Export-Import Bank of the Slovak Republic 'A+/A-1' Ratings Affirmed; Outlook Stable

  • We believe Export-Import Bank of the Slovak Republic's (Eximbanka's) new management are looking for new ways to strengthen the bank's public policy role and reverse the stagnation of traditional export financing activities over the past five years.
  • We expect the Slovak government will demonstrate its supportive stance toward the bank by amending the Eximbanka Act to allow for an expansion of Eximbanka's mandate to include development finance activities.
  • We are affirming our 'A+/A-1' ratings on Eximbanka.
  • The stable outlook reflects our expectation that the bank's renewed mandate will revitalize its business profile, reverse the long-standing stagnation of its balance sheet, and sustain its key role in the execution of Slovak public policy.
STOCKHOLM (S&P Global Ratings) Sept. 13, 2019--S&P Global Ratings today affirmed its 'A+/A-1' issuer credit ratings on the Export-Import Bank of the Slovak Republic (Eximbanka). The outlook is stable.
The ratings affirmation reflects our view that the upcoming expansion of Eximbanka's lending mandate will secure its critical public policy role, and affirm its key role in fulfilling Slovakia's trade and development aid policies. We expect the forthcoming legislative changes to the Eximbanka Act, the legislation under which the bank was established, will expand Eximbanka's mandate to include development finance activities, helping reverse the stagnating trend in the bank's balance sheet and supporting its public policy role. Although we consider that execution risks remain, we also view this revision as confirmation that the government will use Eximbanka to foster public policy. In particular, we expect it will support the gradual scale-up of Slovakia's development aid, so that United Nation Sustainable Development Agenda targets are met.
We assess Eximbanka as having an integral link with and critical role for the Slovak government and maintain our view that there is an almost certain likelihood that, if needed, the Slovak government would provide timely extraordinary support sufficient to service Eximbanka's financial obligations. Accordingly, we continue to equalize our ratings on Eximbanka with those on the bank's sole owner, Slovakia (A+/Stable/A-1).
Our view of the likelihood of government support reflects our assessment of Eximbanka's:
  • Integral link with the Slovak government. Eximbanka is 100% state owned and benefits from a strong state guarantee framework that covers the majority of the agency's financial obligations. The bank's activities are regulated by an entity-specific legal act, it does not hold a banking license, and it is not subject to the supervision by the National Bank of Slovakia.
  • Critical role for the government as a key tool supporting the government's export strategies and extending its activities in support of the government's official development aid policies.
Eximbanka has recently faced increasing competition from commercial banks and insurers due to the Slovak economy's strong business cycle, commercial banks' substantial liquidity, and low interest rates over the past three years. Furthermore, despite the prominent role of exports in the Slovak economy (exports account for almost 100% of GDP), the majority are attributed to larger entities, predominantly within the automotive sector, and neither these entities nor their export counterparts typically require state sponsorship. Growth in the bank's export activities remained flat over 2015-2018, and its balance sheet as per year-end 2018 accounted for only 0.4% of Slovak GDP, small in comparison with that of international peers (measured as a share of exports and as a share of GDP).
As a response to these developments, we note that the government changed the bank's management in late 2017 with the aim of refocusing and enhancing its public policy role, finding new niches for its business, including the small and midsized enterprise lending and refinancing segments, and promoting exports to non-EU countries (nonmarketable export insurance).
Eximbank's management has introduced several organizational changes since stepping into office. In particular, over the past two years, Eximbanka, in cooperation with financial consultants, has changed its organizational structure to resemble that of a commercial bank in terms of monitoring departments, risk and back office setup, and separation of commercial and analytical functions. We consider this reorganization positive because it should allow the bank to adapt to the requirements of risk monitoring development-related projects.
We note ongoing policy discussions between the government and Eximbank regarding the bank's implementation of the government's development aid policy. We believe the extension of Eximbanka's mandate is key in sustaining its public policy role. We understand that parliament have approved revisions to the Eximbanka Act, and the legislation will be in place by Oct. 1, 2019. The amendments will allow for lending through soft loan concessions and we anticipate Eximbanka will engage in this, adapting some of its business to reflect that of a development bank. This will allow the bank to directly finance exporters with grant elements under ODA (official development assistance) programs.
Therefore, we expect Eximbanka will increasingly pursue and integrate development-bank activities into its business, as well as continuing its direct export-related business lines. This will support Slovakia's efforts to achieve budget allocation in line with United Nations Sustainable Development Agenda targets of 0.7% of gross national income (GNI) by 2030, with government's current spending at a low 0.17% of GNI. We expect ODA programs, facilitated by Eximbank, will play a prominent role in progressing toward these targets. We observe that the current pipeline for ODA-related projects stands at about €160 million, about half of the bank's current prospective project portfolio.
Reflecting the new management's efforts, Eximbanka's total business volume increased in 2018, with total lending assets rising to €218 million from €121 million. Intensified business activities in 2018 also affected net interest income, which increased 73% compared with 2017. We believe that when the business cycle turns downward, in combination with the pipeline of prospects under Eximbanka's newfound development banking mandate, the bank's business opportunities have the potential to become more dynamic.
In our view, for the bank to maintain these positive results it will require a successful strategic transition, with support from its owner to sustain financial sustainability. In this regard, we note that the Slovak government has created a mechanism that allows for the transfer of risky assets from Eximbanka to the Ministry of Finance of the Slovak Republic in exchange for compensation. This process will allow Eximbanka to decrease the risk associated with such assets and, in our view, signals the government's commitment to expanding Eximbanka's lending mandate.
Eximbanka was established in 1997 under Act No. 80/1997 Coll. The agency provides support to exporters through both export-related banking (direct credit, refinancing, investment loans, and guarantees) as well as insurance and reinsurance services. In addition to export-related operations, Eximbanka also issues guarantees and credits for importers with the overall aim of supporting the government's strategy of promoting trade and employment.
A statutory guarantee makes the government unconditionally and irrevocably liable for all of Eximbanka's commitments, except for its marketable risk insurance activities. The state guarantee does not specifically mention the timeliness of support. However, we assume the sovereign would step in immediately if the guarantee was called. The Slovak government wholly owns Eximbanka through the Ministry of Finance. Accordingly, the ministry directly supervises Eximbanka and approves its financial statements and annual reports. The ministry can also appoint and recall Eximbanka's supervisory board, which is in charge of monitoring and auditing the agency's financial operations. More specifically, the supervisory board must approve Eximbanka's domestic and foreign capital raising, as well as its credit terms and conditions.
Our assessment of Eximbanka's link with the government also factors in the state's track record of injecting funds into the agency: €17 million in 2000, €41 million in 2009, and €60 million in 2012. The government provided these additional funds to ensure that Eximbanka's capitalization was sufficient to support its operations. Shareholder equity forms a major part of total funding (82.2% of the balance sheet), with the rest comprising interbank loans. Eximbanka does not have access to central bank funding. Although legally allowed, we understand that the agency does not plan to tap the capital markets in 2019-2020 as it has secured credit facilities with financial institutions, including the European Investment Bank, to the tune of €80 million, which is sufficient to cover its financing needs over 2020.
We estimate that the bank's stand-alone credit profile, absent extraordinary support, is in the 'bb' category.
The stable outlook reflects our expectation that the bank's renewed development finance mandate will revitalize its business profile, reverse balance sheet stagnation, and help maintain its position as a critical policy instrument of the Slovak government. We expect the Slovak authorities will remain engaged in the bank's strategic policy direction and support its agenda expansion.
Any change in the ratings on Slovakia would likely trigger a corresponding rating action on Eximbanka. Regardless of sovereign rating actions, we could take a negative action on Eximbanka if we observed signs that the bank's link with or public policy role for the government had weakened. This could be demonstrated for example by an absence of tangible government engagement in expanding Eximbanka's strategic policy, lack of explicit government-supported business development strategy, or/and decline in the bank's traditional export support activities.
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