ZAGREB (Croatia), September 26 (SeeNews) - S&P Global Ratings said it has affirmed its 'BBB-/A-3' ratings on Croatia's development bank Hrvatska Banka za Obnovu i Razvitak (HBOR), as it believes the state-owned bank benefits from an almost certain likelihood of extraordinary government support.
The ratings outlook remains stable, S&P said in a statement late on Wednesday.
The agency said its ratings on HBOR have been equalised with Croatia's souvereign rating since in the event of financial distress, the government in Zagreb is almost certain to provide timely and sufficient support to the bank.
Here is what else S&P said in its statement:
"We base our assessment of the likelihood of support on our view of HBOR'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, for example with a focus on small and medium size enterprises (SMEs). 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 president of the supervisory board is the Minister of Finance, while the Minister of the Economy, Entrepreneurship, and Trade serves as the deputy president of the board. In addition, the supervisory board includes the ministers of Construction and Physical Planning, Regional Development and EU Funds, Agriculture, Tourism, as well as the Chairman of the Croatian Chamber of Economy, Chairman of the Finance and Central Budget Committee of the Croatian Parliament, and two members of the Croatian Parliament. Lastly, the government is continuing its capital injections, with the stated goal of HBOR reaching total capital of Croatian kuna (HRK) 7 billion (roughly €950 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, both directly and through commercial banks and leasing companies. 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 also implements its loan programs in cooperation with commercial banks using a risk-sharing model.
We think that HBOR will continue to focus on SMEs, on key sectors such as tourism and agriculture and on projects that utilize EU funds, where Croatia could benefit from an increase in absorption of available funding. Exports are another focus for HBOR, due to their significance for the small, open Croatian economy.
HBOR's gross loan portfolio has stabilized in recent years at slightly above a sizable HRK26 billion (7% of GDP). The bank's loan portfolio has been shifting toward direct lending in recent years (now accounts for about 60%) in line with the bank's countercyclical role. This trend will likely gradually reverse as the Croatian economy continues to recover and commercial banks' lending appetites return. Moreover, while the number of newly approved loans in 2017-2018 was higher than past years, the amount committed decreased slightly compared with 2015, indicating a continued focus on small and midsize enterprises (SMEs).
HBOR's loan exposures have been changing over the past seven years from short-term working capital loans to longer term, new investment projects. In 2018, for example, 86% of approved funds were for capital investments and 14% for working capital needs. HBOR has placed particular emphasis on new loans that target start-up businesses and SMEs, to support economic growth. HBOR's higher risk appetite may continue to pose some risk to asset quality. NPLs are elevated at slightly below 20% at year-end 2018 but we view this from the perspective of HBOR's development role and not-for-profit mandate. HBOR's exposure to the struggling Croatian retail company Agrokor and the related provisioning put pressure on the institution's profit in 2017. At the same time, however, these loans are secured by collateral. HBOR's exposure to the struggling Uljanik shipyards benefit largely from sovereign guarantees for Uljanik. Due to the drop in losses from impairments and provisions (among other factors driven by the switch to IFRS 9), HBOR's profit recovered by over 25%.
HBOR's role in facilitating EU funds absorption has been crucial, especially for SMEs. In fact, HBOR has sharpened its focus on SMEs, which account for almost half of the approved loans since 1992 although only 17% in terms of volume. 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 2018, the Croatian government injected HRK50 million into HBOR, increasing the total amount of capital contributed by the state to HRK6.633 billion, or 66% of HBOR's total equity at year-end 2018. The Croatian government is planning a further HRK367 million capital injection over the next few years at roughly the same pace as last year.
The bank has a relatively stable track record of revenue generation and profitability, which supports internal capital generation. HBOR continues to use any profits to bolster its reserves. HBOR's capital adequacy ratio was 57% in 2018, well above the minimum 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 growing and changing loan book portfolio. The bank also exhibits significant, although reduced, single-name concentrations. It continues to rely on concentrated wholesale funding, especially from multilateral institutions. At the same time, it benefits from a sizable liquid asset portfolio that has grown to some 12% of assets over the past few years and an unconditional, irrevocable, and at-first-demand guarantee from the Republic of Croatia, which is embedded in law.
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 and we do not consider government support would be subject to transition risk.
The stable outlook on HBOR reflects that on Croatia. Future rating actions on the bank, positive or negative, will likely follow those on the sovereign.
Beyond any sovereign rating action, we could lower the ratings on HBOR over the next 24 months if we revised our view of the likelihood of sufficient and timely extraordinary support from the state, for example if we considered that the bank's role for, or link to, the Croatian government had weakened."