Slovenia banking system outlook still negative

The outlook on Slovenia's banking system remains negative, unchanged since 2008, according to Moody's Investors Service, saying this “reflects the lack of adequate capitalisation of the leading Slovenian banks and of on-going losses due to chronic asset-quality problems in the context of a persistently adverse operating environment.”
Over the 12-18 month outlook period, the key issue of ensuring sufficient capital resources in the rated Slovenian banks remains acute in the context of the challenging operating environment.
Moody's said that a spiralling decline in asset quality has undermined banks' risk-absorption capacity, leaving the banking system requiring further external support in order to restore normal operations. Without an additional and sufficiently large-scale capital injection the banks' ability to attract funding would be inhibited, leading to further deleveraging and heightened instability in funding base.
Asset-quality problems are likely to persist for Slovenian banks, as Moody's expects that the ongoing recession will continue, weighing on fragile business confidence, limiting demand for credit and restricting profitable lending opportunities.
As noted in July, the rating agency forecasts that real GDP will contract by 1.9% in 2013 and by 0.1% in 2014, following a decrease of 2.3% in 2012. High indebtedness in the corporate sector, which constitutes around two thirds of the loan book, is unlikely to improve dramatically.
In this context Moody's noted that the government-led "bad bank project" to clean up the asset quality of leading banks has been postponed until end-2013 and its full impact and details remain unclear at this stage and subject to approval by the European Commission.
Meanwhile, Moody's said that the planned liquidation of two small banks further reinforce its view of the unstable position of the Slovenian banking environment.
After several years of continuing losses, Moody's believes that the leading banks will remain loss-making because of on-going deleveraging, declining margins and weak core profitability.