November 17 (SeeNews) - Standard & Poor's Global Ratings said on Friday it has affirmed its 'BB' long-term issuer credit rating on Croatia's Zagrebacka banka, with a positive outlook.
"The affirmation reflects our view that Zagrebacka's strong franchise in Croatia and good capitalization will continue to underpin the bank's stand-alone creditworthiness," the ratings agency said in a statement.
The positive outlook mirrors that on Croatia and reflects S&P's view that the UniCredit Group will remain supportive of its Croatian subsidiary, it added.
S&P also wrote:
"Specifically, we think that Zagrebacka's long-standing presence in its home market, focused strategy, and stable customer base enable the bank to defend its 30% market share, even in an increasingly competitive environment.
Further, we anticipate that the bank's risk-adjusted capital (RAC) ratio will remain at 7.5%-8.0% over the next 24 months, compared to a 7.5% RAC ratio at end-2016. This is mainly on the back of Zagrebacka's ongoing de-risking process, aimed at reducing its stock of nonperforming assets.
That said, we now have a more negative view of the bank's risk profile. This is because Zagrebacka's single-name concentration--especially toward Agrokor, a troubled counterparty--has increased over the past few months.
Agrokor is Croatia's largest retail conglomerate, with more than 30,000 employees in the region--approximately 2.5% of the country's total employment--and with an estimated contribution to Croatia's GDP of 2.0%-2.5%.
The group has been placed under extraordinary administration in April this year, following the outbreak of a severe liquidity crisis. The company is now under restructuring and has agreed to a new financing deal with a group of creditors, amounting to about EUR1,060 million, in order to ensure the viability of the group.
We understand that Zagrebacka is one of the major domestic contributors to this financing. Despite the fact that we expect an orderly wind-down of the troubled company and that related losses will remain manageable for the domestic banking system, we think that Zagrebacka's involvement in the new financing facility could make the bank more vulnerable than other domestic peers to the outcome of Agrokor's restructuring. Greater exposure to Agrokor has increased the bank's customer loans portfolio's single-name concentration, in our view. As of March 2017, we calculated that the top 20 largest exposures accounted for about 1.03x the bank's total adjusted capital.
Finally, the positive outlook reflects our expectation that the UniCredit Group will provide Zagrebacka with sufficient extraordinary support to offset potential constraints to the bank's stand-alone credit profile, if needed.
Our positive outlook on Zagrebacka mirrors that on Croatia, as we are unlikely to rate the bank above the sovereign. This is because we think it is unlikely that Zagrebacka will continue to fulfil its obligations in a timely manner in the event of a sovereign default, given its domestic concentration.
As such, we may raise our rating over the next 12 months, following a similar action on the sovereign ratings. In such a scenario, we would be able to incorporate uplift for extraordinary support from the parent company.
Conversely, we could consider a revision of the outlook to stable, if we took a similar action on Croatia. We may also revise the outlook to stable if we thought that Zagrebacka's importance within the UniCredit Group had materially diminished."