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Rating Action:

Moody's concludes review of eight Slovak banks, downgrades debt ratings of three by one notch

30 Jul 2009

BFSRs of all banks confirmed

New York, July 30, 2009 -- Moody's Investors Service today concluded its review of the ratings of eight Slovak financial institutions. The bank financial strength ratings (BFSRs) of all the banks that were on review were confirmed, while the deposit ratings of three banks (Vseobecna uverova banka, UnicCredit Bank Slovakia and Ceskoslovenska obchonda banka Slovakia) were downgraded by one notch.

Moody's review, during which it carried out stress tests on the Slovak banks' asset quality and earnings, showed that the ratings were generally well placed to withstand a further deterioration of asset quality and earnings that may result from the economic downturn. But while the rating agency expects Slovakia's GDP to contract significantly in 2009, it noted that the economy, which has benefited from adopting the euro, may demonstrate a greater resilience and could out-perform other EU countries next year. Overall, the banking system may face less distress than its peers as household indebtedness is fairly low and the corporate sector has been able to quickly adjust to the global environment. Consequently, Moody's confirmed all the BFSRs, although in some cases they carry a negative outlook.

The downgrades of the deposit ratings were limited to one notch and were primarily driven by Moody's view that during this systemic crisis the Slovak state's ability to support its banking system not just with liquidity, but also with capital, has weakened. It now has been closer aligned with the government's own fiscal flexibility (as expressed by the government bond rating of A1). Prior to the crisis, government support for banks was not expected to be required on a systemic basis and together with the tools of the European Central Bank, the ability of the Slovak government to support any of its banks was considered to be higher, at Aaa. Consequently, some of those banks that had benefited in their ratings from such systemic importance have been affected and have been downgraded by one notch.(see below for details).

Moody's confirmed all the ratings of Slovenska Sporitelna and Privatbanka with a stable outlook, while it confirmed those of Tatra Banka, Tatra Leasing and OTP Banka Slovakia with a negative outlook. The rating agency also confirmed the BFSRs of Vseobecna uverova banka, UniCredit Bank Slovakia and Ceskoslovenska obchodna banka Slovakia, but downgraded these banks' long-term deposit ratings. Full details of all the rating actions can be found below.

These rating actions conclude Moody's review of these eight Slovak financial institutions that was initiated on 26 May 2009 with the exception of Home Credit Slovakia, which remains on review for possible downgrade together with its sister company Home Credit (Czech Republic).

During the review, Moody's assessed the potential pressure on the banks' asset quality indicators and earnings generating ability in the distressed operating environment and their combined effect on the banks' capitalisation (please refer to Moody's Special Comment "Calibrating Bank Ratings in the Context of the Global Financial Crisis", published in February 2009) and standalone creditworthiness. The rating agency also reviewed the ability and willingness of parent banks and the system (see Moody's Special Comment "Financial Crisis More Closely Aligns Bank Credit Risk and Government Ratings in Non-Aaa Countries", published in May 2009), where applicable, to support the banks, which represents an important input for assigning the final ratings.

REVIEW OF BANK FINANCIAL STRENGTH RATINGS

Moody's did not downgrade any Slovak bank's BFSR. The stress-testing exercise (please refer to Moody's Special Comment "Moody's Approach to Estimating Slovak Banks' Credit Losses", published in July 2009) showed that the standalone ratings of the Slovak banks already reflected their ability to cope -- given their capital positions and earnings generating capacity -- with a potential increase in expected losses in a deteriorating operating environment. However, Moody's changed the outlook on the BFSRs of two banks to negative where the standalone rating was seen as being slightly more exposed to a significant deterioration of the operating environment than the rating agency currently envisages.

Moody's expects banks with a BFSR of between C- and the higher end of the D range to withstand its anticipated case loss assumptions reasonably well, but believes that they could come under material pressure in a more severe scenario. Banks rated between the lower end of the D range and E+ display more modest fundamentals under the rating agency's anticipated scenario and are highly sensitive to a more stressed scenario, resulting in an increased likelihood that third-party support would be required. Moreover, while Moody's loss estimates often indicate a similar magnitude of potential capital shortfalls for D- and E+ rated banks, banks rated D- have more robust business models and overall stronger risk profiles.

REFINED SYSTEMIC SUPPORT ASSESSMENT

The downgrades of the banks' local and foreign currency deposit ratings were driven by Moody's review of parental and systemic support probabilities, and in particular by the application of its refined systemic support assumptions. The rating agency previously used the local currency deposit ceiling (LCDC; Aaa in the case of Slovakia) as the main input for its assessment of the ability of the national government to support its banks. Although anchoring the probability of support at the LCDC is appropriate in most circumstances -- regarding the provision of liquidity to a selected number of institutions over a short period of time -- this might overestimate the capacity, and even willingness, of a central bank to support financial institutions in the event of a banking crisis becoming both truly systemic and protracted.

Thus, the anchor used for measuring the influence of the probability of systemic support on banks' ratings is now the Slovak government bond rating of A1 (stable outlook) plus two notches of uplift, resulting in an Aa2 input. Including the uplift to the government's rating reflects Moody's view that the government's ability to support a bank can be higher than the government debt rating as the state has an array of tools -- financial and non-financial -- that can be employed, especially when the authorities fear that a collapse of the banking system might amplify the economic stress.

The extent of the uplift in the case of Slovakia reflects Moody's view that the risks of a systemic crisis in the banking system remain relatively low and its assessment of the state's willingness to support its banks. The latter also reflects the legislature's recent approval of a bank stability act that allows the state to support the banks in the event of need with capital injections, debt guarantees or direct lending.

LIST OF RATING ACTIONS

Moody's has taken the following rating actions on the Slovak banks:

Slovenska Sporitelna (SLSP)

SLSP's BFSR of C-, which maps to a Baseline Credit Assessment (BCA) of Baa2, was confirmed with a stable outlook. In Moody's view, the bank's standalone rating appropriately reflects its ability to withstand potential pressure on its capital adequacy caused by the increase in problem loans in a distressed environment. Moody's notes that the expected losses on the bank's portfolio were positively affected by its strong retail franchise, where the bank focuses on loans secured by real estate.

The local and foreign currency deposit ratings of A2/Prime-1 were confirmed with a stable outlook.

Vseobecna uverova banks (VUB)

Moody's confirmed VUB's BFSR of C-, which maps to a BCA of Baa2, with a stable outlook. Although the bank's large consumer finance portfolio (VUB is the leader in the consumer finance market through a subsidiary) is a reason for potential concern due to the weaker quality of this type of lending, its strong capitalisation and good earnings generating ability support Moody's view that the bank is well positioned to cope with potential losses.

However, due to its review of parental and systemic support probabilities, Moody's downgraded the bank's long-term local and foreign currency deposit ratings to A1 from Aa3. The ratings carry a stable outlook. The Prime-1 short-term deposit rating was confirmed.

Tatra Banka

Tatra Banka's BFSR of C-, mapping to BCA of Baa2, was confirmed with a negative outlook. In reviewing the rating, Moody's took into consideration the bank's strong franchise, which translates into good revenue generating ability, and the recently approved capital injections. However, given the bank's primarily corporate profile, high concentrations in the loan book and moderate capitalisation, Moody's views the Tatra Banka's rating as being relatively vulnerable to further deterioration of the operating environment.

The bank's local and foreign currency deposit ratings were confirmed at A2/Prime-1, but the outlook was changed to negative in line with the negative outlook on Tatra Banka's BFSR.

Tatra Leasing

Moody's confirmed the Aa3.sk rating of Tatra Leasing with a negative outlook. Although the leasing market in Slovakia has been significantly affected by the worsening operating environment, the company's rating is driven primarily by the rating of its parent, Tatra Banka. The negative outlook therefore reflects the negative outlook on the bank's ratings, given the close integration of and co-operation between the two entities. Note that in the event of a downgrade of Tatra Banka's BFSR, the ratings of Tatra Leasing would also come under downward pressure.

UniCredit Bank Slovakia (Unicredit)

Moody's confirmed the UniCredit's BFSR of D+, which maps to a BCA of Ba1, with a stable outlook. Although we regard UniCredit's primarily corporate profile as more risky than those of banks with stronger retail franchises, this is partly mitigated by its good earnings power and strong capitalisation (2008: 13.4%),

However, Moody's adjustments to the systemic support inputs resulted in a downgrade of the bank's local and foreign currency deposit ratings to A3/Prime-2 from A2/Prime-1. UniCredit's deposit ratings carry a stable outlook, in line with the stable outlook on the BFSR.

Ceskoslovenska cbchodna banka (CSOB)

Moody's confirmed CSOB's BFSR of D, which maps to a BCA of Ba2, with a stable outlook. The bank's BFSR was not affected by the rating agency's assessment of the potential losses on its capital adequacy, but the bank's standalone rating is weighed down by the challenges the entity is facing. The bank became a standalone entity only at the beginning of 2008 after being spun off from Czech Republic's Ceskoslovenska Obchodni Banka (rated Aa3/Prime-1/C) and is currently in a process of integrating another bank acquired by its parent, KBC Bank N.V. (rated Aa3/Prime-1/C+), last year.

Moody's adjustments to its systemic support inputs resulted in a downgrade of the bank's local and foreign currency deposit ratings to A3/Prime-2 from A2/Prime-1. CSOB's deposit ratings carry a stable outlook, in line with the stable outlook on the BFSR.

OTP Banka Slovakia (OBS)

OBS's BFSR of D-, which maps to a BCA of Ba3, was confirmed with a negative outlook. Although Moody's regards OBS's rating as able to incorporate significant stress in the bank's loan portfolio, the entity's weak profitability and modest capital adequacy (in comparison with those of some of the other rated banks) makes it particularly vulnerable to a more drastic deterioration in the environment than the rating agency currently expects.

The bank's deposit ratings of Baa3/Prime-3 were also confirmed with a negative outlook, which reflects the negative outlook on the bank's BFSR and also the negative outlook on its parent and support provider, Hungary's OTP Bank (rated Baa1/P-2/D+).

Privatbanka

Privatbanka's BFSR of E+, which maps to a BCA of B2, was confirmed with a stable outlook. In Moody's view, the bank's potential vulnerability to the weakening operating environment, given its weak franchise and high concentration in the loan book, is already reflected in its ratings. Moody's notes that bank's historical profitability has been good and its end-2008 capital adequacy ratio of 16.77% is very strong.

Moody's does not incorporate any parental or systemic support into the bank's B2/Non-Prime deposit ratings, which map to national scale ratings of Baa3.sk/SK-3. All its ratings have a stable outlook.

PREVIOUS RATING ACTIONS

Moody's last rating action on SLSP was on 26 May 2009 when all its ratings were placed on review for possible downgrade.

Headquartered in Bratislava, Slovakia, SLSP reported consolidated IFRS net income of EUR142 million in 2008 and total assets of EUR12.6 billion as of the end of the year.

Moody's last rating action on VUB was on 26 May 2009 when all its ratings were placed on review for possible downgrade.

Headquartered in Bratislava, Slovakia, VUB reported consolidated IFRS net income of EUR168 million in 2008 and total assets of EUR11.2 billion as of the end of the year.

Moody's last rating action on Tatra Banka was on 26 May 2009 when all its ratings were placed on review for possible downgrade.

Headquartered in Bratislava, Slovakia, Tatra Banka reported consolidated IFRS net income of EUR131 million in 2008 and total assets of EUR10.5 billion as of the end of the year.

Moody's last rating action on Tatra Leasing was 26 May 2009 when all its ratings were placed on review for possible downgrade.

Headquartered in Bratislava, Slovakia, Tatra Leasing reported consolidated IFRS net income of EUR1.8 million in 2008 and total assets of EUR485 million as of the end of the year.

Moody's last rating action on BSOB was on 26 May 2009 when all its ratings were placed on review for possible downgrade.

Headquartered in Bratislava, Slovakia, CSOB reported consolidated IFRS net income of EUR37 million in 2008 and total assets of EUR7.3 billion as of the end of the year.

Moody's last rating action on UniCredit was on 26 May 2009 when all its ratings were placed on review for possible downgrade.

Headquartered in Bratislava, Slovakia, UniCredit reported consolidated IFRS net income of EUR72 million in 2008 and total assets of EUR4.6 billion as of the end of the year.

Moody's last rating action on OBS was on 26 May 2009 when all its ratings were placed on review for possible downgrade.

Headquartered in Bratislava, Slovakia, OBS reported consolidated IFRS net income of EUR11 million in 2008 and total assets of EUR1.6 billion as of the end of the year.

Moody's last rating action on Privatbanka was on 26 May 2009 when all its ratings were placed on review for possible downgrade.

Headquartered in Bratislava, Slovakia, Privatbanka reported consolidated IFRS net income of EUR2 million in 2008 and total assets of EUR421 million as of the end of the year.

The principal methodologies used in rating these banks were "Bank Financial Strength Ratings: Global Methodology" (February 2007) and "Incorporation of Joint-Default Analysis into Moody's Bank Ratings: A Refined Methodology" (March 2007), which can be found at www.moodys.com in the Credit Policy & Methodologies directory, in the Ratings Methodologies sub-directory. Other methodologies and factors that may have been considered in the process of rating these issuers can also be found in the Credit Policy & Methodologies directory.

London
Johannes Wassenberg
Managing Director
Financial Institutions Group
Moody's Investors Service Ltd.
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

London
Gabriel Kadasi
Analyst
Financial Institutions Group
Moody's Investors Service Ltd.
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

Moody's concludes review of eight Slovak banks, downgrades debt ratings of three by one notch
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