Outlook still negative for Slovenia banking

Moody's Investors Service continues to hold a negative outlook on the Slovenian banking system for the third consecutive year, based on the persistent difficult operating conditions, ongoing asset-quality deterioration, and the banks' limited capital resources to absorb further loan losses.
"Also underpinning our negative system outlook is the largest banks' significant reliance on international market funding, which is currently constrained. The negative factors are only partly offset by governmental funding support and by the ability of two of the three largest Slovenian banks to generate positive earnings throughout the recent recession," explained George Chrysaphinis, a Moody's senior analyst.
The Slovenian banking system was severely hit by the 2008-09 global financial crisis and by the very deep and protracted recession that stretched from Q4 2008 to Q1 2010; gross domestic product (GDP) dropped by 7.8% in 2009 alone.
"The market turmoil combined with the recession have weakened the credit fundamentals of our three rated Slovenian banks, the three largest banks in the system, resulting in multi-notch downgrades for these banks since October 2009. Ultimately, the difficult operating environment and asset-quality challenges pose a risk to the banks' limited capital resources," said Chrysaphinis.
Although Slovenian banks entered the recession with adequate regulatory capital — and most banks remained marginally profitable in 2009 and H1 2010 — NPL growth has already consumed any surplus pre-crisis loan-loss reserves. As such, any further significant provisioning needs that exceed the banks' earnings capacity could erode available capital. Moody's scenario analysis indicates that banks have sufficient loss-absorption capacity to cope with expected losses under a base-case scenario, but only limited resources to cover the noteworthy downside risks to asset quality.
"Given the difficult operating environment, the banks' net profits will remain constrained in 2011 due to persistently elevated provisioning costs. The expected slowdown in asset-quality deterioration could reduce provisioning costs, providing a modest lift to recently weak net profits. The challenging operating environment has not, so far, materially impacted Slovenian banks' limited (but relatively stable) pre-provision profitability," added Chrysaphinis.
The outlook on the individual deposit ratings and standalone Bank Financial Strength Ratings (BFSRs) of the three leading Slovenian banks are negative, largely reflecting the same factors that drive Moody's system outlook for Slovenia.