VIENNA Aug 5 Ratings agency Moody's Investor Service downgraded part-nationalised Austrian lender Volksbanken AG (VBAG) on Tuesday to reflect what it called reduced assumptions for more state support.
Moody's cited new EU rules on supervising banks and winding down those in trouble as reasons for the move.
"The pressure on support results from the recent adoption of the Bank Recovery and Resolution Directive (BRRD) and the Single Resolution Mechanism (SRM) regulation in the EU," Moody's said.
The EU measures force bank investors to contribute to the rescue of failing lenders under certain circumstances, in a process known as "bail-in".
Once the BRRD is fully in force from the start of 2016, not only a bank's shareholders but also bondholders and even large depositors would have to lose money before government or euro zone money could be used to save a bank from collapse.
Austria broke new ground for debt markets in June by deciding to annul 890 million euros ($1.19 billion) of subordinated Hypo Alpe Adria debt guaranteed by the nationalised bank's home province of Carinthia.
The move triggered downgrades of other Austrian banks and the International Monetary Fund has said the move risked calling into question similar guarantees by other lenders.
Moody's cut its issuer, senior unsecured debt and deposit ratings for Volksbanken - one of six Austrian lenders undergoing scrutiny from the European Central Bank before it takes on supervision of big euro zone banks this year - to Ba3 from Ba1.
"The ratings now include four notches of support, down from previously six notches, and reflect the implications of Moody's reassessment of the support environment in Austria for VBAG," it said. Its outlook for the bank's long-term ratings is negative.
Its assumptions for VBAG were now in line with those for other systemically relevant banks in Austria expected to get state support if needed.
Moody's acknowledged the "substantial progress" Volksbanken has made in implementing a restructuring ordered by the European Commission in return for state aid, but said operating performance remained weak.
Austria became Volksbanken's second-biggest shareholder with a stake of 43 percent in 2012. It has ploughed 1.35 billion euros ($1.81 billion) of aid into the bank to keep it afloat.
The bank, majority owned by regional savings banks, posted a first-quarter loss of 57 million euros and has forecast a significant 2014 loss.
Moody's saw a "reasonable likelihood" that the wider Volksbanken sector - Volksbanken AG and its network of owner banks - would need more capital, but said its central scenario was for the sector to address capital needs on its own.
($1 = 0.7470 Euros) (Reporting by Michael Shields; Editing by Shadia Nasralla and Jason Neely)