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In an updated report on the Slovenian banking system, Standard & Poor’s Ratings Services notes that the system is adapting itself to challenges posed by the upcoming economic and political convergence with the EU in 2004. Slovenia is one of the EU accession frontrunners.

In the past few years, the system has benefited from modernization, consolidation, and foreign participation, retaining its pre-eminent position in the economy, although further reforms are required to make its legal, regulatory, and market framework more effective.

“Slovenian banks are largely prepared for a more difficult operating environment and any potential macroeconomic shocks,” says Standard & Poor’s credit analyst Denis Deripasko. “The profitability of Slovenian banks is going to be challenged by the opening up of the system to foreign competition, as still-high interest margins are gradually adjusted to EU levels.”

The banking system remains profitable, however, and the banks are now seeking to diversify their income flows by offering a broader range of services and products, promoting cross selling, and even venturing into foreign markets, as the financial sector becomes more sophisticated.

The Slovenian banking sector is transforming. Over the past few years, the sector has undergone partial privatization, which has been largely driven by the EU’s policy of equal competition, which disallows state support for banks. In 2002, the state sold 34% of the largest bank in Slovenia , Nova Ljubljanska banka (BBB/Stable/A-2), to Belgium-based KBC Bank N.V. (A+/Negative/A-1). The state still retains more than 27.5% of the banking sector assets, however, as the system remains mostly locally owned. The government is resistant toward the further sale of Slovenian banks to foreign investors.

“Banks are becoming more sophisticated and have been able to maintain good levels of capitalisation and liquidity due to low levels of financial intermediation and a rather protective operational environment,” states Standard & Poor’s credit analyst Magar Kouyoumdjian. “Banks have been implementing stronger credit underwriting and control procedures in anticipation of harsher operational conditions, but asset quality remains untested in an economic downturn.”