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Related Issuers
Rating Action:

Moody's concludes the review of Siauliu Bankas, upgrades to Baa3, outlook positive

23 Oct 2017

London, 23 October 2017 -- Moody's Investors Service, ("Moody's") has today upgraded the long- and short-term deposit ratings of Siauliu Bankas, AB (Siauliu Bankas) in Lithuania to Baa3/P-3 from Ba1/NP. The baseline credit assessment (BCA) was upgraded to ba2 from ba3. Furthermore, the long- and short-term counterparty risk (CR) assessments were upgraded to Baa2(cr)/P-2(cr) from Baa3(cr)/P-3(cr). The outlook on the long-term deposit ratings was changed to positive from Rating under Review.

This action concludes the review initiated on 13 July 2017 to assess the bank's ability to sustain its positive trajectory through a full economic cycle, focusing on the bank's improving fundamentals beyond the current favourable operating conditions and the risks associated with the partial acquisition of the failed Lithuanian bank, AB Ukio Bankas.

The key drivers for the upgrade are: (1) the improved operating environment in Lithuania; (2) the stronger fundamentals of the bank, with increased capitalisation and sustainable profitability; and (3) the reduced risks associated with the acquisition of the AB Ukio Bankas portfolio in 2013. This is balanced against the bank's high loan growth and sector concentration toward SME's and consumer finance in Lithuania. Meanwhile the assumptions regarding loss absorption given failure remain unchanged, with the volumes of subordinated obligations and junior deposits indicating a very low loss given failure for junior deposits and extremely low loss given failure in Moody's counterparty risk assessment.

The positive outlook reflects Moody's expectations of continued favourable operating conditions supporting the improvements in the bank's fundamentals regarding both risk management and capital management.

See the end of this press release for a full list of affected ratings.

RATINGS RATIONALE

BASELINE CREDIT ASSESSMENT

The primary driver for the upgrade of Siauliu Bankas' BCA is the context of a benign operating environment in Lithuania. The rating agency expects Lithuania's real GDP to expand by 3.5% and 3.4% in 2017 and 2018 on the back of robust private consumption and increasing levels of exports. Of significance for Siauliu Bankas' growth and asset quality, nominal wages are increasing, unemployment is declining, and demand for credit is picking up while debt affordability continues to be high due to an accommodative monetary policy. In this context, Siauliu Bankas is in a position to maintain solid profitability and strengthen capital buffers.

In this favourable context, Moody's expects problem loans to continue declining to 6% from 7.2% at year-end 2016, contributing to reduce costs and sustain profits. Due to improved internal capital generation, capitalisation will remain solid after improving significantly in recent years, with tangible common equity over risk weighted assets increasing to 15.85% at year-end 2016 from 12.59% in 2015 and 9.64% in 2014. In addition, the bank has a large headroom above minimum requirements of 8.9% as of 31 December 2016. The bank's recurring profitability will normalise after higher than usual earnings in 2016, with net income over tangible assets increasing to 1.77% at year-end 2016 from 1.17% in 2015 and 0.33% in 2014. Although results in 2016 were boosted by revenues that will subside over time, the bank has succeeded in attaining an economy of scale that will support solid recurring earnings.

Another driver for the BCA upgrade is the largely dissipated risks associated with the acquisition of the AB Ukio Bankas portfolio in 2013. Since the acquisition, the bank has methodically reviewed the portfolio, written down any loans that were deemed sub-par and aligned internal ratings to their underwriting standards. The rating agency considers that the risks associated with the acquired portfolio to be significantly reduced and that asset risk of the acquired portfolio is aligned with the rest of the portfolio. However, this positive driver is balanced against sector concentration risks, with a high concentration toward SME's and consumer finance in Lithuania, and risks related to high loan growth, with an annual pace of between 10%-15%. Moody's views these risks in the context of how the asset risk will evolve when the economy enters a less favourable point in the cycle.

- RATIONALE FOR THE UPGRADE OF THE LONG-TERM DEPOSIT RATING

The long-term deposit ratings were upgraded due to a one notch BCA upgrade, while our Advanced Loss Given Failure approach and government support assumptions remain unchanged.

The upgrade of Siauliu Bankas long-term deposit rating to Baa3 from Ba1 therefore reflects: (1) the upgrade of the bank's BCA and adjusted BCA to ba2; (2) the large amounts of junior deposits and subordinated debt indicating a very low loss given failure according to Moody's Advance Loss-Given Failure (LGF) analysis, reflected by two notches of uplift for the deposit ratings above the adjusted BCA; and (3) Moody's assessment of a low probability of government support for Siauliu Bankas, which results in no uplift for the deposit ratings.

- RATIONALE FOR THE POSITIVE OUTLOOK

The positive outlook on Siauliu Bankas' long-term deposit ratings reflects Moody's expectation that the bank will continue to effectively wind down its stock of problem loans while maintaining a solid capitalization with large headroom above requirements. The rating agency further expects profitability to remain high while acknowledging there are certain revenue sources with definitive time limits.

- RATIONALE FOR UPGRADING THE COUNTERPARTY RISK ASSESSMENT

As part of today's rating action, Moody's upgraded Siauliu Bankas' long-term CR Assessment to Baa2(cr) from Baa3(cr), three notches above the BCA of ba2, whereas the short-term CR Assessment was upgraded to P-2(cr) from P-3(cr). The CR Assessment is driven by the bank's adjusted BCA, a low likelihood of systemic support and by the cushion against default provided by senior obligations represented by subordinated instruments and junior deposits.

FACTORS THAT COULD LEAD TO AN UPGRADE

Siauliu Bankas' ratings could be upgraded, if the bank increases its capitalization while unwinding its portfolio of problem loans, while also maintaining a stable recurring profitability.

- FACTORS THAT COULD LEAD TO A DOWNGRADE

Downward pressure on Siauliu Bankas could develop if the operating environment deteriorated significantly, or if the bank's fundamentals deteriorated considerably from current levels.

LIST OF AFFECTED RATINGS

Issuer: Siauliu Bankas, AB

Upgrades:

....LT Bank Deposits, Upgraded to Baa3 from Ba1, Outlook Changed To Positive From Rating Under Review

....ST Bank Deposits, Upgraded to P-3 from NP

....Adjusted Baseline Credit Assessment, Upgraded to ba2 from ba3

....Baseline Credit Assessment, Upgraded to ba2 from ba3

....LT Counterparty Risk Assessment, Upgraded to Baa2(cr) from Baa3(cr)

....ST Counterparty Risk Assessment, Upgraded to P-2(cr) from P-3(cr)

Outlook Actions:

....Outlook, Changed To Positive From Rating Under Review

PRINCIPAL METHODOLOGY

The principal methodology used in these ratings was Banks published in September 2017. Please see the Rating Methodologies 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 credit rating action on the support provider and in relation to each particular credit 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 credit rating action, and whose ratings may change as a result of this credit 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.

Niclas Boheman
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
Client Service: 44 20 7772 5454

Sean Marion
MD - Financial Institutions
Financial Institutions Group
JOURNALISTS: 44 20 7772 5456
Client Service: 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
Client Service: 44 20 7772 5454

No Related Data.
© 2021 Moody’s Corporation, Moody’s Investors Service, Inc., Moody’s Analytics, Inc. and/or their licensors and affiliates (collectively, “MOODY’S”). All rights reserved.

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