About the Slovenian business banks stress tests in 2013

In 2012 Slovenia was faced with specific campaign together with media frenzy that resulted in restrictive fiscal measures, prolonged recession and in large-scale project of Slovenian business banks rehabilitation. In this context in 2013 Bank of Slovenia alone or with contractors developed three stress tests (analysis checking whether the given business bank manages risks associated with possible economic crisis: the decline of the GDP, rise of unemployment, etc.):

  1. a) Internal stress test of the Bank of Slovenia showed 2,7 billion euros deficit.
  2. b) Ronald Berger Test showed a 3,3 billion euros deficit.
  3. c) Oliver Wyman Test showed a 4,8 billion euros deficit.

For the assessment of non-performing credits was taken as relevant the most unfavorable scenario in Oliver Wyman stress test with expectations of a decline in Slovenian GDP for 3.1% in 2013 (in fact it declined for 1.1% – due to mentioned errors in economic policy), then decline for 3.8% in 2014 (in fact there was export-driven increase for 3.1%) and even further decline for 2.9% in 2015 (in fact there was 2.3% growth). Taken all together Oliver Wyman assumed decline in the Slovenian GDP for 9.5% at the time of the actual increase of 4.3%. The assumptions were wrong by almost 14 percentage points of Slovenian GDP. Estimation of bad claims as a base for Slovenian business banks “rehabilitation” project (nationalization and recapitalization of four largest banks: NLB, NKBM, Abanka, Banka Celje) were calculated on the basis a fictitious and mistaken assumptions.

If you consider these numbers opaque, you can use an analogy:

A consulting firm assesses what kind of damage would suffer Slovenia in a case of the earthquake with the same power as that in March 1511. On the basis of this assessment, Slovenian State then nationalizes four largest business banks and recapitalize them by the sum that is comparable to investment in the construction of the Slovenian motorway cross.

Bank of Slovenia should reject the results of stress tests with a mention difference in their estimations and with such unrealistic assumptions. The analysis should be started again and taken in account that Slovenia is an industrialized country, net exporter (savings more than cover investment), with the controlled inflation and low level of indebtedness of the population and the economy.

Some details how Slovenian banks rehabilitation project was performed

In the beginning of 2015 parliamentary debate about Slovenian business banks rehabilitation project revealed:

  1. Business banks shareholders and owners of subordinated bonds were expropriated in December 2013 with reference to European Commission Communication which came in force only on January 2016.
  1. Bank of Slovenia was delayed with the claim for banks recapitalization waiting on new, more restrictive, EU regulations for state aid to business banks. Slovenian biggest bank, NLB, requested the state aid in January 2013, and the second biggest bank, NKBM, requested it in June 2013. New EU regulations on state aid, however, came in force in August 2013.
  1. In December 2012 and then in June 2013, the Slovenian State banned the NKBM Bank recapitalization.
  1. Banks that were under the supervision had found that during the stress test Oliver Wyman changed methodology. This company refused to disclose the changes and Bank of Slovenia had accepted his reasoning that the methodology is in his private ownership.
  1. Oliver Wyman estimated 4.8 billion euros of bad claims and asked for 70% relief of their nominal (contractual) values. That was by far the largest write-off in the EU. It happened in spite of the fact that Slovenia is a great net exporter, with gross operating surplus (sum of profit and depreciation) around quarter of GDP and with the one of the lowest share of total bank assets in the GDP among eurogroup’s countries.
  1. Oliver Wyman has been selected to do stress test without a call for tenders. For his work he received 11.2 million euros from the Bank of Slovenia. The tested business banks have paid him additional 10 million euros.
  1. The decision on the deletion of the owners of subordinated claims was issued on December 19. 2013 (or later). Taking into account that the Constitutional Court is going to decide about this deletion and had the right to suspend the implementation of this decision, Bank of Slovenia backdated decision on December 17. 2013. In this decision Bank of Slovenia referred to the decision of the European Commission authorizing State aid to Slovenian banks issued on December 18. 2013.
  1. As a result of “rehabilitation” at the end of 2013, the liquidity of the Slovenian business banks rose significantly above the European average. Liquidity in NKBM amounted to 20% and liquidity in NLB reached 17%.

The consequences of the Slovenian business banks rehabilitation project

The regulators on Slovenian and EU level had set to rehabilitated Slovenian business banks such conditions that they were forced in sharp reduction of credits to the non-financial corporations (economy without financial sector). This credits fell for 34% from 2013 to 2016. At the end of 2016 they represented only 23% of Slovenian GDP (less than annual gross operating surplus on macroeconomic level). “Vae victis” would said Gaelic warlord Bren. Obviously someone had power to cheat in the implementation of Slovenian bank rehabilitation project in 2013. Second largest among rehabilitated banks (NKBM) has been already sold for around 20% of its fair value in 2015 and Slovenian State has lost funds that could cover the costs of construction a 100 kilometers of new highway.

After banks rehabilitation in 2013 the credit/deposit ratio in rehabilitated banks fell to around 0.8, and Slovenian banks started to be a net creditor on international market with complete turnaround (from net importer in 2013 to net exporter of capital in 2016) in the size of more than 12% of Slovenian GDP.

A large net capital outflow and contraction of credits to the non-financial corporations in the specific situation of Slovenian strong export oriented economy most affected the small and medium-sized enterprises, as most big businesses managed to cover their needs for credits on the world market. In the case of smaller businesses the limited credit lines in rehabilitated banks created new bad claims. In given circumstances these businesses or their business partners (suppliers, customers) didn’t have sufficient financial resources to pay old debts and to finance their normal activity.

Project of Slovenian business banks rehabilitation in 2013 needs strong corrective action. In the first place it is necessary to remove all restrictive measures and allow the banks to compete on market that was strongly and negatively affected by these measures. In the second place there is a urgent need for the restoration of the ownership of attacked banks as it was before rehabilitation. On the third place is the need for new, this time honestly performed stress test as a basis for Slovenian State decision about the adjustment of the amount of capital in these banks.

The need for intervention:

Slovenian Minister of Finance Ms. Mateja Vraničar visited European Commissions Directorate General for Competition headed by Commissioner Ms. Margrethe Vestager on January 21. 2017 to discuss about the conditions that have been set to Slovenian business banks during the process of artificially mismanaged banks rehabilitation in 2013. The advisors in the Directorate General for Competition didn’t approve any release in these conditions nevertheless we expect that Slovenian jurisdiction will react and put the Slovenian State in the position when it will have to implement corrective measures about Slovenian banks rehabilitation project in 2013.

Slovenian Social Democrats expect the support of European Socialist and Democrats alliance to reach the Commission recognition that Slovenian business banks rehabilitation project in 2013 was mistakenly planed, performed and was completely out of control.

About NLB d.d.

NLB d.d. (Nova ljubljanska banka d.d.) is the largest Slovenian business bank with 23% market share in Slovenia, with strong network of branches in Western Balkans, with 16.2% capital adequacy, with 6300 employees and with shocking 0.79 credit/deposit ratio. The bank was recapitalized under the misguided reconstruction project in 2013 and is now under a strong regulator pressure to curb its business.

In 2012 the group NLB had a capital of 1.125 million euros. On December the 18. 2013 the bank’s stockholders and owners of subordinated bonds were expropriated and bank was recapitalized for 1.551 million euros. Former bank’s stockholders and owners of subordinated bonds are now trying to get justice on the Slovenian courts and according to ill performed bank rehabilitation project in 2013 there is no doubt that they are going to win.

In the beginning of 2017 we have a specific situation about NLB. Last data about its book value is for 2015 when it was 1.423 million euros but under doubtful cuts of capital and huge recapitalization in 2013. If we consider that the lowest price limit for selling such a bank presents its book value enlarged by factor 1,5 (we take as real value of working capital the book value from 2012), we see that the lowest acceptable price would be 1.688 million euros. Bu there is still 1.551 million euros of overpaid Slovenian state’s capital in the NLB. So all together Slovenia should expect the 3.239 million euros for this bank. Price significantly under this limit would mean the commitment of crime.

Slovenia already has a bad experience with forced selling of its second large bank – NKBM. The average book value of bank’s capital was 435 million euros between 2009 and 2011, bank was recapitalized by 870 million euros in 2013 and sold for 250 million euros in 2015. So Slovenian state lost 1.055 million euros and it is going to loose the trial with expropriated stockowners and owners of subordinated bonds.

What is needed about NLB rehabilitation of “rehabilitation in 2013”:

  1. It is necessary to remove all restrictive measures and allow NLB to compete on market that was strongly and negatively affected by these measures.
  1. There is a urgent need for the restoration of the ownership of NLB as it was before the “rehabilitation project in 2013”.
  1. There is a need for new this time honest bank revision as a basis for Slovenian State decision about the adjustment of the amount of capital in the NLB.