December 20 (SeeNews) - Standard & Poor's said it has revised its outlook on Croatian state-owned development bank, Hrvatska banka za obnovu i razvitak (HBOR) to stable from negative, while at the same time affirming the bank's BB/B long- and short-term issuer credit ratings.
This follows similar action on Croatia on December 16, 2016, when S&P announced it has revised its outlook on the Croatian sovereign rating from negative to stable.
"We equalize our ratings on HBOR with our ratings on Croatia. In our view, the sovereign is almost certain to provide timely and sufficient extraordinary support to HBOR in the event of financial distress. We do not consider the almost certain likelihood of support to be subject to transition risk", the ratings agency said in a statement late on Monday.
S&P also noted:
"We base our assessment of the likelihood of support on our view of the bank's:
- Critical public policy role in implementing the government's economic, social, and political policy--namely, the sustainable development of the Croatian economy and the promotion of exports. The bank's role has widened since its formation and has evolved alongside the government's strategic goals for the country's social and economic development. Since 2015, HBOR has officially been in charge of coordinating the implementation of the investment plan for Europe in cooperation with the European Investment Bank and the European Investment Fund; and
- Integral link with Croatia, demonstrated by the state's 100% ownership, regular oversight, and injections of capital. HBOR benefits from a public policy mandate and strong government support. Croatia guarantees all of HBOR's obligations unconditionally, irrevocably, and on first demand, without issuing a separate guarantee instrument as stipulated by the HBOR Act. The government is closely involved in defining HBOR's strategy; the supervisory board includes the ministers of finance and economy who serve as president and vice president of the board, as well as the ministers of regional development and EU funds, agriculture, tourism, and entrepreneurship and crafts. Lastly, the government is continuing its capital injections, with the stated goal of HBOR reaching total capital of Croatian kuna (HRK) 7 billion (roughly €930 million) over the next several years.
Established in June 1992, HBOR was tasked with financing the reconstruction and development of the Croatian economy. HBOR lends to both the public and private sectors, either directly or through commercial banks. These banks lend HBOR's funds on to the ultimate borrowers, who benefit from HBOR's lower funding cost while still providing subsidized loans to Croatian corporations.
HBOR's creditworthiness is linked to that of the sovereign. We do not assess a stand-alone credit profile for HBOR because we view the likelihood of extraordinary government support for the bank as almost certain. However, we estimate that the bank's underlying credit quality, absent extraordinary support, is in the 'bb' category. This combines our view of the bank's strong capitalization and the sustainability of its business model as a government-owned development bank and export credit agency and, as such, we do not consider government support to be subject to transition risk.
Positively, HBOR has a relatively stable track record of revenue generation and profitability, which supports internal capital generation. HBOR's capital adequacy ratio stood at over 73% in December 2015, well above the minimum capital requirement for Croatian banks. This is set against a tougher operating environment--in which the bank is exposed to the economic cycle and is susceptible to higher-than-average credit losses--due to a fast-growing and changing loan book portfolio. The bank also exhibits significant, although reduced, single-name concentrations.
As a result of commercial banks' reduced willingness to lend to the private sector, HBOR's share of direct new lending increased to 57% in 2015 from 37% the year before. In turn, HBOR's exposure to the Croatian banking system through loans that are onlent, primarily to small and midsize enterprises (SMEs), has reduced. We understand that this trend will reverse as the economy continues to recover and commercial banks' appetite for lending increases. The bank continues to rely on concentrated wholesale funding, especially from multilateral institutions. At the same time, it benefits from a sizable liquid asset portfolio and an unconditional, irrevocable, and at-first-demand guarantee from the Republic of Croatia, which is embedded in law.
Of HBOR's total loans in 2015, 39% were disbursed via other banks, compared with 63% in 2014 and over 88% in 2009. In addition, another 4% were disbursed through leasing companies, which is a new development. Despite this trend, the bank still intends to increase its direct exposure to clients through risk-sharing models with banks, and meet increasing demand for direct loans from clients. Furthermore, HBOR's loan exposures have been changing over the past five years from short-term working capital loans toward longer-term, new investment projects. In 2015, 82% of approved funds were for capital investments and 18% for working capital needs. HBOR has placed particular emphasis on new loans that target companies emerging from pre-bankruptcy settlement proceedings, as well as start-up businesses, to support growth in the economy. We therefore expect that HBOR's higher risk appetite may result in some deterioration in asset quality over the next 12 to 18 months.
Furthermore, HBOR's role in facilitating EU funds absorption has been crucial, especially for SMEs. In fact, HBOR has significantly intensified its role in funding SMEs. In 2015, 94% of the loans HBOR approved were to SMEs, increasing the bank's lending to this sector to 41% of its loan book. In light of the government's economic agenda, we believe that HBOR will continue to play a vital role, as demonstrated by the state's continued capital injections and growth in new lending. In 2015, the Croatian government injected HRK32.9 million in HBOR, increasing the total amount of capital contributed by the stateto HRK6.5 billion, or 67% of total equity at year-end 2015. The Croatian government is planning a further HRK500 million capital injection over the next few years at roughly the same pace as last year. 2015 was also marked by a hike in direct lending, as the share of directly approved new loans increased to 57% from an average of 34% over 2010-2014.
The stable outlook on HBOR reflects that on Croatia. We believe that HBOR's integral link with and critical role for the Croatian government's economic development plans and policies will remain unchanged. Any downward revision in our assessment of the bank's relationship with the government could lead us to consider lowering the ratings on HBOR. In addition, any upgrade or downgrade of Croatia will result in a similar action on HBOR."