Slovenia’s Bad-Loan Delay Threatens Bank Funding, UniCredit Says

Slovenia risks leaving banks vulnerable to market volatility and funding shortage by delaying a transfer of toxic loans from lenders such as Nova Ljubljanska Banka d.d. to a government agency, UniCredit Bank said.

Cleaning up the Slovenian banking system is being delayed after the European Commission failed to give approval to the first batch of non-performing loan transfers to the bank asset management company by June 28, Carlos Ortiz, an economist from UniCredit in London, said in a report today. The deadline has been moved to mid-July, when the results of Deloitte’s system-wide review of asset quality and Oliver Wyman’s stress tests will be known, he said.

“The delay is not that significant, especially given that we are dealing with a full banking system asset-quality review,” Ortiz said. Any further delay beyond the third quarter of 2013 “could reduce market confidence in the recapitalization process and put bank funding at risk.”

Slovenian banks, burdened by rising bad loans as the economy struggles with a second recession since 2009, are at the center of concerns that the nation may be forced to seek outside assistance after the Cyprus rescue in March put the spotlight on Slovenia’s weak financial industry.

The risk of a bailout in the next 12 months has fallen considerably, Ortiz said, as Slovenian banks look to have sufficient collateral to more than double their current access to traditional euro-system facilities at the European Central Bank.

Yield Falls

The yield on the benchmark government notes maturing in 2022 dropped for the first time in four sessions today, declining 2 basis points, or 0.02 percentage point, to 6.658 percent at 1:47 p.m. in Ljubljana after rising to a record high of 7.52 percent June 24, according to data compiled by Bloomberg.

“The fact that its long-term bonds continue to trade at Portuguese levels also reflects how delicate the situation is,” Ortiz said in the report. “Hence, this makes the need to meet the bank reform targets by year-end even more necessary, as this could constitute the last chance for Alenka Bratusek’s Cabinet to safeguard investor confidence.”