Downgrades of LT ratings and/or BFSRs limited to one or two notches
London, 08 September 2009 -- Moody's Investors Service today downgraded Pohjola Bank's long-term
ratings to Aa2 from Aa1 and its bank financial strength rating (BFSR)
to C- from C+. The outlook on these ratings is negative.
At the same time, the Prime-1 short-term rating was
affirmed. Moody's also downgraded the BFSR of OP-Pohjola
Group (previously OP Bank Group) to B- from B and the insurance
financial strength rating (IFSR) of Pohjola Insurance Limited (PIL) to
A2 from A1. The outlook on these ratings is also negative.
Moody's notes that it has not assigned a separate deposit rating
to OP-Pohjola Group.
The rating actions conclude the review for possible downgrade initiated
on 15 April 2009.
The full list of rating actions can be found below.
Pohjola Bank is the corporate bank and non-life insurance arm of
the Finnish co-operative financial group, OP-Pohjola
Group, which is the second-largest banking group in Finland.
Please note that this press release does not deal with the possible implications
for the covered bond ratings.
DOWNGRADES OF BANK FINANCIAL STRENGTH RATINGS
The downgrade of Pohjola Bank's BFSR to C- (mapping to a
Baa1 Baseline Credit Assessment, BCA) reflects the greater pressure
that the bank could face as a result of further deterioration in the Finnish
economy. Moody's remains concerned that the Finnish economy
has only recently begun to feel the effect of the global recession and,
consequently, pressure on the bank's asset quality and earnings
may still increase significantly.
During the review, Moody's applied its framework for estimating
Nordic banks' credit losses to Pohjola Bank's and OP-Pohjola
Group's asset breakdown (please refer to Moody's Special Comments:
"Moody's Approach to Estimating Nordic Banks' Credit
Losses", published in July 2009; "Calibrating Bank
Ratings in the Context of the Global Financial Crisis", published
in February 2009; and "Moody's Approach to Estimating
Bank Credit Losses and their Impact on Bank Financial Strength Ratings",
published in May 2009). Based on these assumptions, the rating
agency performed a scenario analysis to assess the potential pressure
on the banks' asset quality indicators and earnings generating ability
and their combined effect on the banks' capital adequacy and standalone
creditworthiness.
The results of the scenario analysis showed that Pohjola Bank's
and OP-Pohjola Group's key credit drivers, in particular
capital adequacy, became weaker in their respective BFSR categories
in relation to Moody's expectation of asset quality deterioration.
In particular, Moody's notes the potential for rising credit
costs embedded within Pohjola Bank's loan portfolio, especially
given its high exposure to the Finnish corporate sector, combined
with very high borrower concentration risk. Moody's key concerns
relate to the bank's exposure to the real estate and construction
sectors. Positively, the rating agency notes that Pohjola
Bank's exposure to the Baltic countries remains negligible,
accounting for less than 1% (or EUR119 million) of the bank's
loan and guarantee portfolio.
Moody's also notes that the capital-raising initiatives completed
earlier in 2009, which amounted to around EUR308 million,
provide a significant buffer with which to absorb potential credit losses
and are an important factor underpinning the C- BFSR. At
the end of June 2009, Pohjola Bank's Tier 1 and total capital
adequacy ratios were 11.5% and 12.2%,
respectively. For OP-Pohjola Group, the Tier 1 and
total capital ratios were 12.1%.
Due to the weakening Finnish economy, Moody's expects the problem
loan ratio to rise. The rating agency's anticipation of deteriorating
asset quality primarily reflects the weakening of Finland's highly
export-driven economy. With goods exports down by as much
as 30% year-on-year in Q1 2009, Moody's
expects the contraction in Finland's GDP to be 6.0%
this year. For 2010, Moody's forecasts a modest GDP rebound
of 0.5%. Also, it expects the unemployment
rate to increase to around 10.5% in 2010 (from 6.4%
in 2008).
The downgrade of OP-Pohjola Group's BFSR to B- from
B primarily reflects Moody's expectation of potential losses associated
with the entity's significant exposure to the Finnish corporate sector
through its full ownership of Pohjola Bank, which is a pure corporate
bank and accounts a significant 23% of the group's total
loan portfolio.
Moody's notes that OP-Pohjola Group's BFSR showed relatively
good resilience to the base scenario and considerably higher losses would
be needed for the rating to come under further downward pressure.
Consequently, the magnitude of the downgrade was less than in case
of Pohjola Bank. OP-Pohjola Group's more resilient performance
in the base scenario reflects the group's dominant exposure to the
retail sector, which accounts for nearly 70% of its total
loan book.
The negative outlook on both entities' BFSRs reflects Moody's
additional concern that the extent of weakening of the Finnish economy
could, under a more severe scenario, result in the deterioration
of financial fundamentals beyond a level compatible with the current standalone
ratings.
DOWNGRADES OF LONG-TERM DEBT AND DEPOSIT RATINGS
Pohjola Bank's deposit and debt ratings were downgraded to Aa2 from
Aa1 and continue to receive a sizeable five-notch uplift from the
BCA. This reflects the bank's key systemic importance to
the Finnish banking system and therefore Moody's assessment of a
very high probability of systemic support. It also reflects unquestioned
co-operative group support from OP-Pohjola Group,
which takes the form of a joint and several guarantee. The outlook
on the Aa2 ratings is negative, reflecting the negative outlook
on the BCA.
RATING OF HYBRIDS
The downgrade of hybrids was in line with the size of the downgrade of
the senior debt rating and Moody's current methodology.
Moody's published a Request for Comment in July 2009 on its proposed
changes to banks' subordinated capital ratings. If implemented
in their proposed form, the changes could lead to multi-notch
downgrades of hybrids. Please refer to the Request for Comment
"Moody's Proposed Changes to Bank Subordinated Capital Ratings"
for further.
POHJOLA INSURANCE LIMITED (PIL)
The downgrade of PIL's IFSR from A1 to A2, with a negative outlook,
reflects both the healthy standalone financial fundamentals of the insurance
operations, but also the rating action on the wider Op-Pohjola
Group. Moody's previously incorporated two notches of support into
the published IFSR of PIL, which has been reduced to a single notch
following this rating action.
Within non-life insurance, PIL currently holds the market-leading
position, slightly ahead of If P&C.
Moody's also notes that any further negative rating action on Pohjola
Bank and/or OP-Pohjola would also likely lead to a negative rating
action on PIL.
The following ratings of Pohjola Bank were downgraded:
- BFSR: downgraded to C- from C+, with
negative outlook;
- Bank deposits: downgraded to Aa2 from Aa1;
- Issuer rating: downgraded to Aa2 from Aa1;
- Senior unsecured: downgraded to Aa2 from Aa1;
- Subordinate: downgraded to Aa3 from Aa2;
- Junior subordinate: downgraded to Aa3 from Aa2;
- Preferred stock: downgraded to A1 from Aa3.
The bank's Prime-1short-term debt and deposit ratings remain
unchanged.
The following rating of OP-Pohjola Group was downgraded:
- BFSR: downgraded to B- from B, with negative
outlook.
The following rating of PIL was downgraded:
- IFSR: downgraded to A2 from A1.
The last rating actions on Pohjola Bank, OP-Pohjola Group
and PIL were implemented on 15 April 2009, when all the ratings
were placed on review for possible downgrade.
RATING METHODOLOGIES
The principal methodologies used in rating Pohjola Bank, OP-Pohjola
Group and PIL were "Bank Financial Strength Ratings: Global Methodology",
published in February 2007 and "Incorporation of Joint-Default
Analysis into Moody's Bank Ratings: A Refined Methodology",
published in March 2007 and "Moody's Global Rating Methodology for Property
and Casualty Insurers", published in July 2008, and 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 this issuer can
also be found in the Rating Methodologies sub-directory on Moody's
website.
Headquartered in Helsinki, Finland, Pohjola Bank reported
consolidated assets of EUR33.6 billion at the end of June 2009.
OP-Pohjola Group reported consolidated assets of EUR77.6
billion at the end of June 2009.
London
Reynold R. Leegerstee
Managing Director
Financial Institutions Group
Moody's Investors Service Ltd.
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454
London
Kimmo Rama
Vice President - Senior Analyst
Financial Institutions Group
Moody's Investors Service Ltd.
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454
Moody's concludes review of Pohjola Bank, Pohjola Insurance and OP-Pohjola Group
