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A Sign of Stress?

Nova Ljubljanska Banka (NLB), the biggest Slovenian financial institution, recently announced that its EUR 300 m rights issue was a success. However, that was not clear from the beginning. Immediately after the bank had informed its shareholders that it would issue new shares for EUR 334 a piece, rumours surfaced that the management was being forced to raise fresh capital because NLB had squandered too much of it on losses related to leveraged buyout loans. Observers of the industry say that recent attempts to first consolidate and then take over Istrabenz, an energy and tourist holding, and Laško brewery, which controls the country's biggest retailer, Mercator, and the leading newspaper, Delo, are in part financed by NLB. The latter probably accepted shares of takeover targets as collateral, just in time to be hit by the turmoil on the Ljubljana Stock Exchange (LJSE), which has seen its leading index, the SBI20, fall by more than 20 percent this year.

As Jožko Peterlin, the head of fund management at Ilirika, a brokerage and fund manager, recently pointed out, investors also took out loans to buy shares while the stock market was booming, but now have difficulties meeting margin calls. Add to this mixture the fact that the economy is slowing down, making the servicing of all kinds of loans more difficult, and it is not hard to see why some economists thought that newly issued NLB shares were too expensive. Pricing them at 2.5 times their book value, management was obviously confident that investors would judge the bank to be in better health than the doomsayers claimed.

The government to the rescue

Judging by banks' rights issues that have swept across Europe and the US in the wake of the US financial crisis, Marjan Kramar, NLB's CEO, could have been accused of being too optimistic. While major international banks were forced to lure panicky investors with steep discounts to current share prices to raise urgently needed capital, he had the privilege of counting the state itself as the bank's biggest shareholder. The government, the funds it owns and the companies it controls duly bought over 90 percent of the share issue, drawing criticism that NLB was in effect being bailed out with taxpayers' money.

But was it really? A comparison with a rights issue by Societe Generale (SG), a French banking giant, which is present in Slovenia with its subsidiary SKB, is instructive. Its capital battered by losses stemming from its exposure to dodgy credit derivatives, SG in effect begged investors for fresh money, offering the new shares at almost a 40 percent discount to the current price of listed shares. With its capital adequacy ratio below the eight percent required by the EU rules, SG had no other choice. NLB, in contrast, sported a comfortable 10.7 percent ratio at the end of 2007, i.e. before the rights issue, and had no urgent need for additional capital. It is, therefore, fair to give the benefit of the doubt to the government's claims that NLB needs additional funds to expand its operations in the region.

Reshuffles

The rights issue introduced changes in the ownership structure of the bank. The state and two state-run funds, Kad and Sod, maintained their 45 percent share, while the stake of the second biggest shareholder, the Belgian financial group KBC, decreased from 34 to 30 percent. KBC refused to buy the newly issued shares after it had become clear that the government would not sell the group an additional 34 percent of NLB. The Belgians are now looking for the buyer of their stake, asking EUR 300 a share. The European Bank for Reconstruction and Development (EBRD) succeeded in selling its five percent stake in NLB to Poteza, a Slovenian investment fund, at this price, thus setting a floor for future deals. Private equity funds Blackstone and Apax have already expressed interest in KBC's stake, but they think the price is too high.

The same cannot be said about the small shareholders of the second biggest bank in Slovenia, NKBM, as the latter's share price dropped to EUR 27 in the end of June. The government sold 49 percent of the bank to the general public and informed investors last year at EUR 27 a share. After the IPO had been completed, the NKBM share price shot through the roof, reaching EUR 44 and allowing those who sold the shares to realize hefty capital gains. As for the remaining small shareholders, they tried to acquire more control over the management of the bank by pushing through their candidates for the supervisory board at the recent shareholder meeting, but their proposals were defeated by the government.

The great migration

Obviously, the government's ownership of financial institutions can be a mixed blessing, but borrowers can always be counted on to vote with their feet. The market share of the three biggest domestic banks - NLB, NKBM and the government-controlled Abanka -has been steadily declining by volume of operations, from 53.3 percent in 2003 to 48.1 percent in January this year.

Foreign-owned banks have been growing far more briskly than domestic ones. While the latter's loans to the private sector grew 22 and 34 percent in 2006 and 2007, respectively, subsidiaries of foreign banks recorded growth rates of 34 and 40 percent. After the fallout from the subprime crisis hit Europe, this trend only became more pronounced. In March this year, the loans of foreign subsidiaries already grew by 45.5 percent, compared to 32 percent loan growth for domestic banks.

As Slovenian banks increasingly finance their lending by borrowing the funds on international financial markets in general and on interbank markets in particular, they have been hit by higher interbank rates. Interbank markets have been periodically seizing up because of the uncertainty with regard to exposure of banks to low-quality mortgages and hard-to-value financial derivatives. Foreign-owned subsidiaries, however, can access cheaper funds provided to them by their owners, a significant advantage in times where lending standards are becoming increasingly tighter.