October 30 (SeeNews) - Moody's Investors Service has assigned a Baa3 local currency deposit rating to the Croatian unit of Raiffeisenbank Austria (RBA), with a positive outlook, it said.
Moody's also assigned a foreign currency deposit rating of Ba3, a Baseline Credit Assessment (BCA) of ba2, an adjusted BCA of ba1, Counterparty Risk Ratings of Baa3/P-3, and Counterparty Risk Assessment (CR Assessment) of Baa3 to the bank, it said in a statement on Tuesday.
RBA's BCA reflects its stable funding, high liquidity and strong capital buffers, but also its high asset risks and potential litigation costs. The local currency deposit rating also incorporates one notch of affiliate support uplift from its parent bank, Austria's Raiffeisen Bank International AG, resulting in an Adjusted BCA of ba1, Moody's said.
Moody's also said in its statement:
"RATINGS RATIONALE
BASELINE CREDIT ASSESSMENT (BCA)
According to Moody's, RBA's ba2 BCA reflects its stable funding structure, good liquidity buffers and strong capitalisation, partly offset by its high asset risks and potential litigation costs. More specifically, the bank is a deposit funded institution, with customer deposits accounting for 75% of total assets as of December 2018, with minimal reliance on more confidence-sensitive market funding. The bank also maintains high liquidity buffers, with cash and interbank balances accounting for 24.9% of total assets. RBA's capital buffers are also high and can absorb substantial unexpected credit losses, with the Moody's-adjusted 2018 tangible common equity-to risk-weighted assets ratio at 16.6%. RBA's profitability is moderate, with a 2018 return on tangible assets of 0.8%, affected by a relatively high cost base, declining margins, still elevated provisioning requirements and low balance sheet growth.
The rating agency also notes that the bank is faced with high asset risks, which translate into higher-than-similarly-rated peers non-performing loans (NPLs), which account for 8.4% of gross loans as at December 2018. Moody's acknowledges however, that NPLs have been declining, a trend that it expects will continue, supported by on-going NPL recoveries, write-offs and sales, as the operating and macro conditions in Croatia have been resilient.
RBA, along with other Croatian banks, is faced with rising legal risks. These relate to a recent Croatian Supreme Court decision, which ruled that the Swiss Franc Foreign exchange (FX) clauses, included in the contracts of consumers that borrowed in Swiss Francs, are null and void. The decision allows consumers who borrowed in Swiss francs and suffered losses as a result of the currency's depreciation to individually sue banks for compensation. The monetary impact on RBA is difficult to establish, as it will depend on a number of variables, including the number of consumers that will sue the bank, the vast majority of which have already repaid their loans. Moody's expects the impact to be material, but manageable, given the bank's strong capital buffers.
ADJUSTED BCA (AFFILIATE SUPPORT)
The bank's ba1 Adjusted BCA incorporates one notch of uplift owing to affiliate support resulting from the rating agency's assumption of a high likelihood of parental support in case of need from RBI, the Austrian parent of RBA. The high likelihood of support reflects: (1) RBI's full ownership of RBA, (2) the high degree of strategic alignment between the bank and the group, and (3) the very high brand association between the two.
LOSS GIVEN FAILURE ANALYSIS
RBA is subject to the EU Bank Recovery and Resolution Directive (BRRD), which Moody's considers to be an Operational Resolution Regime, and thereby the rating agency's advanced LGF analysis is applied. The bank's Baa3 long-term local currency deposit rating is based on RBA's ba1 adjusted BCA and incorporates one notch of rating uplift following the application of Moody's Advanced LGF. Although Moody's LGF analysis indicates a "very low" loss-given-failure for deposits, a scenario that would normally translate to two notches of uplift, the local currency deposit rating is capped at Baa3 or two notches above the government rating, as prescribed by Moody's Banks methodology.
POSITIVE OUTLOOK
The positive outlook on RBA's long-term deposit rating is in line with the sovereign rating outlook, and reflects the fact that RBA's ratings are currently constrained by the government rating.
WHAT COULD MOVE THE RATING UP/DOWN
An upgrade of RBA's local currency deposit rating could be prompted by an upgrade of the sovereign rating, as it is currently constrained at two notches above the government rating, as per Moody's Banks methodology.
There is currently limited downside pressures on the bank's ratings, which could nonetheless be triggered by a significant deterioration in the operating environment, also leading to a deterioration in RBA's asset quality and profitability metrics, or by higher than expected litigation costs relating to the recent Supreme Court ruling on the Swiss Franc FX clause."
Raiffeisenbank Austria 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