Business
-
Ljubljana bourse: Touching new lows
-
-
Financial market
What goes up ...
10.10.2008
The SBI 20 index, tracking 20 leading companies listed on the Ljubljana Stock Exchange (LJSE), has lost nearly half of its value since it peaked in August last year. The stock market boom that started in earnest in March 2007, two months after Slovenia adopted the euro, has now definitely turned to bust.
For more than two years, Slovenia’s economy has grown vigorously. Strong external demand has filled the order books of the country’s leading exporters, which have posted record profits. Turning many a Slovenian town into a construction site, the developers have poured money in commercial and residential real-estate, allowing the builders to enjoy an unprecedented bonanza.
But as exports and investment, the two engines of Slovenian economic growth, slow down, analysts are taking a harder look at the economy’s prospects. Growth is forecasted at 4.8 percent for 2008, down from a record 6.8 percent last year. With the stock market teetering and banks scrambling for capital, it seems that the fallout from the US financial crisis is hurting both the financial and real sectors of the economy.
Perils of cheap money
Only a few months ago, money was still cheap and loans were easy to come by. While firms used the funds to invest in equipment and expand production facilities to keep up with the rising demand, some individual investors chose to put their money in stocks. Many more turned to the real-estate market, taking advantage of the lax credit standards and no-deposit mortgages offered by some banks. Not to be outdone, managers of leading Slovenian companies took out loans to buy out their companies, with banks only too happy to accept those same companies’ shares as collateral.
Of houses and blue chips
Judging by the anecdotal evidence from various quarters of the economy, borrowers have taken on too much debt and now have troubles servicing their loans and meeting margin calls. In the Primorska and Gorenjska regions, where Slovenians have been buying holiday homes to enjoy either the sea or the mountains, many houses have been thrown on the market. The lack of buyers and the increasing number of foreclosures are putting downward pressure on prices.
Ljubljana’s housing market, the country’s hottest, is also cooling down, not only because many new units have been added to the office and housing stocks in the course of the construction boom, but also because the credit is getting scarcer.
However, it is not only the real-estate developers and newly minted homeowners who could force the banks to write down part of their loans. Steep declines in the share prices of Slovenian blue chips, which often serve as collateral for buyout loans, have put the managers involved in MBOs in a corner. Trying to raise cash to meet the margin calls, they are selling stocks into a falling market. Conversely, the slowing economy will make it much harder to repay the loans from future profits.
The big squeeze
Faced with an almost certain increase in the number of defaults across the economy, banks are signalling that the lending spree is over. Interest rates are going up, maturities of loans are being shortened and lending standards tightened. Following the advice of Banka Slovenije, the Slovenian central bank, banks have all but stopped accepting shares as collateral. Credit growth peaked at the end of last year. In July, it fell below 30 percent for the first time since April 2007.
Despite souring loans, it is unlikely that Slovenian banks will find themselves in such dire straits as some of their European counterparts. Securitization has never taken off in Slovenia which means that loans stay on banks’ balance sheets until maturity. Bankers thus have an incentive to keep a closer eye on the ability of borrowers to repay the loans. Most importantly, Slovenian banks are much less dependent on volatile wholesale markets for funding, as they finance their operations primarily with deposits.
The periodical seizing up of interbank markets testifies to the fact that banks are now wary of lending to each other, since none of them knows what toxic assets might be lurking on the others’ balance sheets. If leverage ratios are any indication, the two leading Slovenian banks, the state-owned NLB and NKBM, should be in a better position to weather the financial storm than the biggest names in the industry (see chart).
When dubious assets’ values are marked to market, equity of highly-leveraged institutions can be quickly wiped out. Observers say that Slovenian banks do not have much exposure to the US financial market, making their insolvency a remote possibility. Just to be on the safe side, the government injected EUR 300m in NLB in June and is involved in raising EUR 100m of fresh capital for NKBM. Both banks’ capital adequacy ratios are comfortably above the regulatory limit of eight percent. Sometimes it pays to have the government as your majority shareholder.
Free falling
If the country’s banks look solid, the same cannot be said of the stock market. The jittery nerves of investors have sent the numbers tumbling, with NKBM dropping below its IPO price of EUR 27. Other stocks have not been spared either. Luka Flere, senior portfolio manager at KD Funds, Slovenia’s biggest fund manager, thinks this reflects a broader trend of risk aversion.
“The willingness to take risks changed significantly in the last year, which is reflected in selling riskier asset classes and investment regions. Sentiments on the market changed as well and all that results in the situation we see on the markets,” he explained.
Flere sees nothing exceptional in the behaviour of the SBI 20 index that tracks leading companies listed on Ljubljana Stock Exchange (LJSE). “It is not only the SBI 20 that has fallen; the magnitude of the decline is not disproportionate when compared to other markets in the region or even globally,” he said. Despite the stock market rout, however, Jožko Peterlin, head of fund management at Ilirika, a broker and fund manager, points out that price-to-earnings (P/E) ratios of stocks on LJSE remain above those observed on other stock exchanges in the region.
The stock market boom in 2006 and 2007 was fuelled by expectations of takeover premiums, either from sales of state-owned companies or MBOs, explained Peterlin. Exceptionally good business results of Slovenian blue chips also encouraged investors to plough the money in their stocks. But with the economy souring and investors rethinking their exposure to clearly overvalued assets, such times are not likely to return any time soon.