Contributed By ODI Law Firm
Slovenian banks suffered considerable losses in the recent financial crisis. The government and the regulator, the Bank of Slovenia, took very rigorous measures, such as establishment of a bad bank (BAMC) and recapitalisation of important banks with state funds, to stabilise the economy. For recapitalisation, EU state aid rules had to be taken into account and therefore equity, hybrid capital and subordinated debt holders should have fully contributed to offset the losses. Additionally, the government made commitments with regard to structural changes and privatisation of banks, recipients of state aid, etc.
Decision of the European Court of Justice on the Banking Communication
After the recapitalisation of banks and the corresponding bail-in, equity, hybrid and subordinated claims holders filed a petition before the Slovenian Constitutional Court, claiming that the measure was unconstitutional and that the Banking Communication, issued by the European Commission, which required burden-sharing (bail-in) had not been adequately applied. The Constitutional Court stayed the proceedings and referred certain question to the Court of Justice of the European Union (Court of Justice). The latter issued a judgement in July 2016, claiming that the Banking Communication was not binding, but in situations such as those governed by the Banking Communication, burden-sharing by investors could normally be regarded as necessary for such aid to be considered compatible under Article 107(3)(b) of the Treaty on the Functioning of the European Union. In October 2016 the Constitutional court issued a decision that the applied legislation was partially unconstitutional and should be amended in such a way that the holders of hybrid and subordinated claims shall have legal remedy against decisions of the Bank of Slovenia.
Consolidation and Privatisation of the Banking Sector
One of the consequences of the measures, taken by the Slovenian Government and the Bank of Slovenia, is consolidation and privatisation of the banking sector. From 19 banks and three savings banks in 2015, the number dropped to 13 banks and three savings banks in 2016, with more expected to follow.
One of the measures of the government and the Bank of Slovenia was the recapitalisation of two smaller Slovenian banks, Probanka and Factor banka, in accordance with EU state aid rules. The European Commission approved the measure under the condition that the banks exit the market by 31 December 2016. After the controlled liquidation, which continued in 2015 under supervision of the regulator, the banks’ banking licences were withdrawn in 2016 and the companies were merged with BAMC.
Furthermore, the European Commission required privatisation of NLB, the largest Slovenian bank, sale of NKBM and a merger and subsequent privatisation of Abanka Vipa and Banka Celje. The Slovenian Sovereign Holding (SSH), a state-owned entity, already started with the preparatory activities for the envisaged IPO on the Ljubljana and London Stock Exchange to sell a 75% share of NLB, to comply with the requirements of the European Commission. The activities, however, have been stayed, mainly due to Brexit, unstable financial markets and internal political issues.
Currently, Abanka (newly merged Abanka Vipa and Banka Celje), recently sold its daughter company Aleasing to Banka Sparkasse and initiated the sale of its NPL portfolio. Both actions could be seen as preparatory activities for the sale of Abanka. In 2016 the bank reported profit of more than EUR 90 million on a consolidated basis. According to the commitment to the European Commission, the bank has to be sold by July 2019.
NKBM, however, has been sold to the US investment firm Apollo and EBRD. Following the transaction, NKBM acquired its affiliate bank Poštna banka in 2016 and Raiffeisen bank (KBS bank), which was also sold to Apollo. Furthermore, Apollo is currently bidding to acquire the share of Gorenjska banka.
In addition to investing into NKBM, EBRD also participated as an investor in the purchase of Hypo Bank, which was sold to American fund Advent International (and EBRD). After the acquisition Hypo Bank was renamed Addiko Bank.
Sberbank, which announced exit from the market, is still looking for new investors. Furthermore, a majority share of Gorenjska banka is for sale, but the process is expected to close in the near future. The main reason for the sale of the share is the financial difficulties of one the bank’s shareholders, Sava, which is currently in the process of financial restructuring. Consequently, the shareholder no longer complied with legally required criteria to hold bank shares and its licence has been revoked by the regulator, the Bank of Slovenia.
NPL Transactions replace Restructuring
BAMC, as a state-owned entity, has become a significant player on the Slovenian banking market and led the way for debt trading. Gradually, other banks joined the process, starting by selling their claims to large companies which had already been restructured in the past but were again facing financial problems. Simultaneously, banks often refused to participate in additional restructuring processes, unless they saw an opportunity to improve their position as a seller of non-performing loans.
Eventually, several banks, including the largest Slovenian bank, NLB, decided to sell their entire portfolio of non-performing loans. Whereas some banks (eg, Raiffeisen, NLB, Unicredit) closed the deal, the others (NKBM, NLB Interfinanz) decided to withdraw. The sale of NPL portfolio by Abanka is still in progress. Reasons for such portfolio sales vary from the envisaged privatisation and planned exit from the Slovenian market to a change of corporate strategy of a particular bank. In general, there has been a significant trend of NPL decrease in the Slovenian market, although the level of NPLs is still well above the EU average. It is expected, however, that provided that the current trend continues, the EU average will be met in the following years.
These portfolio sales hindered the restructuring processes of the corporate sector. The Slovenian corporate sector has not fully recovered after the financial crisis. The majority of large companies have either been restructured, sold or went bankrupt. Having their hands full with large companies and their restructurings, various banks did not engage in restructuring processes of small and medium companies (SME). To encourage SME restructurings, the Bank Association of Slovenia and the Bank of Slovenia adopted restructuring guidelines for micro, small and medium-sized companies aimed at providing useful guidelines for SME’s restructuring. Despite the guidelines and the need for restructuring of SMEs, banks, which sold their entire NPL portfolio, left the future of SMEs to the buyers (mainly foreign funds or their subsidiaries), who are now to decide whether to engage in the restructuring or to proceed with enforcement.
New Platforms for Funding and Debt Trading
After the crisis and the reluctance of the banking sector to lend money to start-ups, there was a growing enthusiasm in the market for alternative sources of financing. In the past, many Slovenian companies successfully raised money at Kickstarter. Recently, new platforms in the Slovenian market have been established. Adrifund is the first Slovenian crowd-funding platform. Conda, a crowd-investing platform, already established in other countries, also entered the Slovenian market and; one of their first projects was Borza terjatev, the first organised market for trading business receivables.
The Single Supervisory Mechanism (SSM) – whereby the European central bank became a direct supervisor for significant banks, which represent the majority of Slovenian banks, and an indirect supervisor for other banks (such as Gorenjska banka, DBS, savings banks) – is now in full force. Banking Act, implementing CDR IV, which was adopted in 2015, has now been complemented with Resolution and Compulsory Dissolution of Credit Institutions Act and Deposit Guarantee Scheme Act.
Bank Sales Continue
Sberbank and Gorenjska banka are still looking for appropriate investors. However, the privatisation of NLB, the largest Slovenian bank, seems to be postponed for a while. The preparatory acts for the sale have been stayed and the government could be asking the European Commission for an extended deadline or change of conditions. However, the planned sale of Abanka, another recipient of state aid, has not yet started, but the bank is selling its daughter companies and cleaning up its balance sheets by selling its entire portfolio of NPLs, which could be seen as a preparatory activity for the sale of the bank.
Due to the fact that a decision of the Court of Justice with regard to the preliminary questions as well as the decision of the Constitutional court have been issued last year, it is expected that a new act on legal measures available to holders of shares, bonds and hybrid instruments is to be adopted in the near future. The government has already published a proposed text of the new act and several interested parties (including ECB) have already given their comments.
After the recapitalisation, sale of non-performing loans and more conservative lending in recent years, the banks are looking for new financing opportunities and are even willing to renegotiate master restructuring agreements on better terms. An increase of consumer lending is expected, especially in the light of a more active real estate market. The incomplete recovery of the corporate sector is an obstacle for corporate lending, meaning that the banks will be aggressively competing – including with banks not operating on the Slovenian market – for good projects, such as potential acquisitions and potential infrastructural projects which are on the horizon.
In addition to bank lending, alternative sources of financing, such as crowd-funding and crowd-investing, are very likely to expand, especially for start-ups. However, bond issuance is no longer aso attractive due to the banks’ willingness to lend.
In conclusion, the consolidation and privatisation of the banking sector continues, although at a slower pace. Sberbank, Gorenjska banka Abanka and potentially even NLB could be changing their shareholders in the coming years. NPL transactions are in decline. Lending, especially to consumers, is expected to rise, whereas corporate lending depends on the recovery of the corporate sector and the occurrence of large projects.