MOODY'S ASSIGNS RATINGS TO ZAGREBACKA BANKA FOR LONG- AND SHORT-TERM DEPOSITS AT Ba1/Not-Prime, SENIOR DEBT AT Ba1, AND BANK FINANCIAL STRENGTH AT D
Limassol, 04-08-97 -- Moody's Investors Service announced today that it has assigned first-time ratings to Zagrebacka banka d.d. (ZB) for long- and short-term deposits at Ba1/Not-Prime, and Bank Financial Strength (BFSR) at D. A rating of Ba1 was assigned to the bank's prospective Eurobond issue.
Deposit ratings are opinions of an institution's overall credit risk. In addition to bank-specific elements, they reflect external support factors and transfer risk, and are constrained by the home-country's ceiling for foreign currency bank deposits. BFSRs, however, are Moody's opinion of an institution's intrinsic safety and soundness on a stand alone basis, and, as such, exclude ownership and external support considerations. Moody's BFSRs, are not constrained by a country ceiling but do take into account the bank's domestic operating environment.
ZB's ratings reflect its strong business franchise and its leading position in the market. ZB is the largest deposit money bank in Croatia and accounts for around a quarter of total banking assets. It has a well-established corporate business and serves many good-quality private companies and public sector entities. Recently, ZB has been developing and expanding its retail banking business, and, supported by its Split-based subsidiary bank, Pomorska banka, now has the broadest retail customer base and a large network of branches and ATMs. If its retail business continues to grow according to plan, ZB could become a dominant force in this market sector.
ZB is the only large bank in Croatia that has not joined the government's rehabilitation program. Because of its limited exposure to the war-effected parts of Croatia, the 1991-1995 war had relatively little direct impact on ZB's portfolio quality. Nonetheless, the bank still suffered from a high level of problem loans as a result of the decline in tourism and the general economic deterioration. In addition to building up loan loss reserves against its problem loans, ZB engaged in debt-for-equity swaps and improved its prospects for recovering funds. Lending activity now favors the retail sector and the bank is taking a cautious approach to corporate lending because, due to difficult economic conditions, good lending opportunities are scarce.
Moody's says that liquidity remains a concern over the medium term, even though liquidity squeezes in April 1996, have led the bank to keep higher levels of liquid assets. Despite improved liquidity in the market, the bank's capacity to change its balance sheet profile and to manage liquidity are constrained by its high level of holdings of illiquid, long-term government securities--mainly given in replacement for inherited uncollectible receivables. Also, the limited availability of hedging instruments in the market and lack of transparency of ZAP - the Croatian clearing agency for local currency business payments - makes the day-to-day liquidity management more difficult.
Despite the prevailing wide interest margins, the bank's profits remain under pressure. However, efforts to broaden the earnings base, coupled with the strict cost cutting measures that are being implemented, should gradually strengthen the bank's underlying profitability.
In the few years since the stabilization of the political situation in, and around Croatia, the bank has made strong progress by developing its systems and adopting a market-oriented approach. However, there is still room for further improvement. Efforts continue to improve its operating infrastructure, while the twinning program with Allied Irish Bank, should accelerate ZB's pace of transition. ZB's broad base of customers places it in a strong position to capitalize on Croatia's recovery and the expected economic growth. However, the bank's performance and future prospects will be constrained by challenges arising from the developing operating environment and the transitory state of the economy.
ZB is the largest privately-owned bank, with foreign institutional shareholders owning approximately a quarter of its share capital. Despite the diversified ownership base, Moody's believes that, ZB is likely to benefit from state support if it was faced with a stress situation, because of the bank's importance in the market. Nonetheless, the form or timeliness of support cannot be predicted given the market's short track record and the lack of specific assurances.
With total group assets of HRK 20.3bn ($3.8bn) at end-1996, Zagrebacka banka is headquartered in Zagreb.
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