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Rating Action:

Moody's downgrades C BFSRs of OeVAG and Investkredit to C-; long term debt and deposit ratings of Investkredit put on review for possible downgrade

17 Nov 2008

All other ratings have been affirmed including P-1 ratings of both banks.

London, 17 November 2008 -- Moody's Investors Service today downgraded the C bank financial strength ratings (BFSRs) of both Oesterreichische Volksbanken AG ("ÖVAG", rated Aa3/P-1) ) and its 100% subsidiary Investkredit Bank AG ("Investkredit") to C- and put the long term debt and deposit ratings of Investkredit on review for possible downgrade. The C- BFSR's of both banks remain on review for possible downgrade. All other ratings including the short term P-1 ratings have been affirmed with a stable outlook (see list below).

1) RATING ACTION ON ÖEVAG

a) Downgrade of BFSR to C-

Moody's decision to lower ÖVAG's C BFSR to C- has been prompted by (i) the recent announcement of the planned de-merger of the Kommunalkredit Group from the ÖVAG group, following problems at these subsidiary companies and a need for support of ÖVAG from the owners and/or from the Austrian State under the latter's rescue package available to Austrian banks; (ii) the meaningful impact of such a de-merger on ÖVAG's business mix as well as its balance sheet size and profit and loss account in both 2008 and following years; (iii) the group's heavy reliance on market and interbank funding; (iv) its exposure to the CEE real estate market directly and via its subsidiary, Investkredit.

b) Review of BFSR of C-

Given the degree of uncertainty that remains at this point with respect to (i) the group's demerged profile, (ii) the business model that Oevag intends to pursue in a post-Kummunalkredit-era, (iii) the details of the up to EUR1 billion capital injection that the bank has announced, either from its shareholders or from the rescue package offered by the Austrian State to lift its Core Tier 1 capital ratio to 8%; (iv) the longer-term support strategy of the Austrian government, (v) its expected performance in the short- to medium term, the BFSR has been kept on review for possible downgrade.

More precisely, Moody's review will focus on:

1) The revised business focus of the bank without the municipal finance business of the Kommunalkredit Group. In this context, the review will focus on all of the bank's remaining business segments but in particular on real estate, which makes a large contribution to earnings, assessing aspects including geographic distribution and type of property exposures. Moody's notes that ÖVAG also has significant exposures to countries in Central and Eastern Europe (CEE) and South-Eastern Europe (SEE) directly and via its group company Investkredit, and will therefore need to look more closely at the potential stresses that could arise from this portfolio.

2) The ultimate support received from the owners or the Austrian state and its impact on the bank's fundamentals.

3) The sustainability of the business model given its heavy reliance on market and interbank funding.

c) Affirmation of short- and long-term Debt & Deposit ratings

The affirmation of Oevag's Aa3/P-1 ratings with a stable outlook reflects the strength of the support that is expected both from its majority owners, the (unrated) Austrian Volksbanken-group, as well as from the state given the systemic importance of Oevag as the central institution of that mutualist group. With such support, the Aa3/P-1 ratings are not expected to be affected should the intrinsic rating of Oevag, the BFSR of C-, be downgraded further to D+.

2) RATING ACTION ON INVESTKREDIT

a) Downgrade of BFSR to C-

The downgrade of Investkredit's C BFSR to C- has been prompted by Moody's concern (i) that Investkredit will be exposed to increasing pressure on asset quality and profitability stemming from its strong focus on real estate. More importantly, liquidity management seems to be a challenge in the group already and may remain so going forward. The latter is and may remain a major pressure point.

b) Review for downgrade of Investkredit's BFSR of C-

While Moody's recognises the wide geographic spread of Investkredit's exposures, the significant share of its loan portfolio consisting of non-residential real estate (of around 70%) as well as the concentration in some CEE/SEE countries may challenge Investkredit as these activities will likely face a severe downturn more than previously expected, impacting both asset quality (and this indirectly profitability) as well as the bank's ability to generate new business. As in the case of ÖVAG, Moody's will seek to assess the options for a business model that is heavily reliant on market or interbank funding.

c) Review for downgrade on the bank's Debt & Deposit Ratings:

Investkredit's long-term debt and deposit ratings have also been placed on review for possible downgrade, primarily reflecting a lower degree of expected support from its owners or the state. Therefore, a downgrade of its BFSR could also place pressure on its debt and deposit ratings, which is contrary to the affirmation of Oevag's long- and short term debt & deposit ratings, where the support expectations underpinned the Aa3/P-1 ratings and their stable outlook.

The following ratings have been downgraded and remain on review for further downgrade:

- ÖVAG's BFSR to C-

- Investkredit's BFSR to C-

The following ratings have also been placed on review for possible downgrade:

- Investkredit's Bank Deposit rating of A1

- Investkredit's Long term Senior Unsecured ratings of A1

- Investkredit's Subordinated ratings of A2

- Investkredit's Funding Ltd. I and II ratings of A3

The following ratings have been affirmed:

- ÖVAG's Long term Deposit rating of Aa3

- ÖVAG's Long term Senior Unsecured ratings of Aa3

- ÖVAG's Issuer Rating of Aa3

- ÖVAG's Subordinate ratings of A1

- ÖVAG's Finance (Jersey) rating of A2

- ÖVAG's Participation Capital Certificates of A3

- ÖVAG's Short term P-1 ratings

- Investkredit's Short term P-1 ratings

The most recent rating action on one of the entities was on 25 April 2008, when Moody's assigned an A3 rating to the Participation Capital Certificates issued by ÖVAG.

Both ÖVAG and Investkredit are headquartered in Vienna. At the end of 2007, ÖVAG and Investkredit had consolidated assets of EUR78.6 billion and EUR13.98 billion, respectively.

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

London
Gabriele Baur
VP - Senior Credit Officer
Financial Institutions Group
Moody's Investors Service Ltd.
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

Moody's downgrades C BFSRs of OeVAG and Investkredit to C-; long term debt and deposit ratings of Investkredit put on review for possible downgrade
No Related Data.
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