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Central Bank: Full Extent of Financial Crisis Only Now Emerging (adds)

Ljubljana, 18 May (STA) - The full extent of the crisis faced by the Slovenian financial system is only now coming to light, Slovenia's central bank, Banka Slovenije, warned as it unveiled its annual financial stability report on Tuesday. The report highlights the heavy dependence on foreign financial sources and loan risks as the main reasons for this.

Slovenian banks are still in the process of restructuring their financial sources after access to foreign sources was limited by the credit crunch, Banka Slovenije report says.

Slovenian banks reduced their liabilities to foreign banks by 20% last year, paying back EUR 3.2bn in loans due. A further EUR 650m was paid back in the first quarter of 2010.

Despite this process, Slovenia continues to be sensitive to lending conditions on international financial markets.

The banks replaced most of the repaid loans abroad with refinancing options within the eurozone and with state deposits, made after the issue of EUR 4bn in state bonds.

Bank deposits rose by EUR 2.1bn in 2009 over the year before, the report points out. The head of the sector for financial stability at the central bank, Tomaz Kosak, warned that these were short-term funds that were not a stable basis for driving an economic upturn.

Banka Slovenije Governor Marko Kranjec meanwhile said the stagnation in loan activity in Slovenia was a result of banks adjusting their balance sheets and companies and households adapting their finances to the economic conditions.

Kranjec highlighted that companies and households were much more cautious in taking decisions on investments. Moreover, banks are also more careful in deciding to give out loans.

According to Banka Slovenije's report, a slow recovery in sectors hit hard by the economic downturn, including construction and finance, is increasing loan risks for banks.

The central bank therefore expects loan portfolios of banks to continue deteriorating. As a result the costs of write-downs and new provisions are expected to remain on par with 2009.

Bad loans increased by 30% last year compared to a year earlier, while write-downs and provisions by banks rose by as much as 78%.

Stanislava Zadravec Caprirolo, a member of the Banka Slovenije Board of Governors, highlighted that the slow recovery in sectors that contributed importantly to growth prior to the crisis was a key to the deteriorating loan portfolio.

The construction and financial sectors are in the midst of extensive restructuring and and will not play the same role in the economy as in the past, she added.

Banks have also been additionally cautious because the share of debt capital to ownership capital in companies stood at 147% last year, which is 42 percentage points above the eurozone average. The highest debt ratios were seen in logistics, construction and real estate sectors.

Despite the current situation, Kranjec maintains that Slovenian banks have sufficient liquidity and capital (capital adequacy stands at 11.6% on average, remaining flat compared to a year earlier). But to improve their operations, they must deal with the current problems, he added.

While there are indications that the economic situation in a number of sectors, especially export-based, was improving, the central bank concludes in its report that the banking system is still relatively sensitive to potential shocks.

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