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Rating Action:

Moody's downgrades Raiffeisen Schweiz to Aa3; assigns stable outlook

19 Jul 2013

Standalone bank financial strength rating affirmed at C/a3

Frankfurt am Main, July 19, 2013 -- Moody's Investors Service has today downgraded Raiffeisen Schweiz's long-term debt and deposit ratings to Aa3 from Aa2 as well as the senior subordinated debt ratings to A3 from A2. The ratings outlook was changed to stable from negative. At the same time, the rating agency affirmed the C standalone bank financial strength rating (BFSR), equivalent to a baseline credit assessment (BCA) of a3. Moody's also affirmed the Prime-1 short-term ratings.

The key drivers of the action are (1) Raiffeisen Group's (unrated) above-average residential mortgage-loan growth over recent years, leading to increased susceptibility to shocks under a scenario of a significant slowdown in the Swiss housing market; and (2) the continued challenging operating environment, characterised by net interest margin compression and low interest rates, which constrain the group's profitability prospects.

Moody's says that Raiffeisen Schweiz's long-term senior ratings benefit from the unchanged strong cohesion of Raiffeisen Group while the sector's increased susceptibility to shocks is reflected in the lowering of Raiffeisen Schweiz's adjusted BCA to a2 from a1. The rating agency's overall assessment of very high sector and systemic support results in a three-notch uplift of the long-term senior ratings to Aa3 from Raiffeisen Schweiz's a3 BCA.

A full list of affected ratings can be found at the end of this press release.

RATINGS RATIONALE

-- DOWNGRADE OF THE LONG-TERM RATINGS

The downgrade of Raiffeisen Schweiz's long-term senior ratings to Aa3 from Aa2 reflects (1) Raiffeisen Group's increased susceptibility to shocks in a potentially adverse environment for the Swiss housing market, because of the group's above-market mortgage-loan growth in recent years; and (2) Moody's unchanged assumptions of very high sector and systemic support for Raiffeisen Schweiz, in case of need, from Raiffeisen Group and Switzerland (Aaa, stable), respectively. Moody's bases its assumptions on the Raiffeisen sector's importance in the domestic market, with market shares of approximately 8% in total client deposits. This provides Raiffeisen Schweiz's long-term ratings with three notches of ratings uplift from its a3 BCA (four notches previously).

Swiss Raiffeisen Group's mortgage-loan book grew by a compound average growth rate (CAGR) of 7.6% between 2007-12, to CHF136 billion, boosting its national market share to 16.1% from 14.1%. In Moody's view, this rapid growth has the potential to weaken its capital buffers in the case of a significant slowdown in the booming Swiss housing market, or during a prolonged period of weaker economic growth in Switzerland.

Given the outlook for continued slow economic growth, the key risk for the Swiss economy stems from the domestic real-estate market, where Moody's sees potential for an asset-price bubble if the above-average price inflation continues. From 2002-12, property prices in Switzerland have risen by 36.6% (3.2% CAGR), with significantly higher price appreciation in the more dynamic regions of Zurich and Lake Geneva. Furthermore, a prolonged period of adverse macroeconomic conditions and persistently low interest rates is likely to exacerbate the existing pressure on the group's asset quality and earnings, because lower interest payments from new/renewed mortgages offset the positive effects of the increased mortgage loan volumes. As a result, Raiffeisen Group's NIM fell to 1.31% in 2012, down from 1.65% in 2007, while net interest income grew to CHF2.1 billion in 2012, up from CHF1.9 billion in 2007.

Under Moody's central scenario -- which incorporates a gradual decline in underlying asset quality -- Raiffeisen Group would be able to cover expected losses from earnings and loan-loss reserves without a meaningful impact on its capital ratios. However, under Moody's adverse scenario -- which incorporates a significant downturn in the domestic real-estate market -- the group's aggregate capitalisation would decline towards the intervention level set by FINMA (10.4% total capital ratio in the case of Raiffeisen). This might require measures to bolster capital to return the group to the 13.6%-14.4% total capital ratio requirements mandated under the Capital Adequacy Ordinance (CAO). In Moody's view, this reveals the group's increased susceptibility to shocks potentially emanating from the domestic real-estate markets.

On a positive note, Moody's continues to recognise (1) Raiffeisen Group's limited exposure to perceived 'hot spots' and luxury segments within the Swiss real-estate market and its historically prudent underwriting standards; (2) its solid capitalization with an estimated Tier-1 ratio of 14.1% and a total capital ratio of 14.8% as of June 2013; (3) Raiffeisen Group's ability to generate sufficient profits to cover expected losses without compromising its franchise stability; and (4) its strong retail banking franchise throughout Switzerland. The latter is underpinned by a comprehensive sector-wide cross-guarantee mechanism, reflected in Moody's unchanged support assumptions.

-- DOWNGRADE OF THE SUBORDINATED DEBT RATINGS

The one-notch downgrade to A3 from A2 of Raiffeisen Schweiz's senior subordinated debt ratings mirrors the one-notch lowering of Raiffeisen Schweiz's adjusted BCA to a2 from a1. The subordinated debt ratings continue to be rated one notch below Raiffeisen Schweiz's adjusted BCA.

-- AFFIRMATION OF THE BFSR

Today's affirmation of Raiffeisen Schweiz's C BFSR, equivalent to a BCA of a3 reflects (1) the bank's ample liquidity buffers, further supported through its access to the group's liquidity; (2) historically very low levels of problem loans; and (3) the entity's improved total capital ratio, further complemented by the existing mutual support mechanism.

Moody's notes that Raiffeisen Schweiz's credit profile is characterised and constrained by its role as the service provider for the group, with corresponding repercussions for its efficiency and profitability. However, whilst Moody's recognises that profit maximisation is not Raiffeisen Schweiz's primary goal, its profitability and efficiency indicators remain weak compared with its European banking peers.

-- RATIONALE FOR THE STABLE OUTLOOK

The stable outlooks on all ratings of Raiffeisen Schweiz express Moody's view that currently foreseen risks to creditors are now incorporated in these ratings, reflecting Moody's expectation that the bank (1) will remain profitable if interest rates gradually rise, because of its effective interest-rate hedging policy; (2) will be able to cover its risk-provisioning needs during expected downturns in the credit cycle; and (3) can absorb some degree of unexpected losses without unduly compromising its stability.

WHAT COULD CHANGE THE RATINGS UP/DOWN

The stable outlook reflects the limited upside for Raiffeisen Schweiz's BFSR. However, upward pressure on the bank's BFSR could develop following (1) a marked and sustainable improvement in risk-adjusted levels of recurring profitability and efficiency; and/or (2) a broadened product range for the bank, leading to stronger and more diversified revenue streams.

Challenges for the bank's BFSR may arise from (1) a material deterioration in asset-quality beyond levels that are consistent with the bank's risk-absorption capacity, especially if this followed a marked slowdown in the Swiss real-estate market; (2) a sustained weakening of its recurring earnings power and levels of operating efficiency; and/or (3) an increase in the bank's risk appetite.

The long-term debt and deposit ratings could experience upward pressure in case of sustainable improvements in the intrinsic strength of the bank and the group. Downward pressure may be exerted on the long-term ratings if the group's financial profile weakens, especially if the real-estate market in Switzerland showed signs of overheating on a broad scale. Additionally, any weakening of the cohesion of the Raiffeisen Group as well as a reduction of the rating agency's very high probability of systemic support assumptions -- which Moody's considers as unlikely -- could exert negative pressure on the ratings.

LIST OF AFFECTED RATINGS

Raiffeisen Schweiz:

The following ratings were downgraded:

- Long-term bank debt and deposit ratings to Aa3 from Aa2

- Subordinated debt ratings to A3 from A2

The following ratings were affirmed:

- BFSR at C

- Short-term bank debt and deposit ratings at Prime-1

All ratings carry a stable outlook.

PRINCIPAL METHODOLOGIES

The principal methodology used in this rating 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.

Michael Rohr
Vice President - Senior Analyst
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 Raiffeisen Schweiz to Aa3; assigns stable outlook
No Related Data.
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