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Rating Action:

Moody's upgrades deposit ratings of Siauliu Bankas to Baa2/P-2 with stable outlook

16 May 2019

Stockholm, May 16, 2019 -- Moody's Investors Service, ("Moody's") has today upgraded the long- and short-term deposit ratings of Siauliu Bankas, AB (Siauliu Bankas) in Lithuania to Baa2/P-2 from Baa3/P-3. The baseline credit assessment (BCA) was upgraded to ba1 from ba2. The outlook changed to stable from positive.

The key drivers for the upgrade are the bank's stronger fundamentals, as reflected in the BCA: (1) a continued strengthening of the bank's capitalisation, inter alia supported by the conversion of a EUR 20 million convertible subordinate loan from the EBRD into equity in September 2018, and (2) a sustained improvement in the bank's profitability, supported by lending growth and good margins. This is balanced against the bank's high loan growth and sector concentration toward SMEs in Lithuania.

The stable outlook reflects Moody's expectation that continued favorable operating conditions in Lithuania will support the bank's fundamentals.

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

RATINGS RATIONALE

BASELINE CREDIT ASSESSMENT

The primary drivers for the upgrade of Siauliu Bankas' BCA is a continued strengthening of both its capitalisation and profitability.

The bank has continued to increase its capitalisation, inter alia supported by the conversion of a EUR 20 million convertible subordinate loan from the EBRD into equity in September 2018. Tangible common equity over risk weighted assets has continued to strengthen to 17.4% at year-end 2018 from 15.8% at year-end 2017. The bank's internal capital generation capacity has also improved, and Moody's expects capital adequacy to remain robust going forward. Moreover, the bank had a CET1 ratio of 15.0% at year-end 2018, 6.1 percentage points above its CET1 requirement of 8.9% at the same date.

The bank's profitability has also continued to strengthen with net income over tangible assets increasing to a strong 2.3% in 2018, compared to 1.5% in 2017. As net profit in 2018 was supported by net gains in fair value of subordinated loans, Moody's expects earnings to be around 1.5% going forward.

We position the BCA at ba1, at the bottom of the BCA range in the bank's scorecard, primarily to reflect the risk that Siauliu's rapidly expanding loan portfolio, with an annual average increase of about 15% between 2015-2018, and primarily towards the SME segment, will be particularly hit if there is a significant downturn in the Lithuanian economy. It also reflects the potential risk of money laundering issues (although there hasn't been any allegations regarding Siauliu in this respect), given the environment where the bank operates, and a limited risk linked to the legacy portfolio of Ukio bankas (which was acquired by Siauliu in 2013 at no cost following regulatory concerns which led to the withdrawal of Ukio's banking license), although the risk is now broadly in line with the bank's own portfolio.

DEPOSIT RATINGS

The upgrade of the long- and short-term deposit ratings follows the upgrade of the BCA, and incorporates Moody's advanced Loss Given Failure (LGF) approach and unchanged government support assumptions.

The upgrade of Siauliu Bankas' deposit ratings to Baa2/P2 from Baa3/P3 therefore reflects: (1) the upgrade of the bank's BCA and adjusted BCA to ba1; (2) the large amount (€480 million at year-end 2018) of junior deposits indicating a very low loss given failure according to Moody's advanced LGF analysis, as reflected by two notches of uplift for the deposit ratings above the adjusted BCA; and (3) Moody's assessment of a low probability of government support for Siauliu Bankas, which results in no additional uplift for the deposit ratings.

STABLE OUTLOOK

The stable outlook on Siauliu Bankas' long-term deposit ratings reflects Moody's expectations that the favorable operating conditions will continue to support the bank's fundamentals. The rating agency projects that the bank will maintain solid capitalisation, with a significant headroom above regulatory CET1 requirements, along with robust profitability.

WHAT COULD CAUSE RATINGS TO GO UP/DOWN

Siauliu Bankas' ratings could be upgraded if the bank were able to demonstrate resilience in terms of broadly maintaining its problem loan ratios, profitability and capitalisation, particularly in the event of an economic downturn.

Conversely, downward pressure on Siauliu Bankas could develop if the operating environment deteriorated significantly, resulting in a significant deterioration of the bank's asset quality, profitability or capital.

PRINCIPAL METHODOLOGY

The principal methodology used in these ratings was Banks published in August 2018. Please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

FULL LIST OF AFFECTED RATINGS

Issuer: Siauliu Bankas, AB

..Upgrades:

.... Adjusted Baseline Credit Assessment, Upgraded to ba1 from ba2

.... Baseline Credit Assessment, Upgraded to ba1 from ba2

.... Long-term Counterparty Risk Assessment, Upgraded to Baa1(cr) from Baa2(cr)

.... Long-term Counterparty Risk Rating, Upgraded to Baa1 from Baa2

.... Long-term Bank Deposits, Upgraded to Baa2 from Baa3, Outlook Changed To Stable From Positive

.... Short-term Bank Deposits, Upgraded to P-2 from P-3

..Affirmations:

.... Short-term Counterparty Risk Assessment, Affirmed P-2(cr)

.... Short-term Counterparty Risk Rating, Affirmed P-2

..Outlook Action:

....Outlook Changed To Stable From Positive

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 credit rating action on the support provider and in relation to each particular credit 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 credit rating action, and whose ratings may change as a result of this credit 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.

Louise Lundberg
VP - Senior Credit Officer
Financial Institutions Group
Moody's Investors Service (Nordics) AB
Norrlandsgatan 20
Stockholm 111 43
Sweden
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454

Sean Marion
MD - Financial Institutions
Financial Institutions Group
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454

Releasing Office:
Moody's Investors Service (Nordics) AB
Norrlandsgatan 20
Stockholm 111 43
Sweden
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454

No Related Data.
© 2021 Moody’s Corporation, Moody’s Investors Service, Inc., Moody’s Analytics, Inc. and/or their licensors and affiliates (collectively, “MOODY’S”). All rights reserved.

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