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Rating Action:

Moody's affirms A2/Prime-1 deposit ratings of Ceska Sporitelna, a.s.

11 Sep 2014

Outlook remains negative

London, 11 September 2014 -- Moody's Investors Service has today affirmed the A2/Prime-1 long- and short-term deposit ratings of Ceska Sporitelna, a.s. (Ceska). Moody's also affirmed the bank's standalone bank financial strength rating (BFSR) of C-, which is equivalent to a baseline credit assessment (BCA) of baa1. The long-term deposit ratings have a negative outlook and the BFSR has a stable outlook.

This rating action follows the downgrade of the long-term senior unsecured debt and deposit ratings of Ceska's 98.97% shareholder, Erste Group Bank AG (Erste: deposits Baa2 negative/Prime-2; BFSR D+ stable/BCA ba1) -- see press release "Moody's downgrades Erste Group Bank AG to Baa2 from Baa1;outlook negative", published 5 September 2014 (https://www.moodys.com/research/PR_306666).

RATINGS RATIONALE

LONG- AND SHORT-TERM DEPOSIT RATINGS

The affirmation of Ceska's A2/Prime-1 long- and short-term deposit ratings is supported by the affirmation of bank's standalone C- BFSR (which is equivalent to a baa1 BCA) and the maintenance of a two-notch uplift to the deposit rating from the BCA. This support uplift is based on Moody's very high expectation of systemic support in case of need, given Ceska's systemic importance as the second-largest bank by total assets in the Czech Republic (A1, stable).

The negative outlook on Ceska's deposit ratings reflects the adoption of the Bank Recovery and Resolution Directive (BRRD) and the Single Resolution Mechanism (SRM) regulation in the EU. The negative outlook reflects Moody's view that -- with the legislation underlying the new resolution framework now in place and the explicit inclusion of burden-sharing with unsecured creditors as a means of reducing the public cost of bank resolutions -- the balance of risk for banks' senior unsecured creditors has shifted to the downside. While the rating agency's support assessments are unchanged for now, there is an increased probability that they will be revised downwards to reflect the new framework.

STANDALONE BFSR

The affirmation of Ceska's standalone rating reflects Moody's view that the bank continues to maintain a well established, independent franchise from that of the parent, aided by the bank's domestic deposit funding profile, and its strong operating and regulatory ring-fencing. These considerations support a three notches differential at the BCA level between the parent and the subsidiary - which is one of Moody's highest BCA differentials between a subsidiary and parent in Central and Eastern European countries.

The stable outlook on Ceska's standalone BFSR is in line with the outlook of Erste's standalone BFSR. The outlook captures Ceska's robust financial fundamentals and its strong performance, and Moody's expects this trend to continue on the back of projected positive economic growth into 2015 for the Czech Republic.

The following four factors underpin the three-notch differential between the BCAs of Ceska and Erste:

(1) Ceska has delivered a strong performance during the two consecutive years of 1% GDP contraction in the Czech Republic in 2012 and 2013, despite deterioration in Erste's group performance, with Ceska contributing half of the Erste group's pre-provisioning income. Moody's expects the bank's strong performance to persist, supported by the rating agency's GDP forecast of 1.9% growth for 2014 and 2.5%growth for 2015 for the Czech Republic. This positive GDP trend paves the way for increased banking intermediation for Ceska, thus supporting its profitability and franchise growth.

(2) Ceska reported a moderate dividend payout ratio, representing 56% of unconsolidated profits in 2013 and 49% in 2012. With Ceska's total capital ratio at 18.6% as at year-end 2013, Moody's sees no material risk of the bank's strong capital base being depleted by dividend transfers to the parent. Furthermore, Moody's views favourably that the Czech regulatory authority (the Czech National Bank or CNB) has the right to limit dividend payout ratios if the regulator believes such actions will deplete the capital base of a bank below its tolerance level.

(3) Ceska remains a fully self-funded institution, with a loan-to-deposit ratio of 75% as of H1 2014 and limited non-material exposures to the parent group amounting to 4% of total assets (in the form of loans/placements and financial assets) and 3% of liabilities (in the form of interbank deposits and derivative transactions). Furthermore, intergroup exposures are capped by related-party limits and regulatory oversight.

(4) Ceska's business and customer base are not directly correlated with those of the group, given Ceska's primarily domestic focus and strong presence in the retail banking segment, with market shares reported by the bank of 26% in retail deposits and 24% in retail loans. The strong presence in the granular retail deposit and loan segments supports Moody's view of the resilience of Ceska's franchise in its domestic market and its high independence from that of the parent group.

WHAT COULD MOVE THE RATINGS UP/DOWN

Moody's notes limited upward pressure on Ceska's ratings, given that the ratings are already at the highest level compared to its Czech peer group, and given the three-notch differential at the BCA level between the parent and the subsidiary.

Today's affirmation reflects Moody's view of the high independence of the Czech subsidiary's franchise. However, the rating agency also recognises that further deterioration in the parent's financial fundamentals and downward pressure on the parent ratings could lead to group-wide spillover effects that could ultimately weaken Ceska's franchise strength.

Therefore, notwithstanding the relative independence of the Czech subsidiary at this stage, further significant downward pressure on Erste's ratings could negatively impact Ceska's standalone and long-term ratings. However, given the stable outlook on the parent's ratings, Moody's does not expect such a scenario to materialise in the next 12 months. In addition, any deterioration of Ceska's own financial fundamentals (regardless of parental connections) and any significant depletion of its capital base would exert downward pressure on the bank's standalone ratings.

PRINCIPAL METHODOLOGY

The principal methodology used in this rating was Global Banks published in July 2014. Please see the Credit Policy page on www.moodys.com for a copy of this methodology.

REGULATORY DISCLOSURES

For ratings issued on a program, series or category/class of debt, this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the rating action on the support provider and in relation to each particular rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this rating action, and whose ratings may change as a result of this rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

Arif Bekiroglu
Asst Vice President - Analyst
Financial Institutions Group
Moody's Investors Service Ltd.
One Canada Square
Canary Wharf
London E14 5FA
United Kingdom
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

Yves J Lemay
MD - Banking
Financial Institutions Group
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

Releasing Office:
Moody's Investors Service Ltd.
One Canada Square
Canary Wharf
London E14 5FA
United Kingdom
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

Moody's affirms A2/Prime-1 deposit ratings of Ceska Sporitelna, a.s.
No Related Data.
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