MLBL's long-term rating confirmed; two banks remain on review for downgrade
London, 25 June 2009 -- Moody's Investors Service today downgraded the ratings of six Baltic banks.
The affected entities are Baltic International Bank (Latvia), BIGBANK
(Estonia), Norvik Banka (Latvia), Siauliu Bankas (Lithuania)
and Trasta Komercbanka (Latvia), with the BFSR of Mortgage and Land
Bank of Latvia (MLBL) also being downgraded, while its long-term
foreign currency deposit rating was confirmed.
Today's downgrades conclude the review process for the six banks that
was initiated on 8 June 2009, although Moody's notes that
the long-term debt and deposit ratings of Parex Bank and Swedbank
AS remain on review for possible downgrade. These reviews were
initiated on 11 May 2009 and 27 April, respectively, and both
are expected to be concluded in the next month following the release of
further information on Parex Bank and the conclusion of the review on
Swedbank AS's parent bank, Swedbank AB.
The full list of rating actions can be found below.
Today's rating actions are driven by the speed and depth of the
deterioration of the Baltic economies (Estonia, Latvia and Lithuania)
and its impact on the banks' standalone creditworthiness, as measured
by their bank financial strength ratings (BFSRs). With the three
economies in deep recession, corporate defaults are rising and Moody's
expects this to lead to significantly increased losses on the banks' corporate
loan portfolios. Moreover, the rating agency expects delinquencies
in the banks' retail portfolios to rise, reflecting higher unemployment,
lower income levels and a likely further decline in house prices.
Moody's expects these potential losses and substantial provisioning
needs to weaken Baltic banks' profitability and capital positions
over the next two years. The declining profitability trends were
already seen in the banks' Q1 financials. Also, a significant
deterioration in asset quality ratio indicators was visible in 2008 and
has continued this year.
Moody's notes, however, that the banks' funding
positions remain relatively comfortable with customer deposits being the
major source of funding for most of the entities. However,
the fierce competition for deposits will exert pressure on some of the
banks' funding. In particular, the rating agency remains
concerned about the future prospects of those banks that are reliant on
non-resident deposits for funding. A business model that
mainly relies on non-resident business could potentially be adversely
affected in the ongoing financial crisis.
Moody's has incorporated expected losses on bank loan portfolios into
its ratings for some time, but the weight that it attaches to certain
rating considerations, particularly capital and future earnings
prospects, has been increased to better reflect the present conditions.
This approach is consistent with Moody's reports "Calibrating Bank Ratings
in the Context of the Global Financial Crisis" and "Moody's Approach to
Estimating Bank Credit Losses and their Impact on Bank Financial Strength
Ratings", published in February and May, respectively,
this year. Both are available on www.moodys.com.
Moody's notes that there has been speculation that the Bank of Latvia
may be forced to devalue the lat and outlined its opinion on a devaluation
scenario in a recently published Special Comment entitled, "Living
on the edge: Latvian devaluation speculation and implications for
the sovereign rating".
Although the probability of a devaluation has recently declined due to
the Latvian parliament's approval of a fiscal package that was welcomed
by the EU and IMF, Moody's stresses that a devaluation cannot be
ruled out completely, as economic and social pressure in Latvia
will continue to be high for some time.
Therefore, Moody's already incorporates a moderate risk of
a devaluation into its estimates of expected bank credit losses.
However, the ratings of some banks would likely be downgraded further
if the risk of a devaluation were to increase. The rating agency
notes that a devaluation would lead to a further deterioration in the
banks' asset quality, given the significant amount of loans
in foreign currency. On average, foreign-exchange
loans account for around 90% of the Moody's rated banks'
total customer loans.
The long-term deposit and debt ratings of all the rated Baltic
banks carry negative outlooks, reflecting the negative outlook that
Moody's has placed on all three banking systems.
TODAY'S RATING ACTIONS
Moody's took the following rating actions on the Baltic banks:
Baltic International Bank
Baltic International Bank's E+ BFSR was affirmed, but
now maps to a BCA of B3 (from B2). Consequently, the bank's
long-term local and foreign currency deposit ratings were downgraded
to B3 from B2. The Not Prime short-term rating was affirmed.
The E+ BFSR and the B3 long-term local and foreign currency
deposit ratings carry a negative outlook.
The lowering of the bank's BCA reflects its relatively low capital
level with a capital adequacy ratio of 10.4% at end-March
2009, which raises its vulnerability to prolonged stress.
While acknowledging the bank's relatively small loan portfolio when
compared with that of its Baltic peers (25% of total assets),
there was a significant increase in problem loans last year. In
addition to weakening asset quality, further concerns relate to
the bank's loan portfolio concentrations to the real estate sector.
The downgrade also reflects Moody's concerns about how the ongoing recession
could affect the bank's business model, which is primarily
focused on private banking and non-resident business.
BIGBANK
Moody's downgraded BIGBANK's BFSR to E (mapping to the BCA of Caa1)
with stable outlook from E+ (mapping to the BCA of B1). The
bank's long-term deposit rating was downgraded to Caa1 with a negative
outlook from B1 following the downgrade of the BFSR. The Not Prime
short-term deposit rating was affirmed.
The magnitude of the downgrade and the negative outlook reflects Moody's
view that BIGBANK's capital position will come under significant
pressure in the short term because of its 100% exposure to higher-risk
consumer finance. Although the bank's total capital adequacy
ratio was 19.2% at the end of March 2009, Moody's
expects that future credit costs in its consumer loan book will lead to
a significant risk of the bank becoming undercapitalised. Moody's
notes that the bank reported an exceptionally high problem loan ratio
of 43% at the end of March 2009, a rapid increase from 18%
at the beginning of 2008. The rating agency adds that the downgrade
reflects its expectation that the bank's capital cushion under financial
covenants will narrow as it limits deterioration in the capital adequacy
ratio to 15%.
Mortgage and Land Bank of Latvia (MLBL)
Moody's confirmed MLBL's long-term foreign currency deposit
rating at Baa3 and downgraded its BFSR to E+ with a stable outlook
(mapping to a BCA of B1) from D- (mapping to a BCA of Ba3).
MLBL's long-term foreign currency deposit rating is at the
same level as the Latvian sovereign bond rating of Baa3. The outlook
on the Baa3 long-term deposit rating is negative, in line
with the negative outlook on the Latvian sovereign rating. The
Prime-3 short-term rating was confirmed.
The downgrade of the BFSR reflects the bank's weakened profitability
and asset quality. It also reflects Moody's expectation of
potential losses associated with the bank's significant exposure
to the property sector and SMEs. In particular, this is in
light of the bank's low loan loss reserves, which provided
a low 16% coverage of problem loans at the end of 2008.
Furthermore, the bank has reported a rapid increase in problem loans,
which accounted for 8.6% of gross loans at the end of 2008
compared with 2.7% at the end of 2007.
Commenting on keeping MLBL's long-term foreign currency deposit
rating at the same level as the government bond rating, Moody's
notes the government's very high commitment to support the bank.
This commitment is demonstrated by: (i) capital injections in the
past, most recently in January 2009 amounting to LVL29 million (US$59
million), and the planned LVL43 million (US$87 million) in
July 2009; (ii) the fact that the bank is wholly owned by the Latvian
government (the Ministry of Finance, specifically); and (iii)
the bank's important role as the sole development bank in Latvia
and its role as a contributor of state funds to the SME sector.
Also, supporting this view, Moody's understands that
the bank is in the process of being transformed into a pure development
bank. Accordingly, the rating agency continues to assess
the probability of government support as very high and consequently expects
that state support would be forthcoming if necessary.
Norvik Banka
Moody's downgraded Norvik Banka's BFSR to E+ with negative
outlook (mapping to a BCA of B1) from D- (mapping to a BCA of Ba3).
The bank's local and foreign currency deposit ratings were downgraded
to B1 from Ba3, due to the downgrade of the BFSR, also with
a negative outlook. The Not Prime short-term rating was
affirmed.
The downgrade reflects the potential losses stemming from the bank's
relatively concentrated corporate portfolio and reduced level of profitability
compared with previous years. While acknowledging the bank's
higher-than-average capital ratio of 14.2%
at the end of March 2009, Moody's notes that its loan book exhibits
concentrations to shipping and consumer finance, which have the
potential to generate large losses in the current environment.
Also of concern is the swift growth of problem loans, which accounted
for 12.5% of gross loans at the end of 2008, up from
1.5% at the beginning of the same year.
Siauliu Bankas
Moody's downgraded Siauliu Bankas's BFSR to D- (mapping to
a BCA of Ba3) with negative outlook from D (mapping to a BCA of Ba2).
The local and foreign currency deposit ratings were also downgraded to
Ba3 with negative outlook from Ba2 following the downgrade of the BFSR.
The Not Prime short-term rating was affirmed.
The downgrade and negative outlook reflect Moody's view that the bank's
profitability and asset quality is expected to be severely impacted by
the ongoing economic downturn due its sizeable exposure to SMEs and the
real estate sector, which are being adversely affected by the recession.
However, Moody's notes that the bank's customer loan portfolio
is not exposed to foreign-exchange risk to the same extent as its
Latvian peers. Also, standing at 15.9% at the
end of March 2009, the bank reports one of the highest capital adequacy
ratios in the Baltic region.
Trasta Komerbanka
Trasta Komercbanka's E+ BFSR was affirmed, but now maps
to a BCA of B3, down from B2. Consequently, the bank's
long-term local and foreign currency deposit ratings were downgraded
to B3 from B2. The Not Prime short-term rating was affirmed.
All the ratings carry a negative outlook.
The lowering of the bank's BCA incorporates its relatively weak
capital level, which raises its vulnerability to prolonged stress,
as well as its rapid asset growth over the past few years. Although
the bank's loan portfolio accounted for a relatively low 44%
of total assets at the end of 2008, potential losses associated
with its significant exposure to the property sector are a cause for concern.
Furthermore, the downgrade also reflects Moody's concerns about
how the ongoing recession will affect the bank's business model,
which is primarily focused on non-resident business.
PREVIOUS RATING ACTIONS AND METHODOLOGIES
Moody's last rating action on Baltic International Bank was on 8 June
2009 when Moody's placed its long-term local and foreign currency
deposit ratings on review for possible downgrade.
Moody's last rating action on BIGBANK was on 8 June 2009 when Moody's
placed its ratings on review for possible downgrade.
Moody's last rating action on Mortgage and Land Bank of Latvia was on
8 June 2009 when Moody's placed its ratings on review for possible downgrade.
Moody's last rating action on Norvik Banka was on 8 June 2009 when Moody's
placed its ratings on review for possible downgrade.
Moody's last rating action on Siauliu Bankas was on 8 June 2009 when Moody's
placed its ratings on review for possible downgrade.
Moody's last rating action on Trasta Komercbanka was on 8 June 2009 when
Moody's placed its long-term local and foreign currency deposit
ratings on review for possible downgrade.
The principal methodologies used in rating the banks were "Bank Financial
Strength Ratings: Global Methodology" (February 2007) and "Incorporation
of Joint-Default Analysis into Moody's Bank Ratings: A Refined
Methodology" (March 2007), which can be found at www.moodys.com
in the Credit Policy & Methodologies directory, in the Ratings
Methodologies sub-directory. Other methodologies and factors
that may have been considered in the process of rating these issuers can
also be found in the Credit Policy & Methodologies directory.
Baltic International Bank is headquartered in Riga, Latvia,
and reported consolidated total assets of LVL0.167 billion (EUR0.24
billion) at the end of December 2008.
BIGBANK is headquartered in Tallinn, Estonia, and reported
consolidated total assets of EEK2.9 billion (EUR0.18 billion)
at the end of December 2008.
Mortgage and Land Bank of Latvia is headquartered in Riga, Latvia,
and reported total assets of LVL969 million (EUR1.4 billion) at
the end of December 2008.
Norvik Banka is headquartered in Riga, Latvia, and reported
total assets of LVL506 million (EUR0.7 billion) at the end of December
2008.
Siauliu Bankas is headquartered in Siauliu, Lithuania, and
reported total assets of LTL2.1 billion (EUR0.6 billion)
at the end of December 2008.
Trasta Komercbanka is headquartered in Riga, Latvia, and reported
consolidated total assets of LVL0.28 billion (EUR0.4 billion)
at the end of December 2008.
London
Reynold R. Leegerstee
Managing Director
Financial Institutions Group
Moody's Investors Service Ltd.
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454
London
Kimmo Rama
Vice President - Senior Analyst
Financial Institutions Group
Moody's Investors Service Ltd.
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454
Moody's downgrades ratings of six Baltic banks
