32 billion in state aid during the 2011-2013 crisis in Slovenia. NLB’s transformation since then has resulted in a significant strengthening of its balance sheet, a significant improvement in asset quality and the introduction of robust risk standards. Thanks to the privatization in 2018 and 2019, the bank is also able to expand its business activities in its main regions of operation through strategic acquisitions, which we believe will remain a growth option in the future. We plan to maintain NLB’s unified risk standards across all operations in the SEE region. The bank’s financial performance has also improved significantly, as evidenced by strong profitability indicators and the bank’s ability to build capital while paying regular dividends to its shareholders. We expect the bank to achieve a double-digit return on equity through 2024 and a risk-adjusted capital ratio of 9.0% to 9.5%, driven by increased operating income in its core regions operating and moderate credit losses. We do not see a direct and significant impact of the war in Ukraine on the bank’s loan portfolio and financial results in our 2022-2024 forecast horizon. But given the material uncertainties stemming from geopolitical tensions and the economic consequences of the Russia-Ukraine conflict, we will be watching closely how this might affect our expectations for economic growth.
in NLB’s major regions of operation as well as the potential impact on banks’ credit outlook.

The stable outlook reflects our expectation that NLB will stick to its issuance plans, thereby strengthening its ALAC reserves. It also reflects our view that NLB will maintain a strong balance sheet and financial performance despite continued pandemic-related uncertainties and the indirect effects of the war in Ukraine over the next 24 months. We expect relatively resilient earnings and asset quality performance, aided by the bank’s strong risk management standards and business diversity in Slovenia and its SEE
operational regions. Under our base case scenario, we expect NLB to create value from its recent acquisitions and benefit from gradually rising interest rates.

Upside Scenario We could move to a positive rating metric over the next 12-24 months if NLB achieves much higher capitalization or loss-absorbing capacity than expected if, for example, its risk-adjusted capital ratio dips. improved sustainably well above 10% or if the ALAC ratio for the Slovenian resolution group has increased sustainably above 8%. Sustained improvements in global economic conditions, combined with a rebound in positive economic risk trends in Slovenia and the major SEE markets where NLB operates, could also lead to positive rating action. Prerequisites for an upgrade would be maintaining strong capitalization and further improving risk metrics, efficiency and profitability.

We could downgrade the ratings if the bank issues lower bailout buffers than we expected and the Slovenian subgroup’s ALAC ratio subsequently falls below 4%. We may also downgrade if we see a deeper and longer lasting deterioration in the operating environment or the emergence of increased domestic competition resulting in a greater decline in profitability and asset quality. Similarly, we see pressure if the group exhibits more aggressive growth or capital depletion strategies in its weaker business areas outside of Slovenia.”

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