October 3 (SeeNews) - Standard&Poor's upgraded on Tuesday the outlook on Zagrebacka Banka (Zagrebacka) to positive from stable, while at the same time affirming its BB long-term counterparty credit rating on the bank.
The outlook revision mirrors the rating action recently taken on the Republic of Croatia.
"We could raise our 'BB' long-term rating on Zagrebacka by one notch following an upgrade of the sovereign. This is because our current assessment of Zagrebacka's stand-alone credit profile (SACP) is 'bb+' and we cap the rating on Zagrebacka at the sovereign rating level," S&P said in a statement.
"We generally don't rate banks above the sovereign as we consider it highly likely that a domestically focused bank would fail a stress test associated with a sovereign foreign currency default," it explained.
The ratings agency also said:
"We expect that a more favorable economic environment will continue to support domestic banks' asset quality improvement, counterbalancing potential additional losses on their exposure to Agrokor d.d.; Croatia's largest retail conglomerate which is currently under extraordinary administration. In our base-case scenario, we expect an orderly wind down of the troubled corporate and that Agrokor's related losses will remain manageable to the banking industry generally and to Zagrebacka specifically.
So far, Croatian banks have been required by the regulator to apply at least a 50% haircut to Agrokor's old debt, and a 25% haircut to the exposure to Agrokor-related suppliers. No haircut is currently required for the tranche of fresh loans disbursed within the new financing agreement, signed on June 8, 2017.
We also think that an active secondary market of nonperforming assets (NPAs)--with recorded transactions of about Croatian kuna (HRK) 9.4 billion in the past 18 months--along with a more favorable tax environment for write-offs, will help Croatian banks to accelerate the NPA stock work-out. This should contribute to closing the gap with banking systems based in other Central and Eastern European countries such as Romania and Hungary, which are currently more advanced in this process.
Our outlook on Zagrebacka is positive, mirroring that on the Republic of Croatia. The ratings are constrained by the long-term sovereign credit rating on Croatia and we would therefore expect any positive or negative rating action on Croatia to trigger a similar action on the bank, all else being equal, in the next 12 months.
As such, we may raise our 'BB' long-term rating on Zagrebacka over the next 12 months, following a similar action on the sovereign rating, all else being equal.
On the other hand, we may revise the outlook on Zagrebacka back to stable over the same period to reflect a similar action on Croatia.
We could also consider a revision of the outlook to stable if we thought that Agrokor's restructuring process was not taking place in an orderly manner, resulting in disruptive consequences for the banking system generally or Zagrebacka specifically and, at the same time, we concluded that support from the UniCredit group would not be sufficient to offset the expected negative impact from an adverse scenario related to Agrokor's failure."
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