January 18 (SeeNews) - Fitch Ratings said on Thursday it has upgraded Zagrebacka Banka d.d.'s (ZABA) viability rating (VR) to 'bb+' from 'bb', while affirming its long-term issuer default rating (IDR) at 'BBB-', with a stable outlook.
Fitch has also affirmed ZABA's short-term IDR at 'F3' and support rating (SR) at '2', it said in a statement.
The upgrade of the bank's VR follows Fitch's upgrade of the long-term IDR of the Croatian sovereign to 'BB+' from 'BB' last week.
Fitch also said in the statement:
"KEY RATING DRIVERS
VR
The upgrade of ZABA's VR to 'bb+' from 'bb' is driven by what Fitch assesses to be an improvement of Croatia's operating environment and, in particular, of the sovereign credit risk profile. Fitch sees a high correlation between the sovereign's and the bank's credit profiles, in particular given ZABA's high direct exposure to the sovereign.
The VR continues to factor in the bank's large, albeit declining, volume of impaired loans and volatile through-the-cycle performance. The rating is underpinned by ZABA's sizeable capital buffers and potential capital support from the parent, the bank's comfortable funding and liquidity position and leading domestic market franchise.
For Fitch's more detailed view on ZABA's VR drivers, see 'Fitch Affirms Zagrebacka Banka at 'BBB-'; Outlook Stable' dated 20 December 2017 at www.fitchratings.com.
IDRS and SR
The affirmation of ZABA's IDRs and SR reflects Fitch's view of a high probability that the bank would be supported, if required, by its parent, UniCredit S.p.A. (BBB/Stable/bbb). The Stable Outlook on ZABA's IDR reflects that on the parent.
Fitch believes that UniCredit has a strong propensity to support ZABA as the Croatian subsidiary is based in the CEE region, which is strategically important for UniCredit. This is further underpinned by ZABA's close operational integration with the parent group and potential reputational damage for UniCredit from a subsidiary default. ZABA's relatively small size (about 2% of UniCredit's consolidated assets) means that potential support should be manageable for the parent.
RATING SENSITIVITIES
VR
An upgrade of the VR would likely require both: i) an upward revision of Fitch's assessment of the operating environment in Croatia, including, but not limited to, a sovereign rating upgrade; and ii) a material reduction of ZABA's legacy bad debts and a sustainable improvement in the bank's profitability.
A VR downgrade could be driven by a sovereign rating downgrade or a significant weakening of the bank's capitalisation, as a result of asset quality or profitability deterioration.
IDRS, SR
ZABA's IDRs and SR are sensitive to our view of the ability and propensity of UniCredit to provide support. An upgrade or downgrade of the parent would likely result in a similar action on the subsidiary. We do not expect the parent's support propensity to weaken."