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Fitch Rates Gorenjska Banka 'BB-'; Outlook Stable
November 8, 2017 / 12:05 PM / 13 days ago

Fitch Rates Gorenjska Banka 'BB-'; Outlook Stable

(The following statement was released by the rating agency) WARSAW/LONDON, November 08 (Fitch) Fitch Ratings has assigned Gorenjska Banka d.d., Kranj (GBKR) a Long-Term Issuer Default Rating (IDR) of 'BB-' with a Stable Outlook. A full list of rating actions is at the end of this commentary. KEY RATING DRIVERS IDRS, VR The IDRs of GBKR are driven by its stand-alone financial strength, as expressed by its Viability Rating (VR). Fitch's assessment of GBKR's stand-alone profile reflects the bank's straightforward business model based on providing traditional banking services, moderate risk appetite and robust liquidity. At the same time, Fitch also considers the bank's high impaired loans ratio, its small size and only regional franchise, modest profitability and only adequate capitalisation. GBKR's branch network and its retail customer base in Slovenia are concentrated in its home market in the Gorenjska region, where the bank has a significant franchise. The bank's presence in other parts of Slovenia is limited. At end-2016, GBKR was the eighth-largest bank is Slovenia, with around a 5% share in sector assets. Lending is dominated by exposures to corporate customers and funding is based predominantly on retail customer deposits. GBKR's weak asset quality reflects mostly legacy problems stemming from relaxed corporate lending prior to 2009, including financing of the commercial real estate and construction sectors (around 18% of the gross loan book at end-2016). Retail loans performed considerably better, but they accounted for a moderate 20% of gross loans at end-2016 (end-2015: 16%). At end-2016, the bank's impaired loans ratio (defined as IFRS impaired loans and IFRS non-impaired loans past due by more than 90 days) stood at 20.3% (but at only 2% in the retail book), which was broadly in line with domestic averages, but weak by international standards. The impaired loans ratio fell from around 39% at end-2014, driven by a portfolio clean-up as new loan production was subdued. GBKR's loan book is fairly well diversified by industry, but single-name concentrations are high. The 20 largest loan exposures were equivalent to around 200% of Fitch Core Capital (FCC) at end-2016. The profitability of GBKR and its domestic peers suffers from the low interest rate environment, limited credit demand resulting in a large portion of low-yielding assets on the bank's balance sheet and a lack of scale that limits pricing power and weighs on cost efficiency. The net interest margin at GBKR (2.2% in 2016) has been under pressure in recent years from the low interest rate environment, but recently has been broadly comparable with domestic peers. Expansion in leasing business should, in our view, benefit margins in the medium term. GBKR is also working on changing its lending mix towards retail customers, but considering the trends in Slovenian retail banking and tough competition this is likely to be a challenging and lengthy process. GBKR's cost efficiency (cost-to-income ratio of around 70% in 2016) suffers from the small size of the bank. Loan impairment charges have dropped to low levels (around 45bp of average gross loans in 2016), driven by limited new loan generation and stabilisation of loan quality in the legacy portfolio. The FCC ratio was a solid 19.4% at end-2016 and provided significant capital buffers over regulatory minimums. Coverage of impaired loans by impairment provisions (specific and IBNR) was, however, moderate in our view, at 51% at end-2016 and weaker than at Slovenian peers rated by Fitch. The stock of uncovered impaired exposures relative to FCC was also substantial and higher than at peers, at around 51% at end-2016. If all impaired loans were fully covered by reserves, GBKR's regulatory core tier 1 ratio would fall close to the Pillar 2 requirement of 10.8%. Internal capital generation is weak. The bank reported a return on equity of 3.2% in 2016 and paid out 75% of profits in dividends. However, capitalisation is supported by limited organic loan growth. In Fitch's view, the latter at GBKR is likely to be single-digit in medium term. GBKR is almost exclusively funded with granular customer deposits. The bank, similar to other Slovenian banks, has enjoyed a steady inflow of customer deposits, which together with limited new lending opportunities have resulted in a significant liquidity surplus invested in good quality instruments. Customer deposits accounted for around 92% of total funding at end-1H17 and were sourced mainly from households (around 86% of the total). The loans/deposits ratio dropped to around 78% at end-2016, from around 94% at end-2014. This was driven by steady deposit growth and almost unchanged gross loans. Available highly liquid assets (around EUR700 million) at end-1H17 covered around 49% total deposits. SUPPORT RATING AND SUPPORT RATING FLOOR In Fitch's view, shareholder support for GBKR cannot be relied upon. GBKR's biggest shareholder is Sava d.d., a local financial holding, with a 29% stake. Sava is under compulsory restructuring and the Slovenian banking regulator withdrew the licence for the company to hold a qualifying shareholding in GBKR in September 2015, ordered Sava to sell all of its shares in GBKR and withdrew its voting rights pending the sale. A consortium of Sava and some other GBKR shareholders have offered a majority stake in the bank for sale. The second-largest shareholder of GBKR is Serbia-based AIK Banka, which injected EUR13 million of fresh capital into GBKR in early 2016. The Support Rating Floor of 'No Floor' and the Support Rating of '5' express Fitch's opinion that potential sovereign support for the bank also cannot be relied on. This is underpinned by the EU's Bank Recovery and Resolution Directive, which provides a framework for resolving banks that are likely to require senior creditors participating in losses, if necessary, instead of or ahead of a bank receiving sovereign support. RATING SENSITIVITIES IDRS, VR The bank's VR and IDRs could be upgraded in case of a significant reduction of impaired loans and maintenance of adequate capital levels. Upside for the VR is, however, limited given GBKR's small size and the limitations of its franchise. A downgrade could be triggered by negative trends in loan book performance or a sharp increase in risk appetite. SUPPORT RATING AND SUPPORT RATING FLOOR The Support Rating could be upgraded if a majority stake in GBKR is acquired by a highly-rated institutional investor. In such a case, the Support Rating Floor would likely be withdrawn, as Fitch would view shareholders rather than the sovereign as the primary potential source of support for GBKR. The rating actions are as follows: Gorenjska Banka d.d., Kranj: Long-Term IDR: assigned at 'BB-', Outlook Stable Short-Term IDR: assigned at 'B' Support Rating: assigned at '5' Support Rating Floor: assigned at 'No Floor' Viability Rating: assigned at 'bb-' Contact: Primary Analyst Artur Szeski +48 22 338 6292 Fitch Polska S.A. Krolewska 16, 00103 Warsaw Secondary Analyst Dmitri Vasiliev Director +7 495 956 5576 Committee Chairperson James Watson Managing Director +7 495 956 6657 Media Relations: Peter Fitzpatrick, London, Tel: +44 20 3530 1103, Email: peter.fitzpatrick@fitchratings.com. 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