Fitch Affirms 2 Croatian Banks

Mon Apr 28, 2014 10:45am EDT

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(The following statement was released by the rating agency) LONDON/WARSAW, April 28 (Fitch) Fitch Ratings has affirmed Zagrebacka Banka d.d.'s (ZABA) Long-term Issuer Default Rating (IDR) at 'BBB' with a Negative Outlook. Fitch has also affirmed Privredna Banka Zagreb d.d.'s (PBZ) Support Ratings at '2'. A full list of rating actions is available at the end of this commentary. KEY RATING DRIVERS - ZABA's IDRS AND SUPPORT RATING ZABA's Long- and Short-term IDRs and Support Ratings are based on potential support available from its ultimate parent, UniCredit S.p.A. (UC; BBB+/Negative/bbb+). The affirmation of the Long- and Short-term IDRs and Support Rating reflects Fitch's view that UC will continue to have a strong propensity to support ZABA given the strategic importance of the Central and Eastern Europe (CEE) markets to UC. The Negative Outlook on the Long-term IDR mirrors that on the Croatian sovereign. Although ZABA's direct owner's, UniCredit Bank Austria AG (UCBA, A/Negative/bbb+), Long-term IDR at present benefits from Fitch's view of potential support from Austrian sovereign due to its systemic importance. Fitch does not incorporate any potential support coming directly from UCBA into ZABA's IDRs and Support Rating. This reflects Fitch's view that the Austrian authorities would probably look to UC to provide support to the CEE subsidiaries before allowing any Austrian sovereign support to flow through to these entities as well as Fitch's expectation of weakening sovereign support (for more details on the latter please see 'Fitch Revises Outlooks on 18 EU Commercial Banks to Negative on Weakening Support' available at www.fitchratings.com). This view also considers the risk that any potential negative developments at UC could ultimately also result in deterioration of UCBA's standalone credit profile, weakening its ability to provide support to the CEE subsidiaries. RATING SENSITIVITIES - ZABA's IDRS AND SUPPORT RATING Any downgrade of UC's Long-term IDR would likely result in a downgrade of ZABA's Long-term IDR. ZABA's IDRs could also be downgraded if (i) UC markedly changes its CEE strategy, resulting in a lower expectation of parent support for its subsidiaries in the region in general, and ZABA in particular; or (ii) Croatia's Country Ceiling being downgraded to 'BBB-' from 'BBB'. Fitch considers the second scenario to be more likely given the Negative Outlook on the Croatian sovereign rating of 'BB+'. The upgrade of ZABA's Long-term IDR would be contingent on both UC and the Croatian sovereign being upgraded. ZABA's Support Rating could be downgraded to '3' from '2' if the bank's Long-term IDRs are downgraded by two notches, to 'BB+' from 'BBB'. KEY RATING DRIVERS AND SENSITIVITIES - PBZ's SUPPORT RATING PBZ's Support Rating of '2' reflects Fitch's opinion that there is a high probability that PBZ's 77% owner, Intesa Sanpaolo (BBB+/Negative/bbb+) will support its subsidiary should the need arise. In light of the parent bank's strategic focus on the broader CEE, Fitch believes, PBZ is a strategic subsidiary for its parent. PBZ's Support Rating could be downgraded in case of a multi-notch downgrade of the parent bank's Long-term IDR, indicating a reduced ability to support the subsidiary, which Fitch currently does not expect. A multi-notch downgrade of Croatia's Long-Term IDRs, and hence its Country Ceiling, could also cause the Support Rating to be downgraded. KEY RATING DRIVERS- ZABA's VR ZABA's 'bb+' Viability Rating (VR) reflects its leading market position, sound capitalisation and funding profile. It also considers a prolonged recessionary and changing regulatory environment. ZABA is the largest bank in Croatia with around a 26% share in loans and deposits in the domestic banking system. Therefore, its standalone profile has been negatively affected by the prolonged recession, which resulted in continued private sector deleveraging and high unemployment (17.6%), and hence, a marked deterioration of domestic banks' assets quality and profitability. Fitch forecasts 0.2% GDP contraction for 2014 and only 0.6% growth in 2015. With no marked economic recovery, ZABA's asset quality is likely to remain under pressure. Impaired loans at ZABA reached 16% of total gross loans at end-2013, slightly above the banking sector average of 15.6% and Fitch expects the ratio to worsen as the economy remains in recession. ZABA's capitalisation was sound at end-2013 with a Fitch Core Capital ratio (FCC) of 28.6%. However, moderate reserve coverage of impaired loans resulted in considerable net impaired loans at 36% of FCC, weakening somewhat the quality of capital. Furthermore, internal capital generation is likely to be subdued in the short- to medium-term due to the weak economy and also due to legislative changes (Consumer Credit Act and higher provisioning requirements with the change in law by the Croatian National Bank in October 2013), putting further pressure on capitalisation. RATING SENSITIVITIES - ZABA's VR An upgrade of ZABA's VR is unlikely, given the risks associated with the weak operating environment in Croatia. The VR is sensitive to a further deterioration in the operating environment, including that evidenced by a potential downgrade of the sovereign rating. According to Fitch criteria the sovereign rating would often act as an effective cap on the maximum level of VR in a jurisdiction. The VR is also sensitive to the continued recessionary environment resulting in reduced profitability through i) further deterioration of asset quality leading to higher non-income generating assets on the balance sheet, ii) lower levels of earnings from no or low loan growth and higher loan impairment charges due to increased impairments. If these result in pressure on capitalisation the VR will most likely be downgraded. The rating actions are as follows: ZABA: Long-term foreign currency IDR: affirmed at 'BBB', Outlook Negative Short-term foreign currency IDR: affirmed at 'F3' Viability Rating: affirmed at 'bb+' Support Rating: affirmed at '2 PBZ: Support Rating: affirmed at '2' Contact: Primary Analyst Banu Cartmell Director +44 20 3530 11 09 Fitch Ratings Limited 30 North Colonnade London E14 5GN Secondary Analyst Agata Gryglewicz Analyst +48 22 330 69 70 Committee Chair Artur Szeski Senior Director +48 22 338 6292 Media Relations: Hannah Huntly, London, Tel: +44 20 3530 1153, Email: hannah.huntly@fitchratings.com. Additional information is available at www.fitchratings.com. Applicable criteria, 'Global Financial Institutions Rating Criteria' dated January 2014are available at www.fitchratings.com. Applicable Criteria and Related Research: Global Financial Institutions Rating Criteria here National Scale Ratings Criteria here Rating FI Subsidiaries and Holding Companies here Additional Disclosure Solicitation Status null/gws/en/disclosure/solicitation?pr_id=827939 ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.

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