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Rating Action:

Moody's takes actions on Austrian Raiffeisen banks

19 Jul 2013

Frankfurt am Main, July 19, 2013 -- Moody's Investors Service has today taken rating actions on seven rated banks that are part of the Austrian Raiffeisen Bankengruppe (RBG; unrated). Moody's has downgraded the long-term senior ratings of five banks by one notch and affirmed the ratings of two entities. Further to these actions, Moody's has assigned stable outlooks to the ratings of three banks while the ratings of four banks carry a negative outlook.

Today's rating actions are driven by Moody's assessment of the Raiffeisen sector's moderate capitalisation, as well as its overall limited loss-absorption capacity relative to its risk profile. Its credit profile is skewed towards and therefore strongly correlated with its higher-risk Central and Eastern European (CEE) operations housed at Raiffeisen Bank International AG (RBI). As a result, the sector's capacity to extend capital support to all of its group members is constrained in an adverse scenario. The rating actions also capture Moody's view that RBG's capital strengthening is progressing at a slower pace than for many of its peers and slower than Moody's had anticipated.

Specifically, Moody's has:

(1) Affirmed the A2 and A3 long-term senior ratings of RBI and Raiffeisen Zentralbank Oesterreich AG (RZB), respectively, and changed the outlooks to negative from stable on both ratings.

(2) Downgraded by one notch to A2 from A1 the long-term senior ratings of Raiffeisenverband Salzburg, Raiffeisen-Landesbank Steiermark and Raiffeisenlandesbank Vorarlberg. All outlooks remain stable.

(3) Downgraded Raiffeisenlandesbank Niederoesterreich-Wien's (RLB NOe) and Raiffeisenlandesbank Oberoesterrreich AG's (RLB OOe) long-term senior ratings to A2 from A1. The ratings of the two entities carry negative outlooks and these actions conclude the reviews on the ratings of these two banks (initiated on 16 November 2012 and extended on 1 March 2013), resulting in a two-notch lowering of their respective baseline credit assessments (BCAs).

RZB's Prime-2 short-term rating as well as the Prime-1 short term ratings of all others entities were affirmed.

Moody's says that while RBG's willingness to provide support to the sector's banks continues to be very high, its capacity to provide support in case of need remains limited and that the adjusted BCAs of baa2 reflect these support assumptions. As such, Moody's has affirmed or downgraded by up to two notches the senior subordinated and hybrid debt ratings of several of the seven banks' debt-issuing entities because these securities' ratings are notched off the banks' adjusted BCAs.

A summary of today's actions, which is an integral part of this press release and identifies each affected issuer is available at http://www.moodys.com/viewresearchdoc.aspx?docid=PBC_156488.

RATINGS RATIONALE

MODERATE GROUP CAPITALISATION PROVIDES A LIMITED CUSHION IN AN ADVERSE SCENARIO

Moody's says that the key driver for the rating actions is RBG's moderate capitalisation at a group level. Moody's considers the group's capitalisation as moderate relative to RBG's overall credit profile, which is skewed towards and therefore strongly correlated with its higher-risk Central and Eastern European (CEE) operations housed at RBI. The rating actions also take into account that RBG's capital strengthening is progressing at a slower pace than for many of its peers and also slower than Moody's had anticipated.

Under Moody's central scenario, capitalisation, loan-loss reserves and profit-generation capacity provide a sufficient cushion for both the sector and RBI. However, RBI's significant exposure to the more volatile operating environments in CEE exposes the bank (and therefore RBG overall) to significant tail risks. Although the group's Austrian exposures are less volatile, higher capital would be required to protect RBG against likely losses under Moody's adverse scenario.

The sector is challenged by the following issues (1) the repayment of state aid (which will become more expensive from 2014 and needs to be repaid by 2019); (2) the changing regulatory requirements regarding Basel III; and (3) potential adverse economic developments in the context of the euro area crisis, or other material adverse events in CEE that could burden asset quality, particularly for RBI.

The overall moderate core capital ratios of the Austrian Raiffeisen sector continue to lag those of their national and international peers. Moody's regards the capitalisation as relatively low, despite significant efforts to address capital requirements from the 2011 European Banking Authority (EBA) capital exercise. As of year-end 2012, RBG's Tier 1 ratio for credit risk stood at 9.1% and RBI's overall Tier 1 ratio at 11.2% and both ratios still lag those of their international peers. Moody's says that the sector is under rising pressure to raise additional capital which would be required to protect against significant tail risk and likely losses under our adverse scenario. In addition, RBI needs to replace EUR2.5 billion of participation capital by 2019, which includes state-aid of EUR1.75 billion provided during the financial crisis.

Several elements have limited the magnitude of today's rating action, including RBG's leading, entrenched franchise in Austria and its stable (though low) domestic earnings as well as an evident ability to raise capital. RBI's CEE operations have shown solid performance thus far under difficult conditions. This also supports RBG group's risk profile and the current rating levels of its rated group entities.

MOODY'S SUPPORT ASSUMPTIONS REMAIN UNCHANGED

The long-term senior ratings of all affected entities benefit from the rating agency's continued assumptions of RBG's very high willingness to support its group members. In addition, Moody's continues to believe that the group's capability to provide such support, in case of need, remains limited. The banks adjusted BCAs of baa2 reflect these support assumptions. Further, Moody's assumptions of very high support from the government of Austria (Aaa negative) are unchanged based on the dominant market position of the Raiffeisen sector in Austria (with about 30% of domestic deposit market shares). As a result, the entities affected by today's rating action benefit from three to five notches of rating uplift from their standalone BCAs.

--- RAIFFEISEN BANK INTERNATIONAL AG AND RAIFFEISEN ZENTRALBANK OESTERREICH AG

RBI's A2 long-term senior ratings were affirmed, while the outlook was changed to negative from stable driven by Moody's assessment of the pressures on the creditworthiness of RBG. Based on Moody's unchanged support assumptions, RBI's long-term ratings continue to benefit from two notches of uplift from sector support and three notches of systemic support uplift from the bank's ba1 standalone BCA.

For RZB, the rating action results in an outlook change to negative from stable, with the affirmation of the A3 long-term senior ratings. RZB's long-term senior ratings are notched off RBI's and incorporate the structural subordination of the senior obligations of the holding company RZB to those of its major operating entity, RBI.

--- RAIFFEISENVERBAND SALZBURG, RAIFFEISEN-LANDESBANK STEIERMARK AND RAIFFEISENLANDESBANK VORARLBERG

Moody's downgraded to A2 from A1 the long-term senior ratings for the three Raiffeisenlandesbanks reflecting the rating agency's assessment of the pressures on the creditworthiness of the broader RBG. Given the banks' assigned baa2 adjusted BCAs, the long-term ratings now incorporate three notches of ratings uplift from four previously. This mainly reflects Moody's unchanged assessment about the very high probability of systemic support, whereas its very high assumptions for sector support in case of need no longer contribute any rating uplift for these group entities at the adjusted BCA level of baa2. The stable outlooks on three banks' long-term ratings reflect the stable outlook on their standalone BCAs.

--- RAIFFEISENLANDESBANK NIEDEROESTERREICH-WIEN

The downgrade of RLB NOe's long-term senior ratings to A2 from A1 was prompted by the lowering of the bank's BFSR to D+/baa3. The downgrade also reflects Moody's unchanged assumptions of very high sector and systemic support that RLB NOe would receive, in case of need, as one of the larger members of RBG. These support assumptions result in ratings uplift of four notches from three previously.

Moody's says that the lowering of RLB NOe standalone financial strength rating to D+/baa3 from C-/baa1 reflects a combination of external and bank-specific factors, including (1) vulnerability to potential shocks or macroeconomic stress; (2) susceptibility to event and market risk; and (3) continued weak and volatile profitability.

RLB NOe's only adequate capitalisation raises its vulnerability to potential shocks or macroeconomic stress, whilst susceptibility to event and market risk emanates from the bank's large loan concentrations as well as sizeable related-party exposure and participations. Also, continued weak and volatile profitability stems from the bank's dependence on dividend income. Overall Moody's believes that the low interest-rate environment and fierce competition in Austrian SME and retail banking imply additional multiple challenges.

The bank's current capitalisation, based on its Tier 1 ratio of 10.3% as of December 2012 provides only a limited buffer to absorb potential losses under Moody's adverse scenario. Given the bank's significant counterparty and regional concentrations in its loan books and shareholdings, and some exposures to Europe's periphery, Moody's considers RLB NOe as vulnerable to asset-quality deterioration in case of a severe macroeconomic scenario.

In addition, RLB NOe's earnings power and therefore capital generation capacity is limited and below the average of Austrian peers. The dependence on income from its participation in RZB renders the bank highly susceptible to the underlying risk drivers inherent in the business profile of RZB and RBI, namely the exposure to CEE economies, a key rating restraint. The rating agency says that the constrained profitability will provide the bank with only a limited cushion against adverse developments.

The negative outlook on RLB NOe's A2 senior long-term ratings reflects Moody's assessment of the pressures on the creditworthiness of RBG. However, the negative outlook on the D+ BFSR reflects the bank's vulnerability to tail risk at its current, only adequate capital levels.

--- RAIFFEISENLANDESBANK OBEROESTERREICH AG

The downgrade of RLB OOe's long-term senior ratings to A2 from A1 was prompted by the lowering the bank's BFSR to D+/ba1. The downgrade also reflects Moody's unchanged assumptions of very high sector and systemic support that RLB OOe would receive, in case of need, as one of the larger members of RBG. These support assumptions result in ratings uplift of five notches from four previously.

Moody's says that the lowering of RLB OOe's standalone financial strength rating to D+/ba1 from C-/baa2 reflects (1) low capitalisation which is pressurised by weak asset quality, (2) susceptibility to event and market risk; and (3) continued weak and volatile profitability.

Susceptibility to event and market risk stems from the bank's large loan concentrations as well as sizeable related-party exposure and participations within and outside the Austrian Raiffeisen sector. Continued weak and volatile profitability stems from the bank's dependence on dividend income as well as the low interest-rate environment and a fiercely competitive market.

RLB OOe's capitalisation is low relative to its elevated risk profile. Its Tier 1 ratio of 8.8% as of year-end 2012 remains broadly unchanged, confirming Moody's view that the bank's capital replenishment capacity might be undermined by rising asset-quality pressures and suppressed profitability. With a problem loan ratio of 9.6% as of year-end 2012 (up from 7.5% in 2011), RLB OOe's asset quality is weak compared to peers. RLB OOe is vulnerable to asset-quality erosion and other shocks in the current Austrian economic environment, given the bank's significant counterparty and regional concentrations in its loan books and shareholdings and some exposures to Europe's periphery.

In addition, RLB OOe's limited earnings continue to be volatile. The bank's bottom-line is primarily a function of (1) income from its large portfolio of industrial participations, exposing the bank to the economic cycle in Austria; (2) its participation in RZB, rendering the bank highly susceptible to the underlying risk drivers inherent in the business profile of RZB and RBI (the exposures to CEE economies); and (3) the potential for further rising loan-loss provisioning requirements on the back of a concentrated loan book, which also includes substantial real-estate exposures. The rating agency believes that these challenges are better reflected in a standalone BCA of ba1.

While the negative outlook on RLB OOe's A2 senior long-term ratings reflects Moody's assessment of the pressures on the creditworthiness of RBG, the negative outlook on the D+ BFSR reflects the bank's vulnerability to tail risk at its current, low capital levels.

WHAT COULD MOVE THE RATING UP/DOWN

Rating upgrades for the rated entities of RBG are unlikely over the near term in view of today's actions and the negative outlooks for some banks, reflecting the persistent pressures on the overall creditworthiness of the Raiffeisen sector. A credible and accelerated capital-strengthening plan across the group's various levels would likely be needed to stabilise the sector's creditworthiness and the banks' ratings.

Unless the pace of capital strengthening accelerates, further downwards pressure might develop on the group entities' ratings as this might imply a lower capacity of sector support. Further, given the operational and financial interdependencies between the banks and the sector, a deterioration in RBG's commercial and financial profile could lead to simultaneous downward rating pressure on the banks' standalone BCAs. Additionally, a re-intensifying euro area debt crisis with detrimental effects on the sector bank's asset quality, earnings and capital resources exceeding Moody's expectations could prompt further downward rating pressure. A re-assessment of the very high systemic support assumptions factored into the ratings could also prompt rating downgrades, although this is considered unlikely at present.

The principal methodology used in these ratings was Moody's Global Banks Methodology 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.

The below contact information is provided for information purposes only. Please see the ratings tab of the issuer page at www.moodys.com, for each of the ratings covered, Moody's disclosures on the lead analyst and the Moody's legal entity that has issued the ratings.

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.

Andrea?Wehmeier
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 takes actions on Austrian Raiffeisen banks
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