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Rating Action:

Moody's downgrades BAWAG's long-term senior debt and deposit ratings to Baa2; outlook stable (Austria)

19 Apr 2011

Standalone BFSR affirmed at D with a stable outlook

Frankfurt am Main, April 19, 2011 -- Moody's Investors Service has today downgraded the long-term senior debt and deposit ratings of BAWAG P.S.K. (Bawag) by one notch to Baa2 from Baa1 following Moody's re-assessment of its future extraordinary systemic support assumptions. Concurrently, the bank's senior subordinated debt was downgraded to Baa3 from Baa2.

Moody's has affirmed Bawag's standalone bank financial strength rating (BFSR) at D, which maps at Ba2 on the long-term scale, as well as its Prime-2 short-term rating. Moody's also affirmed the ratings on the hybrid instruments at B2(hyb) of Bawag and its subsidiaries (BAWAG Capital Finance (Jersey) Ltd, BAWAG Capital Finance (Jersey) II Limited and BAWAG Capital Finance (Jersey) III Limited as detailed further below.

The outlook on all ratings is stable.

Any subsequent short-term debt, long-term senior debt, and subordinated debt issued by Bawag will be rated P-2, Baa2, Baa3. Any subsequent non-cumulative preferred securities will be rated B2 (hyb).

For a detailed list of ratings affected, refer to the end of the press release.

RATINGS RATIONALE

FINANCIAL STRENGTH RATING AFFIRMED AT D WITH A STABLE OUTLOOK

The affirmation of Bawag's BFSR at D with a stable outlook reflects the bank's progress in the strategic repositioning of its activities and the stabilisation of its overall financial performance during 2010. However, Moody's also notes that management's restructuring programme (named "Bolero") and its increased focus on retail activities through the cooperation with the Austrian Post AG will only gradually contribute to the bank's pre-tax profitability .

Those factors constraining the D BFSR at its current level include (i) the challenges in maintaining the bank's profitability and efficiency at a sustainable level, especially in its core retail business; (ii) the measured control of future risk-taking activities in its lending and capital markets business in view of its historic earnings volatility, risk concentrations and ongoing impairments and charges recorded for its legacy risks in 2010; (iii) the continued development of the bank's risk culture towards a solid track record through the credit cycle; and (iv) weaker asset quality, largely reflecting its legacy assets which includes equity participations that are expected to be further reduced over time.

Moody's positively notes that Bawag's Tier 1 ratio of 9.9% at year-end 2010 represents a satisfactory capital cushion for its risk profile. Moreover, the repayment of the EUR550 million in government participation capital is currently not included in Moody's central assumptions and the rating agency expects the bank to further bolster its capital through internal capital generation to maintain its financial flexibility in future years, which should allow for a full repayment of the participation capital.

The stable outlook on the BFSR reflects Moody's expectation that the bank's financial profile will be preserved at the current level and improve over time. The rating agency also notes that the current BFSR should enable the bank to absorb some degree of earnings volatility and pressure on its asset quality based on its current risk profile.

SENIOR DEBT AND DEPOSIT RATINGS DOWNGRADED TO Baa2 GIVEN LOWER EXTRAORDINARY SUPPORT ASSUMPTIONS

The downgrade of Bawag's senior debt ratings to Baa2 reflects the reduction in the extraordinary systemic support assumptions for the bank previously assessed as high during the financial crisis.

However, Bawag's Baa2 long-term debt and deposit ratings continue to benefit from Moody's assessment of a very high probability of systemic support providing a three-notch uplift from its BFSR, which maps on the long-term scale at Ba2.

Moody's notes that Bawag already returned its EUR400 million guarantee on risky assets during 2010 and continues to rely on EUR550 million in participation capital provided by the Government of Austria (Aaa, stable). As the bank has a meaningful market share of national deposits and payment functions, Moody's anticipates that Bawag will continue to benefit from systemic support in the future.

WHAT COULD CHANGE THE RATING UP/DOWN

A further strengthening of BAWAG's standalone financial and business profile could result in upward pressure on the BFSR. Furthermore, substantial, sustained and transparent improvements in risk culture and management could positively affect the BFSR over the medium term.

The bank's long-term debt and deposit ratings could principally benefit from material and sustainable improvements in the bank's intrinsic strength. However, modest upward ratings pressure is unlikely to immediately trigger upward pressure on the long-term ratings in view of the very high support assumptions already factored into the bank's senior debt and deposit ratings.

Negative pressure on the standalone profile could result from a weakening of the bank's financial strength or risk position. Individual factors representing adverse implications over the medium term include (i) persistent losses; (ii) a lack of improvement in the risk profile; and (iii) an inability to maintain its franchise value, particularly in its retail activities.

The bank's long-term ratings could suffer from a persistent weakening in its intrinsic strength, as well as adverse changes in the systemic support assumptions currently factored into Bawag's ratings.

HYBRID RATINGS AFFIRMED AT B2; OUTLOOK ON ALL INSTRUMENTS STABLE

As part of the rating action Moody's affirmed Bawag's noncumulative preferred securities at B2 (hyb). The hybrid ratings incorporate the instruments' deeply subordinated claim in liquidation and non-cumulative coupon skip mechanism tied to the breach of a balance sheet loss trigger. The outlook on these ratings is stable, reflecting the stable outlook on the BFSR.

DETAILED LIST OF RATING ACTIONS

BAWAG P.S.K.

- BFSR: (Ba2 on the long-term scale): affirmed at D, outlook stable

- senior debt and deposit ratings: downgraded to Baa2, outlook stable

- subordinated debt ratings: downgraded to Baa3, outlook stable

- short-term rating: affirmed at Prime-2

- non-cumulative preferred securities: affirmed at B2 (hyb), outlook stable

BAWAG Capital Finance (Jersey) Ltd (XS0119643897)

BAWAG Capital Finance (Jersey) II Limited (DE0008600966)

BAWAG Capital Finance (Jersey) III Limited (GB00B00GQ100)

PRINCIPAL METHODOLOGIES

The principal methodologies used in this rating 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 November 2009.

Headquartered in Vienna, BAWAG P.S.K. reported consolidated total assets of EUR39 billion as at year-end 2010 and a pre-tax profit for 2010 of EUR138 million.

REGULATORY DISCLOSURES

Information sources used to prepare the credit rating are the following: parties involved in the ratings, public information, and confidential and proprietary Moody's Investors Service information.

Moody's Investors Service considers the quality of information available on the issuer or obligation satisfactory for the purposes of maintaining a credit rating.

The rating has been disclosed to the rated entity or its designated agents and issued with no amendment resulting from that disclosure.

Moody's Investors Service may have provided Ancillary or Other Permissible Service(s) to the rated entity or its related third parties within the three years preceding the Credit Rating Action. Please see the ratings disclosure page www.moodys.com/disclosures on our website for further information.

Moody's adopts all necessary measures so that the information it uses in assigning a credit rating is of sufficient quality and from sources Moody's considers to be reliable including, when appropriate, independent third-party sources. However, Moody's is not an auditor and cannot in every instance independently verify or validate information received in the rating process.

Please see ratings tab on the issuer/entity page on Moodys.com for the last rating action and the rating history.

The date on which some Credit Ratings were first released goes back to a time before Moody's Investors Service's Credit Ratings were fully digitized and accurate data may not be available. Consequently, Moody's Investors Service provides a date that it believes is the most reliable and accurate based on the information that is available to it. Please see the ratings disclosure page on our website www.moodys.com for further information.

Please see the Credit Policy page on Moodys.com for the methodologies used in determining ratings, further information on the meaning of each rating category and the definition of default and recovery.

Frankfurt am Main
Claude Raab
Analyst
Financial Institutions Group
Moody's Deutschland GmbH
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

Frankfurt am Main
Carola Schuler
MD - Banking
Financial Institutions Group
Moody's Deutschland GmbH
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

Moody's Deutschland GmbH
An der Welle 5
Frankfurt am Main 60322
Germany
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

Moody's downgrades BAWAG's long-term senior debt and deposit ratings to Baa2; outlook stable (Austria)
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