December 1 (SeeNews) - Global ratings agency Moody's on Tuesday said it has downgraded the issuer and debt ratings of Croatian government-owned development bank HBOR to Baa3 from A3.
Moody's issued the following press release:
"Moody's Investors Service has downgraded the issuer and debt ratings of the Croatian Bank for Reconstruction and Development (Hrvatska banka za obnovu i razvitak -- HBOR) to Baa3 from A3. The outlook on the ratings is now stable.
Under Moody's rating methodology for non-bank financial government-related issuers (GRIs), HBOR's ratings are based on the following combination of inputs:
- Croatia's Baa3 local currency bond rating
- HBOR's Baseline Credit Assessment (BCA) of 11 (on a scale of 1 to 21, where 1 represents the lowest credit risk)
- High dependence
- Very high support
Today's downgrades conclude Moody's review of the bank's issuer and senior unsecured debt ratings, initiated on 27 May 2009, which had been prompted by the reassessment of a government's ability to provide support to GRIs. In Moody's view, like most governments, the Croatian authorities are at least as likely to support their banking system as they are to service their own debt, a view that has traditionally led to bank ratings benefiting from significant uplift.
However, Moody's believes a greater weight should be attributed to the government's rating as a measure of public support for GRIs. As a result, the government's debt rating is used as an indication of the ability of a national government to support non-bank financial GRIs, rather than the local currency deposit ceiling, which is the central bank's capacity to provide support. Consequently, systemic support for HBOR is now imputed from the government's Baa3 local currency debt rating. HBOR's issuer and senior unsecured debt ratings now enjoy a one-notch uplift from its BCA up to Croatia's Baa3 local currency sovereign bond rating.
HBOR's BCA is now comfortably positioned at 11 as Moody's believes that, with pressure on the kuna exchange rate having abated in recent months (despite Croatia's enduring external vulnerabilities) and despite credit conditions in the system having weakened, the bank's strong capitalisation enables it to absorb a level of stress beyond Moody's expected loss assumptions. The bank's BCA is also supported by its robust efficiency ratios and defendable niche as Croatia's sole development bank but is constrained by its revenue reliance on interest income, moderate asset quality (and material single-party and industry concentrations to the domestic financial sector -- HBOR assumes domestic financial institution credit risk through its programs of on-lending via commercial banks) and dependence on market funding.
Moody's previous rating action on HBOR was on 27 May 2009, when it placed its issuer and senior unsecured debt ratings on review for a possible downgrade.
The principal methodologies used in rating HBOR are (i) "Application of Joint Default Analysis to Government-Related Issuers" (April 2005); and (ii) "Revised Methodology for Government-Related Non-Bank Financial Institutions" (August 2006), which can be found at www.moodys.com in the Credit Policy & Methodologies directory, in the Ratings Methodologies subdirectory. Other methodologies and factors that may have been considered in the process of rating the bank can also be found in the Credit Policy & Methodologies directory.
Headquartered in Zagreb, HBOR reported total assets of HRK19.6 billion (EUR2.7 billion) as of June 2009."