RZB downgraded to A2, BFSR withdrawn, backed ratings at RBI level
Frankfurt am Main, October 14, 2010 -- Moody's Investors Service has today taken multiple rating actions on entities
within the Raiffeisen Zentralbank Oesterreich Group (the RZB Group).
These actions follow the successful conclusion of the transfer to Raiffeisen
Bank International AG (RBI), formerly Raiffeisen International Bank-Holding
AG, of the spun-off principal business activities and liabilities
of Raiffeisen Zentralbank Oesterreich AG (RZB).
Moody's has today assigned to RBI a long-term debt and deposit
rating of A1, a short-term debt rating of Prime-1,
and a D+ bank financial strength rating (BFSR), mapping into
a baseline credit assessment (BCA) of Baa3. This rating action
affirms the provisional ratings for RBI assigned on 8 October, 2010.
The outlook on the long-term debt and deposit ratings is stable,
and the outlook on the BFSR is positive.
In addition, Moody's has downgraded RZB's long-term
debt and deposit rating to A2 from A1, reflecting the status of
RZB as a bank holding company and the structurally subordinated nature
of its senior obligations relative to the direct obligations of its subsidiaries.
The outlook on the rating is stable. The rating agency has withdrawn
RZB's BFSR at D+ with a positive outlook. The Prime-1
short-term rating was affirmed.
Moody's has also assigned a backed A1 rating with a stable outlook to
RZB's long-term senior unsecured debt, which benefits from
an unconditional and irrevocable guarantee from RBI.
The ratings of the subordinated and hybrid instruments of RZB and RBI
are discussed below.
Moody's will separately review any potential impact on the current ratings
of the subsidiaries of RBI, which are not covered in this press
release. RBI's Aaa rating for obligations that are guaranteed by
the Republic of Austria remained unaffected by today's rating actions.
On 9 October 2010, RZB Group underwent a corporate reorganization
whereby all of RZB's commercial banking activities and most of its liabilities
were transferred to RBI, the stock-quoted holding company
for the group's international activities in Central & Eastern Europe
(CEE) and in the Commonwealth of Independent States (CIS). With
the asset transfer, RZB has raised its previous 72.8%
stake in RBI to 78.5%. RBI now operates as an Austrian-regulated
banking institution. On a pro forma basis, its assets increased
to EUR148 billion, up from EUR78 billion as of June 2010.
RZB will act as the bank holding company and assume supervisory and control
functions over RBI, as well as the role of central bank for the
RZB Group's owners -- namely, the co-operative sector
or Raiffeisenlandesbanks in Austria. With a marginal earnings contribution
from these activities, RZB's earnings will depend almost exclusively
on income streams from RBI. Moody's expects the capital requirements
of RBI's still-expanding franchise in CEE and CIS to weigh on any
potential dividends to RZB.
RZB retains total assets of close to EUR30 billion, down from EUR93
billion according to YE 2009 individual accounts. While most of
its liabilities were moved to RBI -- in particular,
its market funds and customer deposits -- securities of
EUR8 billion will stay with RZB until maturity in 2020, benefiting
from a guarantee by RBI, as reflected in Moody's ratings.
PROVISIONAL RATINGS FOR RBI AFFIRMED
Following the transaction, RBI has effectively assumed all of RZB's
previous businesses, except for the central bank function.
This function makes a marginal contribution to earnings, but is
relevant to the overall group due to the funding provided by the Raiffeisen
sector of EUR16 billion according to unaudited and pro-forma June
2010 financials. Moody's understands that RZB will pass these resources
on to RBI for a stable funding base.
RBI's BFSR of D+ recognises its strong retail and corporate franchises
throughout Austria, CEE and CIS, which provides for good earnings
diversification by geography as well as by business segment. However,
performance depends heavily on the CEE franchise that the group has successfully
established in the region.
According to unaudited pro forma financials as of June 2010, RBI's
capitalisation is adequate for its risk profile, with a Tier 1 ratio
of 9.5%. Moody's further notes that the group performed
well during the economic crisis, and that credit losses recorded
in 2009 and year-to-date were somewhat below the rating
agency's base-case stress expectations. More importantly,
performance was far better than had been indicated in Moody's stress-case
scenario, which supports the BFSR at the current level.
Corporate governance, previously considered a constraint to the
intrinsic strength of the rating, has clearly improved from the
regrouping of RZB Group's major business activities into a stock-quoted
company, thereby reducing the overall complexity of the group.
These strengths are counterbalanced by modest overall profitability after
catering for risk costs and by challenges to asset quality. In
particular, Moody's remains concerned that economic volatility and
uncertainty will persist in some of RBI's core markets, such as
Russia and Ukraine. Given the nature of RBI's sizeable exposure
to the less granular corporate sector, the predictability of expected
losses or write-down requirements remains an issue. However,
the rating agency considers that further loan impairments can be absorbed
at RBI's D+ BFSR level, hence the positive outlook on
RBI's A1 long-term debt and deposit ratings benefit from the support
mechanisms available to members of the Raiffeisen cooperative banking
sector (Kundengarantiegemeinschaft), which has been extended to
RBI in the context of the transaction, but not to its CEE and CIS
subsidiaries. The rating further reflects a high probability of
systemic support, reflecting RBI's sizeable market share in Austria
as well as the Raiffeisen sector's considerable importance to Austria's
banking system. Together, these factors support a five-notch
uplift to RBI's long-term debt and deposit ratings, as well
as the stable outlook.
Moody's has also assigned the rating of A2 on RBI's senior subordinated
debt, one notch below the senior debt and deposit rating.
For banks in Austria, Moody's continues to incorporate systemic
support in its ratings of dated subordinated debt to the same extent as
in its senior debt ratings. This reflects the absence of a resolution
framework in Austria that would allow for the imposition of losses on
dated subordinated creditors outside of a liquidation scenario.
RZB DOWNGRADED TO A2 IN LINE WITH MOODY'S BANK HOLDCO NOTCHING RULES;
The downgrade to A2 from A1 of the long-term debt and deposit rating
of RZB -- RBI's parent company --incorporates
two main elements: (i) the long-term debt and deposit ratings
of RBI of A1; and (ii) the structural subordination of the senior
obligations of RZB regarding the senior unsecured obligations of its major
operating entity RBI, resulting in a one-notch difference
between RZB and RBI. However, Moody's notes the absence of
any meaningful double leverage at the holding-company level and
considers that RBI will be able to continue to generate adequate earnings
that will allow for uninterrupted dividend payments, and therefore
enable RZB to at least meet its payment obligations. The outlook
on RZB's debt and deposit rating follows from the stable outlook
on RBI's long-term rating.
Given that RZB has no meaningful sources of income except from RBI as
its principal asset and in line with Moody's methodology,
the rating agency has decided to withdraw the BFSR of RZB at a level of
D+ with a positive outlook.
RZB'S BACKED RATINGS ALIGNED WITH RBI
RZB's A1 ratings on the backed debt securities of RZB are based on the
unconditional and irrevocable nature of the guarantee and payment undertaking
of RBI, which allows for the A1 ratings assigned to RBI to be passed
through to the eligible securities.
The A2 ratings for RZB's backed subordinated debt after the transaction
reflect the unconditional and irrevocable subordinated payment undertaking
of RBI, which allows for the A2 ratings assigned to RBI to be passed
through to RZB.
Ba1 HYRID RATING ASSIGNED TO RBI, AND PASSED THROUGH TO RZB'S
BACKED JUNIOR SUBORDINATED DEBT
Moody's assigned a Ba1 rating on non-cumulative preferred securities
issued by or transferred to RBI, three notches below the adjusted
BCA, reflecting their deeply subordinated claims in a liquidation
scenario and the non-cumulative coupon-skip mechanism tied
to the breach of a balance-sheet loss trigger.
RZB Finance (Jersey) II Limited (XS0173287862)
RZB Finance (Jersey) III Limited (XS0193631040)
RZB Finance (Jersey) IV Limited (XS0253262025)
Moreover, the rating agency has today affirmed the Ba1 ratings for
junior subordinated debt instruments (Ergaenzungskapital notes),
which are henceforth based on the unconditional and irrevocable guarantee
and payment undertaking of RBI. The latter allows for the Ba1 ratings
assigned to RBI to be passed through to the eligible securities.
Those securities are rated three notches below the adjusted BCA of RBI,
reflecting the debt's junior subordinated claim in liquidation and cumulative
deferral features that are tied to the breach of a net loss trigger.
Raiffeisen Zentralbank Oesterreich AG: Ergaenzungskapital notes
The adjusted BCA is Moody's starting point for rating hybrid securities
and reflects the bank's standalone credit strength, including parental
or cooperative support, if applicable. The adjusted BCA excludes
systemic support expectations. RBI's adjusted BCA stands
WHAT COULD CHANGE THE RATINGS UP OR DOWN
Upward pressure on the D+ BFSR of RBI would result from a further
improvement in RBI's credit metrics, in particular relating
to asset quality, efficiency and capital. Specifically,
upward pressure will arise to the extent that RBI is able to benefit from
a further stabilization and recovery of macroeconomic conditions in the
CEE and CIS, which should translate into improved asset quality
and stronger earnings and capital levels. The bank's long-term
debt and deposit ratings could principally benefit from material,
sustainable improvements in the bank's intrinsic strength.
However, some modest upward rating pressure, as mentioned
above, is not likely to immediately trigger an upgrade of the long-term
ratings in view of the very high support assumptions already factored
into the bank's senior debt and deposit ratings.
Downward pressure on RBI's D+ BFSR could be triggered by (i)
a backdrop in the recovery in CEE or CIS leading to substantial additional
credit charges, beyond levels currently anticipated by Moody's;
(ii) an extended period of weak earnings and hence reduced internal capital
generation; and/or (iii) weakened capitalization and regulatory capital
levels as a result of strong balance sheet growth on the back of continued
expansion in Eastern Europe and/or following an earlier-than-anticipated
repayment of government capital without replacing the same with similar
capital amounts of high quality. The bank's long-term
debt and deposit ratings could possibly suffer from a material,
longer-term weakening in its intrinsic strength, as well
as from (i) a deterioration in the commercial and financial profile of
the Raiffeisen sector in Austria overall and the lower potential support
this might imply for RBI, and (ii) adverse changes in the systemic
support assumptions that are currently factored into RBI's ratings.
However, Moody's does not consider this likely at present.
An upgrade of RZB's long-term ratings could result from an
upgrade of RBI's long-term ratings. Alternatively,
upward pressure on RZB's rating only could result from a higher
degree of diversification of revenues and earnings, provided that
the cash flows are (i) significant and recurrent and (ii) derived from
businesses that are lowly correlated with those of the main operating
bank RBI, and that (iii) this change does not result in in a doubling
of leverage or otherwise increase the RZB's risk profile.
Equally, a downgrade of RZB's long-term ratings would
likely be a consequence of a downgrade of RBI's long-term
ratings. Developments which could lead to a wider notching between
RZB's rating and RBI's rating would include: (i) the
incidence of the holding company RZB's double leverage; (ii) a multi-notch
downgrade or series of downgrades for the rating of RBI to the lower range
of investment-grade ratings.
The principal methodologies used in rating Raiffeisen Zentralbank Oesterreich
Group and Raiffeisen Bank International AG were Bank Financial Strength
Ratings: Global Methodology published in February 2007, Incorporation
of Joint-Default Analysis into Moody's Bank Ratings: A Refined
Methodology published in March 2007, and Moody's Guidelines for
Rating Bank Hybrid Securities and Subordinated Debt published in January
2010. Other methodologies and factors that may have been considered
in the process of rating this issuer can also be found on Moody's website.
Moody's previous rating action on RZB and RBI was initiated on 8 October
2010, when RBI was assigned provisional ratings, RZB's ratings
were affirmed and hybrids securities ratings were downgraded to Ba1 from
RZB is domiciled in Vienna, Austria. At the end of June 2010,
it had total consolidated assets of EUR152.2 billion and equity
of EUR11 billion, according to IFRS. The group's core capital
Tier 1 ratio was 9.3%, according to BIS standards.
RBI, which will be domiciled in Vienna, Austria, had
total consolidated assets of EUR148 billion and equity of EUR10.1
billion, according to unaudited pro-forma IFRS figures as
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Moody's assigns A1/P-1/D+ ratings to Raiffeisen Bank International (Austria)
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