November 11 (SeeNews) - Fitch Ratings said it placed Slovenia-based Gorenjska Banka's long-term Issuer Default Rating (IDR) of BB- and Viability Rating (VR) of bb- on Rating Watch Evolving (RWE).
"The rating actions follow the announcement on November 3 that Gorenjska Banka, together with its parent AIK Banka a.d. and Agri Cyprus Europe Ltd, is a party to a sale and purchase agreement signed with Sberbank Europe AG (SBEU) for the purchase of certain of SBEU's Central and Eastern Europe subsidiaries, including Slovenia-based Sberbank banka d.d (SBSI)," Fitch said in a statement on Wednesday.
The RWE reflects uncertainty around the impact of this transaction on Gorenjska Banka's credit profile given limited information available on the structure of the transaction, Fitch said.
"In Fitch's view, it is reasonable to expect that Gorenjska Banka may be directly involved in purchasing SBEU's Slovenian subsidiary with a prospect for the future merger of these institutions. The potential acquisition of SBSI would be material for Gorenjska Banka given SEBI's relatively large size," the agency noted.
The ratings agency also said in the statement:
"Fitch will review the RWE once additional details become available on the transaction structure that will enable the agency to formulate an opinion about the likely direction of the ratings. If Gorenjska Banka indeed purchases SBSI, Fitch would resolve the RWE upon the completion of the transaction and the effective transfer of ownership.
KEY RATING DRIVERS
IDRs and VR
Gorenjska Banka's IDRs are driven by its standalone financial strength, as expressed by its VR. The RWE reflects uncertainty around the impact of the transaction on Gorenjska Banka's credit profile if the bank acquires SBSI. In our view, the acquisition of SBSI would be positive for Gorenjska Banka's business profile as it would almost double its market share to about 9%, creating the third-largest bank in Slovenia, as well as improving its geographical coverage of the country and foothold in lending to households and SMEs.
Fitch would also consider the extent to which these benefits could be offset by potential pressures on Gorenjska Banka's capitalisation, given SBSI's relatively large size (SBSI's risk-weighted assets were about EUR1 billion, compared with about EUR1.2 billion at Gorenjska Banka at end-2020). A possible increase in earnings volatility and the uncertain funding impact given potential instability in SBSI's deposit base could also affect our view of the transaction.
SR
The SR of '5' reflects Fitch's opinion that support from AIK, while possible, cannot be relied on. This reflects Gorenjska Banka's large size relative to AIK and our assessment that AIK's credit quality could limit the ability of the parent to provide support, given its exposure to Serbia (BB+/Stable), whose operating environment we assess at 'bb-'.
At the same time, we do not expect significant near-term contagion risks from AIK for Gorenjska Banka. This is based on AIK's reasonable reported financial metrics, limited reliance of the subsidiary on funding from AIK and our view that the Slovenian regulator is sufficiently strong to prevent upstreaming of capital or liquidity from Gorenjska Banka to AIK to the extent it could put significant pressure on Gorenjska Banka's credit profile.
RATING SENSITIVITIES
IDRs and VR
Factors that could, individually or collectively, lead to positive rating action/upgrade:
-An upgrade would require a significant strengthening of the bank's franchise and overall business profile resulting from the transaction, while maintaining solid capital buffers, and profitability and asset-quality metrics close to current levels.
Factors that could, individually or collectively, lead to negative rating action/downgrade:
-Upon the resolution of the Rating Watch, Gorenjska Banka's ratings will be downgraded if Fitch concludes that the benefits of stronger business profile are more than offset by weakening capitalisation, in particular if the buffers above the minimum regulatory requirements for common equity Tier 1 ratio decrease substantially.
SR
Factors that could, individually or collectively, lead to positive rating action/upgrade:
-An upgrade is unlikely, as it would require a material reduction in Gorenjska Banka's size relative to AIK and a material improvement of our assessment of AIK's credit quality.
Factors that could, individually or collectively, lead to negative rating action/downgrade:
-A downgrade of Gorenjska Banka's SR is not possible, given it is currently the lowest SR on our scale.
BEST/WORST CASE RATING SCENARIO
International scale credit ratings of Financial Institutions and Covered Bond issuers have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of three notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of four notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from 'AAA' to 'D'. Best- and worst-case scenario credit ratings are based on historical performance. For more information about the methodology used to determine sector-specific best- and worst-case scenario credit ratings, visit https://www.fitchratings.com/site/re/10111579
REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING
The principal sources of information used in the analysis are described in the Applicable Criteria.
ESG CONSIDERATIONS
Gorenjska Banka has an ESG Relevance Score of '4' for governance structure, reflecting board independence issues given sizeable direct and indirect related-party exposures with parent AIK. This has a moderately negative impact on the credit profile and is relevant to the rating in conjunction with other factors."
Gorenjska Banka d.d. is among the biggest banks in SEE. You can download our SEE Top 100 ranking
here or subscribe to our free Top 100 newsletter
here