Last week, Moody’s Ratings agency upgraded NLB’s long and short-term deposit ratings to A2/P-1 from A3/P-2, and its long-term senior unsecured ratings from A3 to Baa1, with a positive outlook. At the same time, it has upgraded several other indicators for the Group. Continue reading below for a detailed overview.
Moody’s Ratings (“Moody’s”, “The Agency”) has upgraded several ratings for NLB last week. Firstly, it has upgraded the bank’s long and short-term deposit ratings to A2/P-1 from A3/P-2, and its long-term senior unsecured ratings to A3 from Baa1. The outlook on the long-term deposit and senior unsecured ratings was also changed from stable to positive.
The upgrade to A2 from A3, and the upgrade from A3 to Baa1 came due to the upgrade of the bank’s Baseline Credit Assessment (BCA) and adjusted BCA. This is the result of the Agency’s Advanced Loss Given Failure (LGF) analysis, which continues to lead three notches of the rating uplift for the bank’s deposit ratings, and one notch of uplift for its senior unsecured rating. The Agency continues to incorporate a moderate likelihood of support from the Government of Slovenia in case of need. In essence, this results in no further uplift for the bank’s deposit ratings and one notch of uplift for its senior unsecured rating, the latter reflecting the recent sovereign rating upgrade.
To better understand this, one has to look at the upgrade to the Baseline Credit Assessment (BCA). The Agency has upgraded NLB’s BCA to baa2 from baa3, and they noted that this is driven by the bank’s consistently strong financial performance, robust profitability and resilient asset risk metrics. They further noted that, over the past few years, NLB achieved sustainable profitability by diversifying its revenue streams and reinforcing market leadership in Slovenia, while maintaining a solid footprint in South Eastern Europe.
At the same time, the bank demonstrated proficient risk management capabilities in navigating the higher volatility and risk profile of the SEE markets, as reflected in its sound asset quality with low NPL levels and ample reserve coverage across both domestic and regional operations. In this upgrade, Moody’s also considered NLB’s good capitalization. They noted that, while growth ambitions and higher dividends may moderate its capitalization, they expect NLB’s Common Equity Tier 1 (CET1) ratio to remain above the bank’s strategic target of 13%. A key strength underpinning NLB’s baa2 BCA remains its sound funding and liquidity profile, supported by a stable and granular retail deposit base and ample liquid reserves.
Thus, Moody’s also upgraded NLB’s outlook from stable to positive. The stable outlook on NLB’s long-term deposit and senior unsecured ratings reflects Moody’s view that NLB’s financial performance will remain stable over the next 12 to 18 months. Furthermore, the stable outlook on the senior unsecured rating also reflects that any potential additional uplift under their Advanced LGF analysis, stemming from increased issuance of debt, would be offset by a lower uplift from their Government support assumption, given the proximity of this rating to Slovenia’s sovereign rating.
The Agency also commented on factors that could lead to an upgrade or downgrade of ratings. Firstly, an upgrade to NLB’s long-term deposit ratings could come from an upgrade to the bank’s BCA or the country’s sovereign rating. With an unchanged baa2 BCA, NLB’s long-term senior unsecured rating could be upgraded if a higher uplift from Moody’s Advanced LGF analysis were combined with an upgrade of the sovereign rating. At the same time, NLB’s BCA could be upgraded if the bank materially improves its solvency and liquidity profile from the current levels, or through the reduction of tail risks from weaker economic regions, or lastly, an increase in its exposure to stronger operating environments.
On the other hand, a downgrade of NLB’s long-term senior unsecured rating could come as a result of a downgrade of the bank’s BCA, or following a substantial decline in NLB’s outstanding bail-in-able debt. Furthermore, a downgrade of NLB’s deposit ratings could come as a result of a weaker BCA or a weaker uplift under the Agency’s Advanced LGF analysis, in combination with a downgrade of the sovereign rating, in which case the negative impact may not be offset by additional uplift from the Government Support. Lastly, the bank’s BCA could be downgraded following a significant joint erosion of its key solvency metrics or a material deterioration of its liquidity and funding profile.