Slovenia banks face challenges, benefit from supportive environment

The fundamental credit outlook for the Slovenian banking system is negative, reflecting the expected slowdown in the domestic economy over the coming months and the ongoing liquidity squeeze in international funding markets, Moody's Investors Service said in its latest 'Banking System Outlook' report for Slovenia.
"Moody's ratings for Slovenian banks reflect their generally robust franchises, thanks to their strong or very strong domestic market positions. We consider that, despite direct competition from the local operations of Austrian and Italian banks, the rated Slovenian banks' franchises are secure over the medium term," said George Chrysaphinis, a Moody's senior analyst and co-author of the report.
The rating agency also considers that the strong regulatory and supervisory environment in Slovenia and the generally stable economic environment together support the intrinsic financial strength of the country's banks. Moody's believes that the banking sector's current structure will allow it to adapt to any changes in their operating model that become necessary as a result of the ongoing global financial crisis.
Nonetheless, the banks' financial strength is likely to be constrained over the coming months, in Moody's view. A slower economy in Slovenia — driven by lower domestic and export demand — is likely to lead to a weakening credit environment, with adverse implications for the banks' asset quality and profitability. Challenging economic conditions could be further exacerbated if the current tight liquidity conditions in international markets persist for several months, as this would reduce the availability of foreign credit coming into the economy. Critically, Slovenian banks' financial metrics provide them with only moderate loss-absorption coverage.
Moody's acknowledges that the banks' current capitalisation is adequate — especially when excess accumulated provisions are taken into account.
However, their pre-provision profitability is modest and likely to be under further pressure in 2009.
"We recognise that concerns over the liquidity position of the country's banks — which have been increasingly relying on international funding in recent years — have eased somewhat following Parliament's adoption of legislative amendments giving the government the power to support banks' funding and capital efforts," Chrysaphinis noted.
"Moody's regards Slovenia as a medium-support country based on our assessment of the likelihood of systemic support for banks in case of need. This assessment takes into account the track record of selective support and the moderate size and importance of the banking sector," explained Christos Theofilou, associate analyst.
The analysts note, however that, in the current international economic and financial context, governments, including that of Slovenia, are inclined to make more far-reaching statements and commitments with regard to support provision than would otherwise be the case.