SLOVENIA: An Introduction to Banking & Finance

Slovenia: Banking & Finance – Practice Area Overview

As is the constant trend, economic situation, regulatory action and global events have shaped and continue to shape the Slovenian Banking & Finance market.

Post Covid-19 market outlook is positive 

While the initial outlook on the market due to Covid-19 was negative, most companies managed to fare well through the struggles brought on by the pandemic and emerged on the other side to be met with economic growth and new financing opportunities. This positive outlook was the result of a mix of governmental measures, including delaying payment of taxes and subsidising employment stay-at-home orders, which allowed companies to mitigate the brunt of the global pandemic.

Some measures were however not that successful, such as for example loan extensions and loans backed by government warranties (via the Slovenian development bank, SID banka). Despite the generous amounts available, these schemes were broadly seen as unattractive to businesses due to strict conditions for application.

High deposits and tax reforms drive the market 

Despite the non-existent interest rates, Slovenian’s citizens have a majority of their savings in banks as callable deposits, which have reached record highs in recent years. Only after most Slovenian banks imposed custody fees (negative interest rates) for deposits exceeding around EUR100.000 in deposits (depending on the bank), have we seen an increase in private investment of those funds. The majority of these investments have been into the real estate market, while some investment has gone into other spheres of the financial market, including mutual funds or other fund-based products.

The increasing inflation and loosening of deposits has also spurred the real estate market, with real estate typically being considered as a very safe asset class in Slovenia. There is an increase of opportunities for banks for financing investment in second and third homes for retail investors. The demand's increase has driven the value of real estate above levels prior to the financial crisis of 2008, with an increase of both sales and rent prices. As expected, this has also caused an increase in development work to meet the demand, real estate development itself being a typical commercial financing opportunity for Slovenian lenders.

Financing of the “first home” credit market has however been somewhat stunted due to the Bank of Slovenia’s restrictions on consumer lending, which increased the required minimal amount of the available income to a consumer after taking a loan. This has been increased to 76% of the gross minimum wage in Slovenia. Due to the 2022 increase of the minimum wage to EUR1.074,43, these rules have effectively made a lot of would-be first-time home owners ineligible for a bank credit loan.

In the beginning of 2022 the government has adopted a new tax reform aimed at increasing the general personal income tax relief and reducing taxes on interest rates, dividends and rent payments. This is expected to further drive private investments away from high banking deposits. However, there is strong opposition to the tax reform, and the reform might be vetoed by the second house of parliament and returned to the first house for a higher vote requirement, which it might not receive.

No neutrality regarding loans denominated in Swiss francs

A long-standing issue in Slovenia and its region was the question of consumer loans denominated in Swiss francs (CHF). Several Slovenian borrowers took loans out in Swiss francs due to the lower interest rate offered (LIBOR). However, after the appreciation of the CHF the principal loan amounts and overall loan obligations increased substantially. Court action at the Slovenian and European level has resolved each case individually, assessing whether the banks in question adhered to consumer protection laws and fulfilled their duty to inform the consumers of risks.

However in February 2022 the Slovenian parliament adopted a law to regulate all loans denominated in Swiss francs and arguably retroactively for the already paid off or the loans for which litigation was already settled. This has garnered a negative response from lenders across the board and the law application is currently suspended pending a review by the Constitutional Court.

If the law is not squashed by the Constitutional Court, it will affect the profitability of those loans for Slovenian lenders and represent a severe administrative burden for the banks to resolve long-standing (or even concluded) loan arrangements.

Slovenia’s contribution in defining the scope of the ECB’s archives and compensation to the holders of instruments subject to bail-in measures

In the aftermath of the bank restructuring in 2013, the Slovenian banking sector experienced two significant developments. The National Bureau of Investigation conducted a criminal investigation at the premises of the Bank of Slovenia which spurred not only litigation proceedings directed by the Bank of Slovenia and the European Central Bank against the seizing of the data, information and documentation of the Bank of Slovenia and its senior officials, but also until then the unresolved question of inviolability of ECB’s archives protected under the EU primary legislation. In this respect, the Court of Justice of the European Union adopted a landmark decision in a judgment in Case C-316/19 (Commission v Slovenia) ruling that by unilaterally seizing documents that are part of the archives of the ECB, Slovenia failed to fulfil its obligation to respect the principle of the inviolability of the archives of the Union.

Moreover, the CJEU also ruled for the first time on the scope of the ECB’s archives and the principle of the inviolability of the ECB’s archives itself. Additionally, in late 2019 the Slovenian parliament adopted the Act on Judicial Protection Procedure for Former Holders of Eligible Liabilites of Banks providing a compensation legal regime to the holders of instruments subject to bail-in measures adopted by the Bank of Slovenia in the bank restructuring in 2013. The proposed law considered the Bank of Slovenia as an entity liable to pay potential compensations to the holders of instruments subject to bail-in measures. However, the Bank of Slovenia contested the constitutionality of this legislative arrangement. The Constitutional Court has not yet reached a decision and has made a referral to the Court of Justice of the European Union by requesting a preliminary ruling on the interpretation of EU law provisions concerning the prohibition of monetary financing by national central banks. The Court of Justice of the European Union held a hearing in January 2022 and it is expected that it will issue the preliminary ruling in this case after receiving the opinion of the Advocate General (expected by the end of March 2022). This preliminary ruling will - as was the case in the ECB archives - be a landmark decision setting the stage for future bank restructurings and bank resolution measures on a EU-wide level.

Sberbank’s fall and the consolidation of Slovenia’s banking sector

The Slovenian Sberbank subsidiary (owned by Sberbank Europe) faced a liquidity crisis after sanctions were imposed against the Russian Federation and its majority-owned banks. The European Central Bank designated Sberbank Slovenia as failing or likely to fail. While Sberbank Slovenia was previously supposed to be sold, pending regulatory approval, to Gorenjska banka which is part of the Serbian entrepreneur Miodrag Kostić’s group, Gorenjska banka withdrew from the share purchase agreement rather swiftly after the start of the Ukrainian conflict.

On 28 February 2022 the Single Resolution Board of the European Union (SRB) suspended payments and operation for the bank, and on 1 March 2022 it decided to transfer all shares of Sberbank Slovenia to NLB, the (currently) largest bank in Slovenia, in which the Government has a 25% stake.

This transfer continues a wave of consolidation in the Slovenia banking sector with the Hungarian OTP group snatching up several major banks in Slovenia, starting with SKB Bank from French group Société Générale in early 2020 and continuing with NKBM in May 2021. It is expected that OTP Bank’s acquisition of NKBM will close in the second quarter of 2022, and it is likely it will end up with a merger of both banks after that point. This would mean that NLB’s reign as the largest Slovenian bank could soon end and will likely shake up the market and bring more competition to the incumbent largest player.

Russian sanctions might destabilise exporters 

The EU-wide sanctions against the Russian Federation – and the Russian Federation’s response to these sanctions – might negatively impact several key Slovenian industries that have strong export markets in Russia and Ukraine. This is especially true of major Slovenian pharmaceutical and engineering companies, with some generating a quarter of their revenues in these markets. Whatever the ultimate outcome of the sanctions, the negative impact of the sanctions has already affected revenues for these companies. The share value of Krka, a leading generic pharmaceutical company, has dropped by about 30% in a matter of days.

In turn, this will likely affect the financing market, as we expect there might be some bridging loan activity in the future, or refinancing due to different business results. In the worst case scenario, there might be a need for severe restructuring for the industries most affected.