As of December 2015, non-performing loans (NPLs) amounted to €3.0 billion, equivalent to a NPL ratio of 10 % and a NPL coverage ratio of 66.8%.
There was important progress in addressing the NPL overhang through the asset quality review in 2012, and establishment of the Bank Asset Management Company (DUTB) in 2013. A new corporate restructuring and insolvency framework came into effect in 2013, and a number of large enterprises were successfully restructured.
Highlights on NPLs (click to enlarge)
Assessment of NPL Burden and Corporate Debt Distress
International Monetary Fund, Slovenia: Article IV Report, May 2016
Financial stability has improved, though the non-performing loan ratios at large state-owned banks remain elevated. Despite recent deleveraging, many small and medium companies are over-indebted and unable to adequately service their liabilities. Further efforts to resolve non-performing loans, particularly to SMEs, and privatization of major banks will be essential to strengthen the financial system and revive credit to support investment and growth. The operational independence of the Bank Asset Management Company is critical for its ability to successfully unwind its portfolio.
European Commission, Country Report Slovenia 2016, February 2016
Credit risk and pressure on profitability are two main concerns. The level of NPLs is decreasing but it remains high, especially in the SME and construction segments. NPLs keep dragging down the banks’ performance and their timely resolution would allow the banks to focus on lending to the real economy and would speed the economic recovery. Profitability is under pressure due to the low interest rate environment that erodes banks’ net interest margin and decreases in the volume of lending.
NPLs continue to decrease but still remain at high levels. In November 2015, NPLs in the corporate sector represented 16.4% of corporate loans, down from 17.7% in 2014 and 20.4% in 2013 (based on the NPL ratio definition of the Bank of Slovenia). The stock of loans is decreasing, particularly loans to corporates and SMEs, although at a slower pace as compared with 2014. The percentage of NPLs in total outstanding loans inevitably remains high compared to most EU countries, as NPLs are not compensated by new performing loans. In terms of volume, NPLs have been contracting over the last year.
The difference between the major state-owned banks and foreign-owned banks is still marked. In the state-owned banks, NPLs remain high relative to the pre-crisis levels despite state-owned banks transferring considerable amounts of NPLs to the public Bank Asset Management Company (BAMC) at the end of 2013 and in 2014. The high NPL ratio in state-owned banks is partly the result of continued contraction in new lending and the poor asset quality of loans to companies outside Slovenia (mainly in the Balkan countries), which could not be transferred to the BAMC.
Slovenian banks are facing increased cross border competition. The NPL legacy has put significant pressure on banks in recent years. In response to this, banks tightened credit standards, which pushed many large and financially viable firms to start looking for loans at better conditions abroad. From the beginning of 2009 until October 2015, the stock of banking loans to non-financial corporations (NFCs) from abroad increased by 38% (the increased peaked in Q2 2014 at +55 %). At the same time, the stock of loans to NFCs from domestic banks dropped by 50%. While this large contraction can be to some extent attributed to the transfer of NPLs to the BAMC, it was nevertheless very severe even when accounting for this transfer.
Bank of Slovenia, Financial Stability Report, January 2016
Non-residents and non-financial corporations, most notably SMEs, remain the most heavily burdened segments of the banks’ portfolio. SMEs account for 42% of total claims more than 90 days in arrears, and 26.7% of claims against SMEs are more than 90 days in arrears. The corresponding figure in the large enterprises segment declined to 10.3% after significant transfers to the BAMC (The Bank Asset Management Company) and restructuring processes under MRAs (Master Restructuring Agreements). In 2015 the banks actively reduced non-performing claims against corporates and non-residents via write-offs and restructuring.
The success of restructuring as measured by the proportion of claims that again fell into arrears after restructuring varies from customer category to customer category: the best performance was in manufacturing, where the economic recovery has also been strongest. The economic recovery process is also having a beneficial impact on portfolio quality via a smaller increase in non-performing claims and a higher level of transitions from non-performing to performing claims.
Before the stabilisation of the banking system was begun, the level of capital did not suffice to cover unimpaired claims more than 90 days in arrears, but by September 2015 it was 3.5 times in excess. Both indicators of coverage of non-performing claims are having a significant impact on the banks’ resilience in the event of major unforeseen deteriorations in the credit portfolio.
World Bank Group, Report on observance of standards and codes on accounting and auditing, Slovenia, May 2014
The banking sector in Slovenia is in need of recapitalization in order to revive growth and ensure stability and the authorities took decisive policy actions in 2013 to stabilize the banking sector. These included asset quality reviews (AQR), stress tests, the recapitalization of the state owned banks and also a private bank where the state had 2% ownership, and the transfer of NPLs to BAMC. The total assets of banks and savings banks (€46.1 billion in 2012) amounted to 130% of GDP. However, NPL ratios reached 16.3% in June 2013 for all types of loans and 25.5% for corporate loans—the highest levels among OECD countries and increased after AQR as of the end of 2013. Despite a fall in NPLs by almost 10 percentage points (from 21% to around 12% in January 2014) due to the transfers to the BAMC (in process also after January 2014), these levels remain elevated. The deteriorating portfolio quality, together with constraints on refinancing from foreign financial markets, is hampering the banks’ ability to manage liquidity effectively. A comprehensive approach to deal with NPLs and distressed assets on the banks’ balance sheets, with the introduction of a state owned bad assets management company, a so called “Bad Bank”, continues to be one of the priorities of the government. Bad assets are being transferred to BAMC, and banks are being recapitalized in accordance with the results of stress tests which were performed in December 2013. The purpose of the stress tests was to assess, with the help of independent international experts, the robustness of the Slovenian banking system in an adverse macroeconomic scenario, and to determine any capital shortfall that could arise at an individual bank or consequently across the entire banking system in the event of such a scenario being realized. The stress tests concluded that a total of €3.012 billion is required for capital increases at NLB, NKBM (Nova KBM) and Abanka Vipa (Abanka). After the process has been completed, NLB, NKBM and Abanka will have overall capital adequacy ratios of around 15%. Nevertheless, the bank recapitalizations and transfers to BAMC have led to a significant increase in the public debt burden. Public debt rose from just 22% of GDP in 2008 to 54.4% in 2012, 71.7% in 2013 and widen further to 80.9% of GDP. Slovenia issued 3.5-year and 7-year government bonds on the euro area market in early April 2014, with a total nominal value of €2 billion.
National reforms and support by the international organisations
Handbook for MSME NPL Management and Workout
Bank of Slovenia and World Bank, March 2017
Micro, Small and Medium Enterprises (MSMEs) form the backbone of the Slovenian economy (99% of all companies, 67% of total revenues, 70% of active labor force).
At the end of 2015, Bank of Slovenia (BoS) and the Slovenian Banking Association (SBA) published restructuring guidelines (Guidelines) for banks to be able to better manage MSME NPLs.
This Handbook, developed by BoS together with SBA and WB, builds on the Guidelines to provide a further practical, operational toolkit for banks to organize the various stages of MSME NPL workout process.
Bank of Slovenia: Policy Strategy Paper for Slovenia, December 2015
A speedy reduction of NPLs is crucial to supporting credit growth. Towards this end, Banka Slovenije, in cooperation with the Bank Association of Slovenia, is overseeing a programme for restructuring of non-performing claims. Systemic solutions supporting the development of a market in distressed assets would make resolution more efficient and faster.
Initially the focus was on restructuring the non-performing claims on large enterprises. Banka Slovenije amended the supervisory guidelines in 2014 so that banks could take a more active role in the corporate restructuring process. It has also been proactive in facilitating the drawing up of Master Restructuring Agreements between banks and 60 large enterprises. During the past two years, about €2 billion of non-performing claims on large enterprises have been restructured on the basis of these restructuring agreements. Banka Slovenije plans to undertake in the coming months an assessment of the quality of the restructuring of these non-performing claims.
Attention is now being directed towards the restructuring of non-performing claims of SMEs. The task is challenging, in view of the very large number of firms involved and their small size. In addition, because the financial statements of SMEs are often weak it is not easy to distinguish viable firms from non-viable firms. Banks have already prepared their loan restructuring targets and timetable for implementation, and these are currently being reviewed by Banka Slovenije. Guidelines for restructuring, prepared jointly by Banka Slovenije and Bank Association of Slovenia, are expected to be ready by end-2015. In addition, Banka Slovenije has suggested drawing up procedures for establishing a special-purpose vehicle (SPV) for non-performing claims.
A host of supporting reforms is needed to enhance the effectiveness of the efforts to reduce NPLs. Banka Slovenije is upgrading the Central Credit Register with the aim of improving the quantity and quality of debtor information. It would be important to make the bankruptcy process more efficient and collection of debts easier. This would decrease the cost of recovering assets provided as collateral for loans and facilitate the creation of a market for distressed assets. The use of informal out-of court restructuring agreements has increased following the amendments to the insolvency framework in 2013. However, the length of in-court restructuring proceedings remains substantial (ranging from 129 to 292 days) and the recovery rate is relatively low (averaging about 37%). We should remove the constraints to faster resolution of non-performing issues arising from existing tax treatment of loan-loss provisioning and loan write-offs.
Banka Slovenije also is adopting a preventive approach to tackling the NPLs problem. To ensure that the risk of repeated build-up of loan losses is minimized, banks have been provided guidelines to develop early warning systems that will include indicators of future distress. Banka Slovenije is participating in a high-level task force set up by the European Central Bank in September 2015, aiming to make the resolution of NPLs speedier. The objective is to develop and implement a supervisory approach that will encourage swift recognition of loan losses and their speedy resolution.
EBRD’s current focus in Slovenia is related to stabilising the financial sector. In what will likely be a protracted process of deleveraging, recapitalisation and consolidation, the EBRD will assist in bank asset restructuring, support healthy banks with medium term funding for the real sector, and help build up alternative funding channels. Progress with balance sheet cleansing and credible commitment to governance reform in the banking sector will open up opportunities for providing support for the privatisation of state-controlled banks.
The Bank’s engagement in support of Slovenia’s financial sector will rest on a number of complementary elements:
Support in consolidation and privatisation of state-owned banks, following the process of NPL clean-up and provided the highest standards of corporate governance are applied. This could most likely only be done alongside other, preferably strategic, investors.
Providing liquidity to sufficiently creditworthy private banks for specific programmes that would focus on supporting SMEs and mid-sized corporates whose access to credit is impaired by deleveraging.
Support to non-bank financial institutions, such as leasing and factoring, for financing SMEs and corporates whose access to finance has been affected by the crisis in the financial sector.
Policy changes specific to NPLs:
EBRD has provided legal technical assistance in support of Slovenia’s corporate restructuring and insolvency framework. Together with external legal advisors, the EBRD advised in September 2013 on new draft legislation to promote corporate restructuring entitled the ‘Systemic Deleveraging Act’. However, this draft legislation was widely considered incapable of implementation and the government redirected efforts into a broad ranging set of amendments to the existing Insolvency Law, aimed at facilitating corporate restructuring for medium to large sized enterprises. The amendments to the Insolvency Law were adopted by the Parliament on 27 November 2013 with broad cross-party support and incorporated advice on a number of key points provided by the Bank during the course of its discussions with the drafting committee. The proposed amendments considerably improve the tools available for corporate restructuring of large and medium-sized enterprises, a key element in banking sector restructuring and in the overall revival of the economy. Nevertheless the Bank has identified that further efforts are needed to strengthen the extrajudicial private or consensual restructuring framework, such as by, for example, the development of multi-bank restructuring guidelines.
In addition, the EBRD can contribute in the area of consensual out-of-court restructuring and specifically in the promotion of ‘soft law’ or guidelines for multi-bank restructurings. Such assistance would complement improvements to the judicial insolvency law framework.
Economic research on the potential benefits of the corporate restructuring process has been undertaken by EBRD, and outreach events and policy dialogue will seek to build broader local stakeholder support for this process.
The government has established the Bank Asset Management Company (BAMC) that is in the process of taking over non-performing assets from banks, followed by the recapitalisation of the restructured banks. This process has been delayed until the end of 2013 as the European Commission demanded an asset quality review (AQR) and stress tests for the entire banking system as a precondition for determining the price for the non-performing assets to be transferred and subsequently for approving a capital injection by the state in any one bank.
Debt Restructuring and Insolvency: Reviving Corporate Growth in Slovenia
5-6 February 2014, Ljubljana
EBRD and Slovenia’s Ministry of Finance and Ministry of JusticeSlovenia’s Ministry of Finance, Ministry of Justice and the EBRD held a conference on 5 February on “Debt Restructuring and Insolvency: Reviving Corporate Growth in Slovenia”. More than a hundred participants from the banking sector, academia, public and private sectors gathered at the University of Ljubljana’s Faculty of Economics to discuss key legal and economic challenges ahead. In addition, they looked at how to engage foreign investors and domestic banks in resolving these challenges.