April 4 (SeeNews) - Standard and Poor's Global Ratings said it has upgraded its long-term issuer credit rating on Croatia's Zagrebacka Banka (ZABA) to ''BBB-" from 'BB+', with negative outlook.
At the same time, S&P also raised its resolution counterparty rating on Zagrebacka Banka to BBB-, the rating agency said in a statement last week.
"The upgrade follows our recent upgrade of Croatia and signifies that we expect ZABA to continue to operate as a strategically important subsidiary within the UniCredit group. Zaba acts as a conduit for the group's corporate and retail activities in Croatia and Bosnia and Herzegovina", it added.
On March 22, S&P raised its long- and short-term foreign and local currency sovereign credit ratings on Croatia to 'BBB-/A-3' from 'BB+/B', with a stable outlook, on improving fiscal metrics.
S&P also said in the statement.
"The upgrade follows our recent upgrade of Croatia and signifies that we expect Zaba to continue to operate as a strategically important subsidiary within the UniCredit group. Zaba acts as a conduit for the group's corporate and retail activities in Croatia and Bosnia and Herzegovina.
With a sovereign rating of 'BBB-', we can factor one additional notch for extraordinary group support into our rating on Zaba. Under our criteria, we could rate the bank three notches above its stand-alone credit profile (SACP) and up to one notch below the rating on its parent company. Its parent UniCredit SpA is rated BBB/Negative/A-2, so our long-term rating on Zaba is now capped at one notch below the one on its parent company. It is also capped at the sovereign rating on Croatia. This is because we think it highly unlikely that UniCredit's support would be sufficient to withstand Croatia defaulting.
We consider that Croatian banks, including Zagrebacka, now face lower industry risk than we were previously anticipated. This because we expect foreign strategic shareholders to remain committed to supporting their Croatian subsidiaries and that Croatian banks will remain profitable, well-capitalized, and well-funded from customer deposits, even if they sustain the current level of credit growth.
Despite recent progress, we anticipate that asset quality will remain a key issue for the Croatian banking sector. As a result, we forecast that credit losses will remain high, at around 100 basis points (bps) per year. Chiefly, we attribute this to banks' recent rapid increase in cash loans, which could generate further losses, particularly if economic conditions were to materially weaken. Net new lending in unsecured cash loans is estimated at above Croatian kuna (HRK) 4 billion (before disposals) in 2018, compared with about HRK3 billion in residential mortgages and HRK3 billion lent to nonfinancial corporations.
In addition, we do not consider that the Croatian private sector has fully recovered from the past recession yet. Private sector indebtedness at the end of 2018 stood at 95% of GDP, one of the highest values among Central and Eastern Europe (CEE) peer countries. We acknowledge that Croatian banks have made significant progress in reducing the nonperforming exposures (NPEs) they originated in the past. At end-2018, the NPE ratio decreased to 9.8%, down from 17.1% at end-2014. That said, banks primarily achieved this reductions through disposals; we have not seen signs of meaningful organic reduction. According to official data from Hrvatska Narodna Banka (HNB, the National Bank of Croatia), banks have sold more than HRK33 billion of NPEs since 2010, of which HRK24 billion were sold between 2015 and the end of 2018.
The negative outlook on Zaba mirrors that on its parent company, UniCredit and incorporates our view that Zaba will remain a strategically important subsidiary of the UniCredit group over the next 12-24 months. It acts as a conduit for the group's retail and corporate activities in Croatia and Bosnia and Herzegovina.
We could lower our long-term rating on Zaba following a similar action on UCG, all else being equal. This could occur if we were to downgrade Italy (BBB/Negative/A-2) and to conclude that UCG would be unlikely to withstand an Italian sovereign default without defaulting. Although unlikely at this stage, we could also downgrade Zaba following a similar action on Croatia, all else being equal. Such a downgrade could occur if we saw a material economic downturn, possibly driven by a significant weakening in the external environment, or higher-than-expected contingent liabilities. We could revise our outlook back to stable following a similar action on UniCredit."
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