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Rating Action:

Moody's downgrades Oesterreichische Volksbanken AG to Ba1 from Baa3; ratings on review for downgrade

Global Credit Research - 27 Mar 2014

Frankfurt am Main, March 27, 2014 -- Moody's Investors Service, ("Moody's") has today downgraded the senior unsecured debt and deposit ratings of Oesterreichische Volksbanken AG (VBAG) to Ba1 from Baa3 and placed the ratings on review for further downgrade. The rating agency has also downgraded the short-term rating to Not Prime from Prime-3 and affirmed the standalone bank financial strength rating (BFSR) at E, equivalent to a caa1 baseline credit assessment (BCA). During the review period Moody's will also assess the potential for downward adjustment for the bank's BCA.

The downgrade of VBAG's debt and deposit ratings reflects Moody's assessment of weakened willingness of the Austrian government for further capital support for VBAG as evidenced by statements of government officials. The potential for downward adjustments of the bank's BCA and, as a consequence, of the long-term debt and deposit ratings results from a potential need for additional capital measures driven by VBAG's weak credit profile and follows a projected loss in excess of EUR200 million at the single entity level for VBAG for the fiscal year 2013, as announced by VBAG on 19 December 2013. The performance of VBAG's run-down portfolios and its Romanian operations create further uncertainties around the bank's future capital needs.

The ratings are placed on review for downgrade to allow Moody's to further assess the Austrian government's preparedness to continue extending support to VBAG and the entire sector as a key shareholder of VBAG. In addition, Moody's will assess (1) VBAG's 2013 financial performance and potential further capital needs based on the annual accounts to be published by April 2014; and (2) the ability of the Austrian Volksbanken sector (unrated) to provide support, if needed. These factors will determine any downward adjustment of VBAG's caa1 BCA.

Moody's also downgraded to Ba1 from Baa3 and placed on review for further downgrade the senior unsecured ratings of VBAG's former subsidiary Investkredit Bank AG (which VBAG assumed in September 2012).

The Caa2 ratings of the subordinate and senior subordinate debt of VBAG and its former subsidiary Investkredit Bank AG (Investkredit) were also placed on review for downgrade. Hybrid capital instruments of VBAG, Investkredit or other issuing entities of the group continue to be rated on an expected loss basis and remain unaffected by today's rating action.

RATING RATIONALE

- DOWNGRADE OF DEBT AND DEPOSIT RATINGS REFLECT UNCERTAINTY ABOUT THE PROVISION OF EXTERNAL SUPPORT

Recently, the officials of the Austrian government has stated publicly that it is no longer willing to step in to fill any further capital shortfalls at VBAG following those in 2009 and 2012. Instead, the sector as the bank's majority owner would need to provide the additional capital if needed. While Moody's does not infer from these statements that the probability of government support is zero, the rating agency has lowered its support assumptions for VBAG and reduced the support uplift incorporated in the rating to six notches from seven. In addition, the ratings remain on review for further downgrade to assess the Austrian government's intentions and likelihood of providing support in case of need.

Previously, VBAG's ratings reflected Moody's expectation of a very high probability of systemic support from Austria (Aaa, stable) being forthcoming in the event of need. The government owns around 43% of VBAG. Austria evidenced its commitment in the past through repeated support measures for VBAG since the onset of the financial crisis including a EUR1 billion injection of participation capital in 2009 and EUR250 million of equity provided in 2012 . In March 2013, VBAG received a EUR100 million asset guarantee until 2015.

- POTENTIAL ADDITIONAL CAPITAL NEEDS TO ENSURE ONGOING COMPLIANCE WITH CAPITAL REQUIREMENTS AT THE LEVEL OF THE VOLKSBANKEN SECTOR

A potential remapping of VBAG's E BFSR could result from additional capital needs that may necessitate a capital injection at the level of the sector. According to a draft report on the Joint Risk Assessment and Decision-Process (JRAD), the Austrian regulator requires a 13.6% minimum total capitalisation of the Volksbanken sector under Basel III. Despite a 15% capitalisation under Basel II.5 as of October 2013, Moody's believes that there is a reasonable likelihood that additional capital will be needed at the level of the sector in the medium term because of (1) VBAG's continued weak operating performance and profitability, and (2) the need to replace the government's EUR300 million participation capital at the end of 2017 when it will lose its regulatory recognition. Further provisioning needs may arise from the European Central Bank's Comprehensive Assessment which the sector is subject to.

In Moody's central scenario, the sector continues to be able to address capital needs on its own, which may include additional capital raising at the level of the sector. In addition, Moody's expects that VBAG's deleveraging will also be a crucial element for the sector to comply with minimum capitalisation needs from the Austrian regulator. VBAG continued to downsize its non-core operations to EUR8.2 billion assets in September 2013, down from EUR10.7 billion at year-end 2012. This has resulted in significantly stronger capital ratios of 13.0% Tier 1 and 17.5% total capitalization under Basel II.5, up from 10.9% and 15.7% at year end.

- VBAG REMAINS VULNERABLE GIVEN ITS CONTINUED WEAK FUNDAMENTALS AND FURTHER TAIL RISK FROM ROMANIAN OPERATIONS

VBAG continues to show (1) weak fundamentals given the poor operating performance, (2) asset quality weaknesses concentrated in its EUR8.2 billion non-core portfolio and its Romanian operations. As a result, visibility of VBAG's core earnings remains low.

VBAG showed moderate provisioning levels of 52% as of September 2013, against non-performing loans of 19.2% or EUR2.4 billion in VBAG's loan book. The bank's Romanian operations pose particular credit risks. VBAG holds 51% in VB Romania (unrated), which is accounted for at equity since September 2011, having been fully consolidated before. Apart from EUR1.1 billion impaired loans there is significant additional risk for further impairments in VB Romania's EUR3.8 billion loan portfolio, in Moody's view. In October 2013, VB Romania needed a capital injection of EUR120 million, of which VBAG provided EUR61 million on their pro-rata ownership basis. As of September 2013, VBAG continued to provide EUR1 billion funding to VB Romania.

WHAT COULD MOVE THE RATING -- UP / DOWN

Downward pressure on VBAG's standalone BCA would emerge if Moody's believes that the sector does not have the capacity to support VBAG, in case of need. Capital shortfalls at the level of VBAG might be one issue that would trigger the need for this support. Further pressure would arise if VBAG's funding profile and liquidity comes under pressure; any delay in the bank's ability to offload its substantial run-down portfolio would likely trigger this extra pressure.

VBAG's debt and deposit ratings could suffer from downward pressure as a result of (1) pressure on its BCA; and/or (2) if Moody's further revises its assumptions regarding the likelihood of the Austrian government being willing to provide systemic support to VBAG.

Upward pressure on VBAG's BFSR would result from a successful recapitalisation and / or asset disposals that would allow VBAG to execute its restructuring plan. In particular, a successful deleveraging and de-risking of its balance sheet, which will support the preservation of an adequate liquidity position.

Upward pressure on the bank's debt and deposit rating would require substantial improvements in the bank's standalone BCA. Moody's believes that these improvements are currently unlikely given the high level of support already incorporated into the bank's ratings.

LIST OF AFFECTED RATINGS

The following ratings of VBAG were downgraded:

- Long-term senior debt and deposit ratings and issuer rating to Ba1, review for downgrade, from Baa3, stable;

- Short-term debt and deposit ratings to Not Prime from Prime-3.

The following rating of VBAG was affirmed:

- E BFSR, equivalent to a BCA of caa1.

The following ratings of VBAG and Investkredit Bank AG were placed on review for downgrade:

- Subordinate and senior subordinate debt ratings at Caa2.

The following ratings of Investkredit Bank AG were downgraded:

- Long-term senior unsecured debt ratings to Ba1, review for downgrade, from Baa3, stable.

PRINCIPAL METHODOLOGIES

The principal methodology used in these ratings was Global Banks published in May 2013. Please see the Credit Policy 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 rating action on the support provider and in relation to each particular 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 rating action, and whose ratings may change as a result of this 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.

Mathias Kuelpmann
Senior Vice President
Financial Institutions Group
Moody's Deutschland GmbH
An der Welle 5
Frankfurt am Main 60322
Germany
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

Carola Schuler
MD - Banking
Financial Institutions Group
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

Releasing Office:
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 Oesterreichische Volksbanken AG to Ba1 from Baa3; ratings on review for downgrade
No Related Data.
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