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Rating Action:

Moody's changes outlook on ZABA's D+ BFSR to stable; downgrades local currency deposit ratings to Baa1/P-2 (negative)

01 Dec 2009

Foreign currency deposit ratings affirmed at Ba1/NP;

Limassol, December 01, 2009 -- Moody's Investors Service today changed to stable from negative the outlook on the D+ bank financial strength rating (BFSR) of Zagrebacka banka d.d (ZABA), which maps to a baseline credit assessment (BCA) of Baa3. At the same time, the bank's long- and short-term global local currency (GLC) deposit ratings were downgraded to Baa1/Prime-2 from A2/Prime-1. The GLC deposit rating now carries a negative outlook. The downgrade concludes the review of these ratings initiated on 27 May 2009. The review had not affected the BFSR.

The bank's foreign currency deposit ratings remain constrained by the country's ceiling for such deposits at Ba1/Not Prime and continue to have a stable outlook.

According to Moody's, ZABA's D+ BFSR is underpinned by its dominant position in the Croatian banking system, good financial metrics -- particularly strong capitalisation, providing a substantial cushion against possible asset quality pressure -- as well as its good-income generating capacity and a solid funding base. However, the BFSR remains constrained by the bank's lack of geographic diversification at a time when operating environment risks are becoming more pronounced in light of Croatia's ongoing recession.

In particular, although the bank's fundamentals remain solid based on reported figures, credit conditions in the country have weakened while, similar to its domestic peers, ZABA's relatively young (notably enhanced) credit risk management and loan loss assumptions remain untested in stressed conditions (as the country had until 2009 not experienced a similar recession in nearly a decade). Currency-induced credit risk, arising from foreign currency and foreign currency-linked lending to un-hedged customers, also persists. Although the bank's BFSR carries a stable outlook as Croatia's economic recovery is projected to be slow, expectations of rising asset quality pressure and higher credit charges are weakening the bank's position within the D+ BFSR range.

ZABA's long-term GLC deposit rating of Baa1 receives a two-notch uplift from its Baa3 BCA based on Moody's assessment of a very high probability of parental support from the majority shareholder, UniCredit SpA (BCA of A3), which holds an 84.2% stake in ZABA (through Bank Austria). Moody's also assumes a high probability of systemic support from the Croatian authorities, but this has no beneficial impact on the rating as Croatia's systemic support indicator is lower, at Baa2. The negative outlook on the bank's long-term GLC deposit rating reflects (i) the negative outlook on UniCredit's BFSR (the support provider); and (ii) the fact that in view of market conditions, ZABA's standing within the D+ range has weakened placing downward pressure on its Baa3 BCA.

Moody's review for possible downgrade of the bank's GLC deposit rating, initiated on 27 May 2009, had been prompted by its reassessment of the Croatian government's ability to provide support to its banking system. Like most governments, the Croatian authorities are at least as likely to support their banking system as they are to service their own debt, a view that has traditionally led to bank ratings benefiting from significant uplift. However, Moody's believes a greater weight should be attributed to the government's rating as a measure of public support for banks. As a result, Croatia's systemic support indicator is Baa2, one notch above the government's Baa3 local currency bond rating.

Moody's previous rating action on Zagrebacka Banka was on 27 May 2009, when the rating agency placed the bank's long-term GLC deposit rating on review for a possible downgrade.

The principal methodologies used in rating the bank are "Bank Financial Strength Ratings: Global Methodology" and "Incorporation of Joint-Default Analysis into Moody's Bank Ratings: A Refined Methodology", which are available on www.moodys.com in the Rating Methodologies sub-directory under the Research & Ratings tab. Other methodologies and factors that may have been considered in the process of rating the bank can also be found in the Rating Methodologies sub-directory on Moody's website.

Headquartered in Zagreb, the Zagrebacka Banka group reported total assets of HRK107 billion (EUR14.7 billion) as of September 2009.

Limassol
Mardig Haladjian
General Manager
Financial Institutions Group
Moody's Investors Service Cyprus Limited
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

Limassol
Stathis A. Kyriakides, CFA
Asst Vice President - Analyst
Financial Institutions Group
Moody's Investors Service Cyprus Limited
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

Moody's changes outlook on ZABA's D+ BFSR to stable; downgrades local currency deposit ratings to Baa1/P-2 (negative)
No Related Data.
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