Who will save NLB?
The main problems of Slovenia’s largest bank include:
- Management and Supervisory board in disarray
- (non) sales of financial investments
- Need for one half to one billion Euro in capital
- Another half billion Euro in write-offs?
- Poor ratings from credit rating agencies
Is it time for new management?
Several of our sources have concluded that the time for new management has come.
Rather than resolving its poor investments, refinancing loans and selling off Mercator, NLB is waiting for the new national government which will name new members to the Supervisory board, and new management which will seek an investor who will recapitalize the bank.
Who can save NLB?
The real profits and losses of NLB Group
Due to the cumulative losses of the Slovenian banking system, which in the last year have totalled approximately 400 million Euro – more than half of which were caused by NLB – the Governor of the Bank of Slovenia Marko Kranjec is seriously considering implementing an emergency management plan at NLB, according to our sources. NLB denies this claim.
“Information received during an inspection, and other measures undertaken toward the supervisory bodies, cannot be revealed, according to the Law on Banking, except in cases defined by law.” We received this answer in writing yesterday from the Bank of Slovenia, in response to our question about whether an emergency management was being considered for NLB, and whether the President of the board of the Unicredit bank of Slovenia France Arhar was being considered for the position.
“The Law on Banking specifies the reasons for installing an emergency management system, as well its functioning,” they added. “The bank’s investments were guaranteed within the framework of an appropriate model in the case that an emergency management is installed.” Therefore, in any case, customers’ deposits are safe, as in all other banks. Deposits up to 100,000 Euro are insured. (Net deposits, in other words, deposit minus loans.)
Emergency management as a last resort
Our sources see the installation of an emergency management board as one of two last remaining legal measures available to stabilize the bank. They likewise believe that this scenario would benefit Prime Minister Janez Janša, who would, in this manner, gain legitimacy for recapitalization of the bank, perhaps even with government funds. The Bank of Slovenia already gave a legal directive to NLB last year, which called for new recapitalization of the bank, involving raising the ratio of capital relevance. At first the deadline for recapitalization – allegedly in the amount of 400 million Euro, which the NLB management also wanted – was set for the end of 2011.
However, when it became clear that negotiations between the government, or rather AUKN on its behalf, and possible investors (KBC, EBRD, IFC), would not be able to be accomplished in the given time period, the deadline was extended, unofficially until the end of this year. The European banking agency (EBA) also concluded by its own “stress test” that NLB was in need of capital (at least 320 million Euro), and requested that NLB acquire new capital by the end of June.
The governor of the Bank of Slovenia mentioned the possibility of installing an emergency Management board because he was aware that the shareholders of NLB (the largest are the government and Belgian NLC) would not be able to undertake measures quickly enough to name a new management board, and would not be able to cope with the challenges which the bank faces (which will be detailed further below). A general Assembly of the Bank would not be able to be held until the end of March, at the earliest. With the fall of the Pahor government, AUKN officially froze negotiations with potential financers.
Thus, in the last two months, nothing has changed – it has only become clear that in the last year NLB has created a record 220 million Euro in pure losses (and 203 million Euro in the preceding year). The new government has not yet formally been formed, or is not yet operative, so that it is still not known who will negotiate with potential investors. The new government would terminate AUKN, which is visible from the coalition’s platform. An even greater unknown is the question of whether there even exists any investor interested in recapitalizing, or what their demands would be. The new government of Janez Janša has promised that the government will not put the burden of recapitalizing NLB on the taxpayers.
According to the opinion of experts, the Bank of Slovenia is right to be concerned and has not ruled out emergency measures such as the installation of an emergency management board. With such a move, BS would settle the claims of NLB’s creditor banks, who have the right to revoke their loans to NLB because of its lowered credit rating and capital relevance.
1. Management in disarray
The current management board of five members is in collapse. In the middle of December last year, it announced the departure of the president of the board, Božo Jašković who would lead the bank until a new president would be named. He wanted to sell one tenth of Mercator which was owned by NLB. The Pahor government was opposed to this, regardless of the fact that a bank with such losses must sell its strategic properties.
Last week, Robert Kleindlenst also left the management, and joined the management of NLB bank in Montenegro. Kleindelenst’s ambitions were compatible with the ideas of David Benedk and Marko Jazbec, who, along with Belgian Guy Snoeks, for now remain in the management of NLB. Who will take over leadership of the fourth management board of NLB in the last three years of crisis (Marjan Kramar, Draško Veselinović, Božo Jašković) is still not clear. If a new emergency management board is named, perhaps that place will be filled by France Arhar, whose mandate at Unicredit is expiring.
2. Supervisory Board in disarray
In spite of the announced statements of the Supervisory board, NLB for now is maintaining a quorum, but is not qualified to make decisions, such as about the sale of Mercator, since several members of the Supervisory board are excluded from decision making. Of ten members of the Supervisory board for now only Stojan Petrić of Kolektor Group has stepped down, and neither president of the Supervisory Board Marko Simoneti nor Igor Masten has announced his resignation.
The unsuccessful moves of the state agency AUKN reveal a great deal about the position of the Supervisory Board of NLB. Already last year AUKN sought the dismissal of four members of the Supervisory Board, along with Simoneti and Petrić, and Rasto Ovina and Andrej Baričić. What will happen at the meeting of the board next week remains to beseen. By law, the members of the board (who also include Jurij Detiček, Anton Macuh, Boris Škapin and two Belgian members of KBC) can be held personallz responsible for compensation for damages resulting from decisions they made. In the case that emergency management is installed, the Bank of Slovenia takes over the function of the Supervisory board.
3. Refinancing – only ECB
In July of this year, 1.5 billion Euro in bonds will come due for NLB – and because of the early buy-out, NLB must refinance an additional billion. Sources close to NLB confirm that refinancing is not a problem since the bank has plenty of liquid reserves, and access to loans from the European Central Bank. In fact, NLB received 250 million Euro from ECB not long ago. On the inter-bank market, long-term indebtedness is not possible since NLB has a poor credit rating. Even if it were to receive funds, the cost would be too high. At the end of September last year, NLB Group had loans in the amount of 2.9 billion Euros, and issued bonds in the amount of 1.4 billion.
4. (un)sold financial investments
NLB has repossessed most of the financial investments from failed holdings. Among others, the bank holds 23.9 percent of the Laško brewery, and 10.7 percent of Mercator. In addition, it is one of the majority owners of Petrol, Union, Iskra Avioelektrika, Istrabenz and several others. Three years have passed since the repossession, so those shares are a completely normal part of the investment portfolio, from which they cannot expect profit for some time, but rather a reduction of liquidity.
NLB’s problem is that the Laško brewery and Mercator are among the bank’s loan holders, so selling the majority shares would cause more harm than good to a financially weak owner. Another problem is whether, by selling financial investments, the bank would pay off part of the debt or turn to a more secure investment such as deposits in another bank. Because of the poor capital relevancy, the options for getting credit are limited, and selling off financial investments would not significantly reduce the need for fresh capital. Selling Mercator at the price of 221 Euro per share, (the price offered by Agrokor) would reduce the need for recapitalization by only 5 million Euro.
5. Real needs: from one half to one billion Euro in capital
Because of poor capital relevancy, NLB has already recapitalized by 250 million Euro in the past year, which was necessary to prop up its weak credit portfolio. Because of the abnormally high price, most of the shares were bought by the government. EBA and the Bank of Slovenia are now demanding from NLB a new recapitalization of at least 320 million Euro, while the management would get 400 million Euro to at least temporarily upgrade the poor capital relevancy which is obstructing normal functioning of the bank. Regarding NLB’s credit portfolio, as much as 500 million Euro is needed, even by some estimates as much as one billion Euro in new, fresh capital in order to establish an active credit or lending policy.
6. Another half billion Euro in write-offs?
At the end of June last year, NLB had issued credit to clients (who were not banks) in the amount of 12.9 billion Euros, of which 1.246 billion Euros was already “weak,” in other words, unlikely to be repaid. In its evaluation of NLB’s lowered credit rating, the Fitch agency warned of a very weak return on loans. The entire banking system allegedly has about 14% weak loans, while only 43% were secure. If NLB has as much weak credit as the rest of the banking system, it is threatened with about 600 million Euro in write offs. It is necessary to warn that according to some estimates, the greatest difficulty in loan repayment is in the real estate sector.
7. Lowered credit rating, poor outlook
The Moody’s credit rating agency does not offer an official rating for long-term credit of NLB. The last rating was lowered on 23 December from Baa3 to Ba1. The highest credit rating given by Moody’s to NLB was from April 2007 to October 2009 when it earned a rating of Baa3, which is eight grades higher than today.
Last week the Fitch agency lowered the credit rating on bonds of NLB with government guarantees, and kept the rating of NLB’s debt at BBB. Fitch lowered only the expectations for future values from stable to negative. Neither does Fitch have a detailed official overview of NLB.
Advantages and disadvantages of emergency management at NLB (survey)
Is the naming of an emergency management plan a good or bad decision? How would it affect the stability and the confidence in the bank, and who would become the emergency manager?
Sam Nucic of NLB, Marko Voljc of KBC (former president of the NLB management) and the president of the management of Unicredit bank France Arhar have been mentioned.
Jože P. Damjan of the Faculty of Economics in Ljubljana, said, “Thinking about installing emergency management at NLB – when the bank’s portfolio is constantly weak, and the agency for managing investment capital (AUKN) acting in the name of the owners did a catastrophically poor job of oversight – is welcome. In recent months, AUKN has not been a competent strategic partner for recapitalization, but rather, used all its power to oppose the development strategy, obstructing the normal restructuring of the bank’s portfolio. This is why the president of the management board left his position. In such a situation, it is crucial that BS install emergency management at NLB. I doubt that this will actually happen, however, since BS does not have enough courage for such a move. This is a story of empty threats, while in the past, there was effective outside pressure put on the owners. The true story of the future of NLB will be seen in the next weeks, while preparations for the General Assembly are underway. At the Assembly, which is actually just a formality, it will be seen whether the new government in the name of the owners, and in regard to the restoration of NLB, is any more trustworthy than the previous one. I personally do not have great hopes in this regard.”
Sašo Polanec, of the Faculty of Economics in Ljubljana, said, “Considering that AUKN has behaved completely irrationally, without clear goals or consistent behaviour, it would be useful [to install an emergency management]. Keep in mind NLB’s strategy, in which it is written that Mercator should be sold, to which AUKN was opposed. The recapitalization which the Bank of Slovenia requested never happened.
Thus, any action or management structure which would reduce the power of AUKN would be useful. The question is whether BS is capable of choosing good management and carrying out the appropriate supervision. So far, BS has not succeeded in its supervision of banks. The choice of managers is even more problematic. Considering who is leading ECB in the Slovenian market, I do not expect that BS will choose the best and most independent people. Instead of some local manager, it would be wiser to choose someone with many years of experience in leadership at a larger bank (at least in the one department).
I will mention Luka Repanška who is now at KBC. Filling this position on the basis of “inside connections” would be the worst choice. I think that any measures undertaken by BS are now extraneous, since the Republic of Slovenia will soon have a new government which will, under the direction of the new minister of finance, find a competent person to make an independent decision. BS’s determination to install a new management could increase confidence in the bank, since at this moment it is cut off from the international financial markets. If BS ensures recapitalization, it would be a positive signal to the international markets and would increase the stability of the bank.”
Metka Tekavčič, SD, economist and former member of the supervisory board of NLB, said, “From the point of view of confidence in the bank, installing an emergency management is never a good move. However, I am surprised that BS did not react earlier to the events regarding NLB, as far as I have been informed. Personally, I support all other solutions. So many mistakes and poor decisions have already been made about NLB. You know, there are analytical types, and then there are those who are capable of leading the bank.
In spite of everything – emergency management would shake the confidence of international markets. On the other hand, it could wake up some reaction from the customers, in the sense that their investments and savings would be safer, considering that BS took things into its own hands. Considering the possible directors who have been mentioned, Marko Voljč, Sam Nučič and France Arhar, I would not specifically favour any candidate over the others. They are all experts, but they must know how to lead the bank in times of crisis.”
Davorin Kračun, of the Faculty of Economics and Business in Maribor, said, “The financial crisis which has lasted almost four years has revealed the weakness of the finanical system by international standards. On top of all this, there is the European debt crisis. The financial system functions only if there is confidence. NLB is our largest bank, mostly government owned. Confidence in NLB is necessary for the functioning of the entire Slovenian banking system.
Measures to increase confidence must be undertaken. This is possible only if we have accurate information about the portfolio, and confidence in the management and the supervisory board. The series of personnel changes and departures from the management and supervisory board of NLB do not exactly increase confidence. It is the responsibility of BS to increase the confidence in NLB and through that, in the whole banking system. Regarding the names of potential candidates for emergency manager, I will say that all the candidates who have been mentioned are worthy of trust, and I believe that NLB is such an important bank that it is necessary to include bankers who are internationally respected.
Emergency bank management, according to the law
Installing an emergency management is one of two interconnected measures with which BS could stabilize the bank. The second measure is increasing the fundamental capital.
Management is intalled by: Bank of Slovenia by legal directive
Goal: stabilizing the bank. Among the reasons for emergency management, the Law stipulates: if continuing business of the bank endangers liquidity and relevant capital.
Term of emergency management: should not be longer than one year.
Structure of the emergency management: BS names two or more emergency managers and determines the type and format of work which each one performs. BS has the right to give the emergency directors instructions on how the bank is to be run, which the managers are obligated to carry out.
Oversight: during the period of emergency management, the Bank of Slovenia assumes the role of the Supervisory Board.
Reporting: The emergency management must present a report on the financial status of the bank to the Bank of Slovenia at least once every three months. After nine months, a rating of the economic stability of the bank must also be presented. This report must include a forecast for the future operations of the bank, which rates the probability that the shareholders of the bank can cover the losses, and possible measures for resolving the financial problems of the bank. An estimate of the costs of such measures must also be included.
Source link: Finance.si
