Actions conclude the review extended on 15 February 2012
London, 30 May 2012 -- Moody's Investors Service has today downgraded Pohjola Bank's debt and
deposit ratings to Aa3 from Aa2; confirmed Pohjola Bank's Prime-1
short-term ratings and C- bank financial strength rating
(BFSR); and lowered Pohjola Bank's standalone credit assessment
within the C- BFSR range to baa2 from baa1.
Moody's has also downgraded OP-Pohjola Group's standalone
BFSR to C/a3 from B-/a1 and downgraded the insurance financial
strength rating (IFSR) of Pohjola Insurance Limited (PIL) to A3 from A2.
Today's actions conclude the review initially announced on 10 August
2011 and extended on 15 February 2012.
Moody's says that the downgrade of Pohjola Bank's and the cooperative
OP-Pohjola Group's standalone ratings reflects (i) both entities'
reliance on market funding; (ii) high sector concentration risks,
mainly related to real estate; and (iii) weakened earnings capacity
compared with the pre-crisis period. Moody's expects
that earnings will be vulnerable to increased funding costs as a result
of pressures stemming from the ongoing euro area crisis.
The downgrade of Pohjola Bank's debt and deposit ratings and PIL's
insurance financial strength rating reflects the downgrade of OP-Pohjola
Group's BFSR.
In addition to the above rating actions, Moody's has downgraded
Pohjola Bank's non-cumulative Tier 1 securities to Baa3 (hyb)
from Baa1 (hyb), prompted by the downgrade of the standalone rating
of the OP-Pohjola Group that acts as a cooperative support provider
for the bank. Moody's has also downgraded Pohjola Bank's
subordinated and junior subordinated debt ratings by four and three notches,
to Baa1 and Baa1 (hyb) respectively. All ratings carry a stable
outlook.
Please click on this http://www.moodys.com/viewresearchdoc.aspx?docid=PBC_142299
for the List of Affected Credit Ratings. This list is an integral
part of this Press Release and identifies each affected issuer.
For additional information on bank ratings, please refer to the
webpage containing Moody's related announcements http://www.moodys.com/bankratings2012.
RATINGS RATIONALE
The lowering of OP-Pohjola Group's and Pohjola Bank's
standalone ratings was primarily driven by the following rating drivers.
FIRST DRIVER --- RELIANCE ON WHOLESALE FUNDING
OP-Pohjola Group's funding profile is reliant on market funds;
around 35% of its funding stems from non-deposit funding,
including covered bonds and interbank placements. At year-end
2011, 57% of its total market funding was short-term
(maturing within one year). The reliance on market funding is more
pronounced for Pohjola Bank, for which 73% of funding relates
to market-based sources. Despite the bank's recent
good access to capital markets -- and recent maturity extensions
-- Moody's regards reliance on wholesale funding as
credit negative, due to the confidence-sensitive nature of
these funding sources and the potential for the availability and cost
of market-based funding to change unexpectedly.
SECOND DRIVER --- REAL ESTATE RELATED EXPOSURE
Real-estate-related exposures, including construction,
remain material at 13% of total OP-Pohjola Group's
exposures at end-2011 from 12% at end-2007,
and at 33% of total Pohjola Bank exposures from 29% at end-2007.
Moody's recognises that around 50% of total real-estate
exposure relates to the renting and operating of residential real estate,
which overall has seen lower levels of problem loans compared with other
sectors. Around 23% of these exposures also benefit from
guarantees from public-sector entities. However, Moody's
views this sizeable exposure to real estate and construction as a potential
vulnerability, as these sectors are typically more susceptible to
economic downturns.
THIRD DRIVER --- WEAKENED PROFITABILITY
OP-Pohjola Group's pre-provision income has fallen
to 0.7% of average total assets in 2011 from 1.4%
and 1.6% in 2006 and 2007, respectively, and
net interest margins to 1.2% of average earning assets in
2011 from 1.5% and 1.7% in 2006 and 2007,
respectively. Moody's expects that the intense competition for
Finnish household lending will continue to exert pressure on margins although
regulatory changes have already led to some increase in margins of new
loans. Additionally, Moody's believes that increased
pressure on funding margins and extending funding maturities may exert
additional pressure on Pohjola Bank's and the OP-Pohjola
Group's margins, specifically in the currently more volatile
bank funding markets, as a result of the ongoing crisis in the euro
area.
MITIGATING FACTORS
Moody's notes several mitigating factors that have limited the extent
of today's downgrades. OP-Pohjola Group's primary
exposure remains to Finland and specifically to Finnish households,
at two-thirds of total lending, which continue to show substantially
lower indebtedness compared with other Nordic economies. The Finnish
economy has also rebounded strongly after a contraction in 2009,
and the Group's relatively good asset quality performance reflects
this operating environment. In addition, Pohjola Bank has
demonstrated through recent debt issuances that it continues to benefit
from access to a wide investor base. The bank has also recently
extended its debt maturities and increased its liquidity buffer.
RATINGS RATIONALE -- DEBT & DEPOSIT RATINGS
The downgrade of Pohjola Bank's debt and deposit ratings reflects
(i) the lowering of the bank's standalone credit assessment to baa2
from baa1; (ii) the downgrade of the BFSR of the OP-Pohjola
Group to C/a3 from B-/a1; and (iii) Moody's assessment
of a very high probability of systemic support from the Finnish sovereign
(Aaa, outlook stable).
RATIONALE FOR SUBORDINATED DEBT AND JUNIOR SUBORDINATED DEBT DOWNGRADES
The downgrade of Pohjola Bank's subordinated and junior subordinated
debt ratings to Baa1 and Baa1 (hyb) respectively (one notch below the
bank's a3 adjusted baseline credit assessment (BCA), which
takes into account cooperative group support) reflects Moody's view
that systemic support is less likely to be extended to subordinated instruments
as well as the specific features of these instruments.
Pohjola Bank's junior subordinated debt has an interest deferral
option if the bank's capitalisation falls below the regulatory minimum.
However, in a liquidation scenario, junior subordinated debt
is structured so that it would not be in a junior position relative to
plain-vanilla subordinated debt. Therefore, the notching
of these two debt instruments and resulting credit rating is the same.
The downgrade of Pohjola Bank's non-cumulative Tier 1 securities'
ratings to Baa3 (hyb) from Baa1 (hyb) follows the reduction in the adjusted
BCA to a3 from a1 which was lowered as a result of the downgrade of the
OP-Pohjola Group. These Tier 1 securities are rated three
notches below Pohjola Bank's adjusted BCA.
RATIONALE FOR THE DOWNGRADE OF POHJOLA INSURANCE LIMITED
The downgrade of PIL's insurance financial strength rating (IFSR) to A3
with a stable outlook reflects the rating action on the wider OP-Pohjola
Group, despite the continued healthy standalone financial fundamentals
and strong market position of the insurance operations. As a result
of this rating action, PIL's IFSR is now in line with the
a3 adjusted BCA of Pohjola Bank. This reflects a combination of
(i) structural subordination if PIL were to issue debt (i.e.,
senior debt issued by PIL would likely be rated one notch below the a3
adjusted BCA of Pohjola Bank); and (ii) the fact that PIL is outside
of the Group's joint and several liability agreement.
TODAY'S ACTIONS FOLLOW REVIEW ANNOUNCEMENTS ON 15 FEBRUARY 2012 AND EARLIER
Today's rating actions follow Moody's decision to review for downgrade
the ratings for 114 European financial institutions (see "Moody's reviews
Ratings for European Banks", 15 February 2012 (http://www.moodys.com/research/Moodys-Reviews-Ratings-for-European-Banks--PR_237914).
Moody's downgrade of OP-Pohjola Group's subordinated
and junior subordinated debt ratings concludes the review of those ratings
initiated on 29 November 2011 (see Moody's reviews European banks' subordinated,
junior and Tier 3 debt for downgrade - http://www.moodys.com/research/Moodys-reviews-European-banks-subordinated-junior-and-Tier-3-debt--PR_231957).
WHAT COULD MOVE THE RATINGS UP/DOWN
An upgrade is unlikely in the near term, given today's negative
rating actions. However, Moody's says that in the medium
term, upwards pressure on the ratings could develop following (i)
an improvement in the group's profitability levels, without
increasing its risk profile; (ii) a further sustained extension in
its funding maturity profile combined with an increasing share of deposit
funding; and/or (iii) a sustained reduction in its concentration
risk, particularly related to real estate.
Moody's says that the current rating levels incorporate a degree
of expected further deterioration in the group's financial metrics
and operating environment. However, the ratings could be
lowered further if (i) Moody's considers that financing conditions
are likely to deteriorate; or (ii) that a macroeconomic slowdown
and/or a worse-than-expected deterioration in the bank's
financial fundamentals are below the levels commensurate with the Group's
current rating level.
In particular, the bank's BFSR could be downgraded if (i)
OP-Pohjola Group's funding conditions become more difficult
and/or costly; (ii) its asset-quality deteriorates more than
Moody's expects; and/or (iii) its profitability deteriorates
further, or its risk profile increases, for example as a result
of increased exposures to more volatile sectors.
The principle methodologies used in these ratings were Bank Financial
Strength Ratings: Global Methodology, published in February
2007, and Incorporation of Joint-Default Analysis into Moody's
Bank Ratings: Global Methodology, published in March 2012.
Please see the Credit Policy page on www.moodys.com for
a copy of these methodologies.
Headquartered in Helsinki, Finland, Pohjola Bank reported
consolidated assets of EUR42.6 billion at the end of March 2012.
OP-Pohjola Group reported consolidated assets of EUR94.1
billion.
REGULATORY DISCLOSURES
For ratings issued on a program, series or category/class of debt,
this announcement provides relevant 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 relevant 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 relevant 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.
The rating of rated entity Pohjola Insurance Ltd was initiated by Moody's
and was not requested by the rated entity.
Rated entity Pohjola Insurance Ltd or its agent(s) participated in the
rating process. This rated entity or its agent(s)provided Moody's
access to the books, records and other relevant internal documents
of the rated entity.
The ratings have been disclosed to the rated entities or their designated
agents and issued with no amendment resulting from that disclosure.
Information sources used to prepare the ratings are the following :
parties involved in the ratings, parties not involved in the ratings,
public information, and confidential and proprietary Moody's
Investors Service information.
Moody's adopts all necessary measures so that the information it
uses in assigning the ratings 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.
Moody's considers the quality of information available on the rated
entities, obligations or credits satisfactory for the purposes of
issuing these ratings.
Moody's Investors Service may have provided Ancillary or Other Permissible
Service(s) to the rated entities or their related third parties within
the two years preceding the credit rating action. Please see the
special report "Ancillary or other permissible services provided
to entities rated by MIS's EU credit rating agencies" on the
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The below contact information is provided for information purposes only.
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for the last rating action and the rating history.
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Simon Harris
MD - Financial Institutions
Financial Institutions Group
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Moody's downgrades Pohjola Bank, OP-Pohjola Group and Pohjola Insurance
