Ratings of VBAG's subsidiary Investkredit affirmed at Baa2/E+; stable outlook
Frankfurt am Main, April 06, 2011 -- Moody's Investors Service has today downgraded the long-term senior
debt and deposit ratings of Österreichische Volksbanken AG (VBAG)
by one notch to Baa2 from Baa1, following Moody's re-assessment
of future extraordinary systemic support assumptions.
Concurrently, the rating agency affirmed VBAG's E+ standalone
bank financial strength rating (BFSR), mapping to B1 on our long-term
scale. Both the BFSR and the senior debt and deposit ratings now
carry a stable outlook. VBAG's Prime-2 short term
ratings were affirmed.
Moody's has also affirmed at Baa2 the long-term debt and
deposit ratings of VBAG's subsidiary Investkredit Bank AG (Investkredit).
The rating agency affirmed Investkredit's E+ standalone BFSR
(mapping to B1 on our long-term scale). Both the BFSR and
the long-term debt and deposit ratings now carry a stable outlook.
Investkredit's Prime-2 short-term ratings were affirmed.
VBAG's senior subordinated debt was downgraded to Baa3 from Baa2.
Its hybrid securities continue to be rated on an expected-loss
basis and are not affected by today's rating action.
Investkredit's senior subordinated debt was affirmed at Baa3.
As of March 2011, Investkredit resumed coupon payments on its hybrid
capital. As a result, the ratings are no longer positioned
based on an expected loss analysis, but are in line with normal
notching conventions for hybrid securities and anchored from Investkredit's
Adjusted Baseline Credit Assessment (Adjusted BCA) of Ba2. The
Adjusted BCA reflects the bank's standalone credit strength, including
parental and/or cooperative support, if applicable. The Adjusted
BCA excludes systemic support expectations. The rating agency upgraded
Investkredit's non-cumulative hybrid securities (Tier 1 instruments)
to B2 (hyb) from Caa1 (hyb). It also upgraded Investkredit's
Upper Tier 2 securities ("Ergänzungskapitalanleihen") to B3 (hyb)
from Caa2 (hyb). The outlook on all the hybrid instruments is stable.
For a detailed list of ratings affected please refer to the section on
Investkredit's hybrid capital below.
Any subsequent short-term and long-term senior debt,
subordinated debt and hybrid debt instruments issued by VBAG will be rated
P-2, Baa2, Baa3 and Caa2 (hyb), respectively.
Any subsequent short-term and long-term senior debt,
subordinated debt and hybrid debt instruments issued by Investkredit will
be rated P-2, Baa2, Baa3, B2 (hyb) (Tier 1),
B3 (hyb) (Ergänzungskapital), respectively.
For a detailed list of ratings affected please refer to the end of the
press release.
RATINGS RATIONALE
VBAG's LONG-TERM RATING DOWNGRADED TO Baa2 STABLE,
BFSR AFFIRMED AT E+
The downgrade of VBAG's senior debt ratings by one notch to Baa2
from Baa1 reflects the reduction in Moody's systemic support assumptions
for the bank from those previously factored into the ratings during the
financial crisis. The Baa2 long-term ratings now include
two notches of sector and three notches of systemic support over the B1
standalone level. Moody's assumptions for high sector support
are underpinned by the substantial levels of funding from the cooperative
sector while recognizing the limited financial capabilities of the sector
to provide capital assistance, in case of need.
"We continue to factor a very high level of systemic support into
VBAG's ratings to reflect Moody's assumption of ongoing support
from the government for the Austrian Volksbanken as a systemically important
sector", explains Mathias Külpmann, a Senior Vice
President at Moody's and lead analyst for the bank. The reversal
of some of the extraordinary systemic support reflects the necessity and
measures taken to repay parts of the capital provided by the Austrian
government. However, given the ongoing fragility of VBAG's
standalone profile, the rating still includes a component of extraordinary
support.
The long-term ratings now carry a stable outlook. If the
sector dispatches of its interest in VBAG, Moody's will revisit
its support assumptions for both the sector and the central government.
The affirmation of the E+ BFSR reflects Moody's view that VBAG
will likely continue to face substantial challenges in its efforts to
rebuild some of its previous financial strength and that it has yet to
demonstrate that its business model is economically viable and that its
franchise is sustainable.
Despite the fact that VBAG has managed to stabilise its capitalisation
(a Tier 1 ratio relative to total risk of 8.9% as of Q3
2010) and funding profile, Moody's argues that the BFSR currently
continues to be constrained by several factors, particularly:
(i) Continued concerns about the long-term viability of VBAG's
lending-biased franchise and VBAG's limited earnings power,
particularly after the planned divestment of its retail operations in
Central and Eastern Europe (CEE);
(ii) Low capital quality, consisting mostly of hybrid capital components
(including the EUR1 billion participation capital provided by the Austrian
government during the financial crisis) and of minority interests resulting
in a 2.4% Core Tier 1 ratio; and
(iii) Impaired asset quality, although this has stabilised at the
current low levels.
Moody's anticipates that VBAG's owners will raise EUR300 million
capital in order to repay the part of the participation capital to the
Republic of Austria that is due by year-end 2011; if not repaid
it would allow the Republic to become the bank's majority owner.
The rating action on VBAG also takes into account the declared downsizing
(from EUR50 billion of total assets currently to EUR30 billion) and streamlining
of the structure of the group:
(i) The targeted disposal of VBAG's 51% stake in Volksbanken
International (VBI; total assets of EUR13.9 billion,
unrated) with its retail franchise in CEE should improve VBAG's
financial profile in terms of capitalisation, liquidity profile
and asset quality. Furthermore, VBAG's trimmed operations
should become more compatible with the commercial interests and financial
means of its majority owner, the Austrian Volksbanken or credit
cooperatives (total assets of EUR29 billion in the primary sector;
unrated). At the same time, VBAG will lose major parts of
its earnings generation capacity.
(ii) The intra-group merger with its subsidiary, Investkredit,
targeted for later this year and a consequence of VBAG's planned
divestment of its retail business, aims to focus the group's
business activities on corporate and real estate lending as well as being
a service provider for the cooperative banks. The merger should
also achieve more efficient corporate governance, capital allocation
and cost benefits over time.
The rating also reflects VBAG's access to and reliance on the reserve
requirements and excess liquidity of the Austrian Volksbanken sector that
provides a significant and vital part of VBAG's funding.
While Moody's considers VBAG's liquidity buffer of EUR3 billion
to be adequate, it also notes that EUR3 billion of state-guaranteed
bonds will mature over the next 2.5 years. Given VBAG's
limited access to wholesale funding, the sale of VBI within the
next 12-18 months is expected to provide for the necessary relief.
The rating agency revised the outlook on the BFSR to stable from negative,
given (i) that challenges from a potential adverse change in the overall
economic environment should be contained; and (ii) the bank's
improved capital and liquidity situation following government's
support.
INVESTKREDIT'S BFSR STABILISED AT E+, LONG-TERM
RATING AT Baa2 STABLE
Moody's affirmation of the E+ BFSR for Investkredit primarily
accounts for (i) the challenges that Investkredit faces in re-establishing
its lending-biased franchise, both on the corporate and the
real-estate side, in particular given a limited product portfolio
and few cross-selling opportunities; (ii) Investkredit's
funding dependence on VBAG; and (iii) Investkredit's impaired
asset quality.
The BFSR also reflects that Investkredit's liquidity and risk management
is fully integrated into VBAG and also reflects Investkredit's capital
levels, which are able to absorb losses in a base-case scenario.
Investkredit's portfolio was severely hit by the financial crisis,
with non-performing loans (NPLs) at 9.4% as of year-end
2009, resulting mainly from a leveraged finance portfolio and loans
originated to borrowers in CEE. The portfolio now benefits from
an increased coverage of 70%.
The rating agency moved the outlook to stable from negative as asset quality
has stabilised, albeit at an impaired level. Asset-quality
risks have been reduced in a downside scenario as Investkredit has moved
to a more cautious borrowing approach, which has led to significant
reductions in its balance sheet.
Investkredit's senior bank and deposit ratings include five notches
of parental support, which aligns VBAG's and Investorkredit's
senior debt and deposit ratings at the Baa2 level.
INVESTKREDIT'S HYBRID CAPITAL UPGRADED
As of March 2011, Investkredit resumed coupon payments on its hybrid
capital. Moody's therefore returned to normal notching conventions
for these securities, which are anchored from Investkredit's
Adjusted BCA of Ba2. As a result, Moody's upgraded the ratings
of the non-cumulative hybrid securities (Tier 1 instruments) issued
by Investkredit's subsidiaries, Investkredit Funding Ltd and Investkredit
Funding II Ltd, to B2 (hyb) from Caa1 (hyb). The ratings
are positioned three notches below the Adjusted BCA, reflecting
their deeply subordinated claim in liquidation and non-cumulative
coupon skip mechanism tied to the breach of a balance sheet loss trigger.
Moody's also upgraded the ratings of the Upper Tier 2 securities
("Ergänzungskapitalanleihen" AT0000A0H874, AT0000322581,
AT0000A05HC5) to B3 (hyb) from Caa2 (hyb). The ratings are positioned
four notches below the Adjusted BCA, reflecting their deeply subordinated
claim in liquidation and non-cumulative coupon skip mechanism tied
to the breach of a net loss trigger. The outlook on all the hybrid
instruments is stable.
WHAT COULD CHANGE THE RATING UP/DOWN
Positive implications for VBAG's BFSR would depend on (i) a significant
improvement in VBAG's earnings generation capacity on the back of
a re-established franchise; (ii) a substantial relief on its
needs to refinance outstanding debt obligations; and (iii) an improvement
in the quality of capital. At present, upward pressure on
VBAG's debt and deposit rating is limited, as a possible improvement
in the BFSR is likely to be compensated by a further reduction of support
uplift that still includes a component of extraordinary support.
Downward pressure on the VBAG's BFSR could be exerted if (i) the
sector reduces its commitment and withdraws its liquidity from the bank;
or (ii) asset quality problems are exacerbated in (a) VBAG's future
core portfolio, including corporate loans or real estate loans;
or (b) in VBAG's CEE operations, as represented by VBI,
thereby precluding a sale of VBI. Downward pressure on VBAG's
senior rating would result from pressure on its BFSR and/or weakening
support from the sector, which would imply pressure on both cooperative
support and systemic support.
DETAILED LIST OF RATING ACTIONS
Österreichische Volksbanken AG (VBAG)
- BFSR: E+ (B1), outlook changed to stable from
negative
- senior debt and deposit ratings: Baa2, outlook changed
to stable from negative
- subordinated debt ratings: Baa3, outlook changed
to stable from negative
- short-term rating: Prime-2 affirmed
- junior subordinated rating (Ergänzungskapital): Caa2
(hyb), with stable outlook
- non-cumulative preferred securities (Tier 1 instruments):
Caa2 (hyb), with stable outlook
Investkredit Bank AG (Investkredit)
- BFSR: E+ (B1), outlook changed to stable from
negative
- senior debt and deposit ratings: Baa2, outlook changed
to stable from negative
- subordinated debt ratings: Baa3, outlook changed
to stable from negative
- short-term rating: Prime-2 affirmed
- junior subordinated rating (Ergänzungskapital): B3
(hyb), with stable outlook
- non-cumulative preferred securities (Tier 1 instruments):
B2 (hyb), with stable outlook
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.
LAST RATING ACTIONS
Moody's most recent rating action on VBAG was on 11 Aug 2010, when
the rating agency withdrew the ratings of two covered bonds issued by
VBAG.
Moody's most recent rating action on Investkredit was on 03 Nov 2009,
when the rating agency corrected several hybrid security ratings of Investkredit.
Headquartered in Vienna, Austria, VBAG reported total assets
of EUR47.8 billion as at September 2010 and a pre-tax profit
for the first nine months 2010 of EUR72.9 million.
Headquartered in Vienna, Austria, Investkredit reported total
assets of EUR11.5 billion as at September 2010 and a pre-tax
profit for the first nine months 2010 of EUR42.8 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
Mathias Kuelpmann
Senior Vice President
Financial Institutions Group
Frankfurt am Main
Carola Schuler
MD - Banking
Financial Institutions Group
Moody's Deutschland GmbH
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Moody's downgrades VBAG to Baa2, affirms E+ BFSR; outlook stable (Austria)
