LJUBLJANA (Slovenia), June 26 (SeeNews) - Standard & Poor's has said it raised its long-term issuer credit rating on Slovenia-based SID Bank to 'A+' from 'A', affirming its stable outlook.

At the same time, the 'A-1' short-term issuer credit rating of SID Bank was affirmed, the credit agency said in a statement late on Friday.

"The upgrade follows our similar action on the Republic of Slovenia on June 16, 2017", S&P said.

S&P noted that it bases its view of the likelihood of support on SID Bank's critical role in implementing the government's economic policies, since the lender is Slovenia's flagship development and export promotion bank and was the country's fifth-largest financial institution in 2016. The government uses SID Bank to help achieve its economic policy goals, for instance, through subsidised loan and insurance programmes, S&P said in the statement.

Moreover, the bank is governed on the basis of the Slovene Export and Development Bank Act, a specially designated law, and operates under the coordinated supervision of the Bank of Slovenia, the Ministry of Finance, and the Ministry of Economic Development and Technology. In addition, the bank benefits from an irrevocable state guarantee against all its debt obligations, the credit agency added.

S&P also said in the statement:

"The guarantee is the strongest applied under Slovenian law, and it supports our assumption of an almost certain likelihood of extraordinary government support.

SID Bank uses its shareholder capital and wholesale borrowing to channel financing‐‐over 50% through the commercial banking system‐‐for infrastructure, small and midsize enterprises (SMEs), housing, and other projects in Slovenia that are not sufficiently serviced by the local banking market. In addition, the bank provides financing, insurance, and guarantees for Slovenian investors and exporters. Although SID Bank is not a deposit‐taking institution, in practice, it relies almost completely on long-term funding, in light of sovereign support and multilateral funding sources. SID Bank total assets stood at €2.5 billion at year-end 2016 (about 6% of GDP).

However, the group's assets have been shrinking in recent years, including a 20% drop in 2016. This can be attributed to the economic recovery in Slovenia, as SID bank plays an important role as a countercyclical policy tool. The bank, therefore, expanded its activities in the aftermath of Slovenia's banking crisis until 2012, but has since shrunk its balance sheet. We view this shift in focus as aligned with the economic cycle in Slovenia and we think that the bank would stand ready as a countercyclical crisis intervention tool if needed. On the other hand, we understand that the public policy role in the bank's development business could be evolving over the coming years, as the government and the bank might be looking for other business niches with market gaps, for example SME financing. At the same time, the bank's core function for export support remains unchanged: SID Bank Group's insurance covered 16% of Slovenian exports in 2016, which underpins its importance for the country's highly export-dependent economy with exports amounting to over 80% of the country's GDP.

SID Bank is 100% owned by the government and it is a joint stock company under corporate law. The government determines the composition of the supervisory board, which in turn appoints the management board. In addition, the bank is defined as a financial institution and is therefore under the supervision of the Bank of Slovenia and the securities market agency. SID Bank's relatively large size led European authorities to classify it as a systemically important institution in 2014 (but not in 2015 and 2016). Consequently, SID Bank was part of the European Central Bank's Asset Quality Review in 2014, which estimated SID Bank to have a comfortable capital ratio (common equity tier 1) of 14.45% in an adverse scenario. Marketable debt instruments issued by SID Bank are eligible for the Eurosystem's expanded asset purchase program. In 2015, the Bank of Slovenia identified SID Bank as an "other systemically important bank" under the Slovenian Banking Act.

SID Bank has remained profitable, albeit on a modest scale, with a return on equity of approximately 3% on average over the past five years. This is not surprising, given its public policy mandates, and is comparable with that of other development banks. Small profits have also kept the bank's capital base stable during the same period.

SID Bank's creditworthiness is linked to that of the sovereign. We don't assess a stand-alone credit profile for SID Bank because we view the likelihood of extraordinary government support for the bank as almost certain. However, we estimate that the bank's underlying credit quality, absent extraordinary support, is in the 'bb' category. As such, we consider that the likelihood of government support is not subject to transition risk.

OUTLOOK

The stable outlook on SID Bank reflects that on Slovenia. Any rating actions on the sovereign would result in a corresponding action on SID Bank.

Beyond any sovereign rating action we may take, we could lower the ratings on SID Bank if, in our view, the bank's role for or link with the government had weakened. This could occur if the public policy role were to weaken as a result of shifts in the bank's strategy or business model, or if there were any adverse statutory changes to SID Bank's operating framework."