Credit Opinion: Raiffeisenlandesbank Vorarlberg

Transcription

1 Credit Opinion: Raiffeisenlandesbank Vorarlberg Global Credit Research - 25 Jun 2014 Bregenz, Austria Ratings Category Moody's Rating Outlook Negative(m) Bank Deposits A3/P-2 Bank Financial Strength C- Baseline Credit Assessment baa2 Adjusted Baseline Credit Assessment baa2 Issuer Rating ST Issuer Rating A3 P-2 Contacts Analyst Phone Andrea Wehmeier/Frankfurt am Main Swen Metzler/Frankfurt am Main Carola Schuler/Frankfurt am Main Maximilian Denkmann/Frankfurt am Main Key Indicators Raiffeisenlandesbank Vorarlberg (Unconsolidated Financials)[1] [2]12-13 [2]12-12 [2]12-11 [2]12-10 [2]12-09 Avg. Total Assets (EUR million) 6, , , , ,390.7 [3]1.2 Total Assets (USD million) 9, , , , ,169.0 [3]0.2 [3]10.0 Tangible Common Equity (EUR million) Tangible Common Equity (USD million) [3]8.9 Net Interest Margin (%) PPI / Average RWA (%) [4]0.4 [5]0.8 Net Income / Average RWA (%) (Market Funds - Liquid Assets) / Total Assets (%) [5]1.0 [4]6.8 Core Deposits / Average Gross Loans (%) Tier 1 Ratio (%) [4] [5]9.6 Tangible Common Equity / RWA (%) [5]10.1 Cost / Income Ratio (%) [4]67.6 Problem Loans / Gross Loans (%) [4]2.2 Problem Loans / (Equity + Loan Loss Reserves) (%) [4]9.1 Source: Moody's [1] All figures and ratios are adjusted using Moody's standard adjustments [2] Basel II; LOCAL GAAP [3] Compound Annual Growth Rate based on LOCAL GAAP reporting periods [4] LOCAL GAAP reporting periods have been used for average calculation [5] Basel II & LOCAL GAAP reporting periods have been used for average calculation Opinion

2 SUMMARY RATING RATIONALE The A3 long-term deposit ratings of Raiffeisenlandesbank Vorarlberg (RLB Vorarlberg) reflect the bank's baseline credit assessment (BCA) of baa2 as well as our view that the probability of cooperative sector is very high and of government support, if needed, is high.. The long-term senior debt and deposit ratings of RLB Vorarlberg benefit from Raiffeisen Bankengruppe Austria's (RBG) very high willingness to support its group members, though we believe that the group's capability to provide such support, in case of need, remains limited. The bank's adjusted BCA of baa2 reflects these support assumptions. We also believe that the probability of systemic support for RLB Vorarlberg is high, due to the bank's integral role in the systemically relevant Raiffeisen sector in Austria. Both factors result in a two-notch uplift in the long-term deposit ratings to A3 from RLB Vorarlberg's baa2 BCA. We recently lowered our systemic support assumptions for the Austrian banking system to high from very high. This follows the 11 June 2014 proposal by the Austrian government to enact legislation designed to allow the government to bail-in nationalised Hypo Alpe-Adria-Bank International AG's (HAA) subordinated debt holders and void the State of Carinthia's (A2 stable) deficiency guarantees on that portion of the bank's debt. The unprecedented nature of the government's decision indicates, in our opinion, that Austrian authorities are now generally more willing to countenance bank resolutions in which losses may also be imposed on senior creditors. The key positive drivers of RLB Vorarlberg's standalone bank financial strength rating of C-, equivalent to a BCA of baa2, are its satisfactory financial fundamentals and its solid franchise in the Austrian province of Vorarlberg. Its standalone credit profile is constrained by the bank's relatively narrowly focused regional franchise and low profitability and its developing risk position including significant credit-risk concentrations within and outside the cooperative sector. Rating Drivers - Well established regional franchise with narrow geographical focus - Subdued profitability, with some dependence on RZB's earnings - Modestly improved, satisfactory capitalisation - Sound asset quality supported by conservative provisioning policy - Sound liquidity supported by diversified funding sources including retail deposits Rating Outlook The outlook on the BFSR is stable while the outlook on the bank's deposit ratings is negative. The negative outlook takes into account the recent adoption of the Bank Recovery and Resolution Directive (BRRD) and the Single Resolution Mechanism (SRM) regulation in the EU. In particular, this reflects that, with the legislation underlying the new resolution framework now in place and the explicit inclusion of burden-sharing with unsecured creditors as a means of reducing the public cost of bank resolutions, the balance of risk for banks' senior unsecured creditors has shifted to the downside. Although our support assumptions are unchanged for now, the probability has risen that they will be revised downwards to reflect the new framework. For further details, please refer to our Special Comment entitled "Reassessing Systemic Support for EU Banks," published on 29 May What Could Change the Rating - Up Positive rating pressure could develop if greater geographical and earnings diversification results in higher-quality earning streams as well as an improvement in the bank's risk profile, particularly through a reduction in its risk concentrations. In this context, we would expect sustainable improvements in profitability, efficiency and asset quality. The bank's debt and deposit ratings could benefit from (1) sustainable improvements in the bank's intrinsic strength; (2) strengthening of the Raiffeisen banking sector. What Could Change the Rating - Down Downward pressure on the bank's credit profile could result from material erosion in RLB Vorarlberg's local market

3 share or a deterioration in profitability, efficiency and asset quality. Any evidence of a further increase in its exposure to the real-estate sector - or equity participations that appear to affect the existing risk profile - could also exert downwards pressure on the bank's BFSR. Furthermore, an unexpected deviation from the bank's prudent management of liquidity and capital could have a negative rating impact. Downwards pressure could also be exerted on the long-term ratings as a result of following: (1) a significant deterioration in the commercial and financial profile of the Raiffeisen sector in Austria; and (2) adverse changes in the systemic support assumptions currently factored into RLB Vorarlberg's ratings. DETAILED RATING CONSIDERATIONS WELL ESTABLISHED REGIONAL FRANCHISE WITH NARROW GEOGRAPHICAL FOCUS With total assets of EUR6.7 billion, RLB Vorarlberg is one of the smaller Raiffeisenlandesbanken in Austria, with operations mainly in the State of Vorarlberg. RLB Vorarlberg is majority-owned by 23 local co-operative banks (Kreditgenossenschaften) in the region, for which the bank is the central institute. In Vorarlberg, the regional cooperative sector has a sizeable market share in retail banking and SME banking. RLB Vorarlberg's franchise value is constrained by the bank's significant investments in RZB (deposits Baa1 negative; stake is at 4.48%) relative to its overall size and to other Raiffeisen affiliated entities and its indirect investment in Raiffeisen Bank International (RBI, deposits A3 negative, BSFR D+/BCA ba1 stable). Although we acknowledge the indirect benefits from the geographic diversification of the Austrian Raiffeisen sector, the bank's limitation to its home region reflects a comparatively narrow geographical focus on Vorarlberg and adjacent regions in Germany and Switzerland. SUBDUED PROFITABILITY WITH SOME DEPENDENCE ON RZB'S EARNINGS RLB Vorarlberg's profitability is commensurate with the business and function the bank undertakes; therefore, the bank's drivers for income (on a pre-tax level) remain focused on its treasury activities and its income from sector participations (2012: EUR14.2 million, mainly from RZB). RLB Vorarlberg reported net income of EUR14.3 million (2011: EUR13.1 million) under audited local GAAP. Net interest income fell to EUR22.9 million (2011: EUR28.6 million) as a result of the low-yield environment. The bank's overall net interest margin of approximately 60bps in recent years is low, though also a reflection of the bank's central role and the institutional liquidity arrangements with the local sector banks. The pressure on the net interest margin is reflected in the bank's recurring earnings power - as expressed by pre-provision income as percentage of average risk-weighted assets - which declined to a low 0.44% in 2012 (2011: 0.59%, 2010: 0.79%). RLB Vorarlberg's cost-to-income ratio rose to above 75% in 2012, reflecting increased pressure on earnings. MODESTLY IMPROVED, SATISFACTORY CAPITALISATION In 2012, RLB Vorarlberg reported a Tier 1 ratio of 9.2% (2011: 9.0%) based on Tier 1 capital of EUR208 million (2011: EUR203 million) and increased RWA of EUR2.258 billion (2011: EUR2.250 billion). However, the bank's capitalisation reflects the relatively low regulatory risk weightings of its assets and does not fully capture the high balance-sheet leverage, which stood at 3.1% (Tier 1 leverage of Basel II). We note positively the solid quality of RLB Vorarlberg's economic and regulatory capital and the absence of hybrid capital instruments. In our view, the bank's capitalisation should be able to withstand a softening of the economic environment without adversely changing the financial profile. SOUND ASSET QUALITY SUPPORTED BY CONSERVATIVE PROVISIONING POLICY We acknowledge the low and declining level of the bank's problem loans and its historically conservative provisioning levels, which have enabled it to protect its capitalisation thus far. The bank's problem loan ratio for 2012 increased to a very contained 1.7% (2011: 1.6%). RLB Vorarlberg's overall risk positioning is exposed to (1) high single-name concentration risk and sector concentration risk to financial institutions, the latter mainly because of its role as a central institute for the regional Raiffeisen banks with their sizeable Swiss franc exposure; (2) high levels of related-party lending (lending to group companies); and (3) some participation, market and earnings risk as a result of its stake in RZB. RLB Vorarlberg has a sizeable portfolio of unquoted equity participations, largely related to the Raiffeisen sector, which we view as a source of potential risk; however, we acknowledge the strategic fit of these investments for

4 the sector. The portfolio carries sizeable hidden reserves according to local GAAP. However, given uncertainties about the liquidity and marketability of such assets in periods of stress - especially for assets that have similar characteristics such as holdings in financial companies - we take only limited comfort from such cushions of unrealised gains in our analysis. Excluding the sector banks, borrower concentration is high, as the top 20 exposures account for more than 120% of Tier 1 capital. SOUND LIQUIDITY SUPPORTED BY DIVERSIFIED FUNDING SOURCES INCLUDING RETAIL DEPOSITS As the central institute for the local Raiffeisen banks in Vorarlberg, RLB Vorarlberg has access to diversified funding sources including sector funds (EUR2.0 billion in 2012) and own issuances (EUR1.5 billion). These funds are complemented by deposits (EUR1.0 billion) and interbank funding (EUR1.9 billion to credit institutes outside the sector). The bank has expanded its portfolio of highly rated fixed-income securities, most of which are eligible for collateral required by central banks, thus providing some additional flexibility for liquidity management. Deposits have grown to such an extent that RLB Vorarlberg achieved a relatively balanced loan-to-deposit ratio of approximately 114% in 2012, which compares favourably with its peers. The market funding ratio remains high - at 38% in reflecting the bank's defined role to collect funds from the primary banks and other sector banks. Global Local Currency Deposit Rating (Joint Default Analysis) The A3/Prime-2 global local currency (GLC) deposit rating is supported by our assumption of a very high probability of support from the Austrian Raiffeisen sector and a high support likelihood from the government of Austria (Aaa, stable), resulting in two notches of uplift to Vorarlberg's standalone credit strength of baa2. Our assumption of a very high likelihood of support for RLB Vorarlberg from the Austrian Raiffeisen sector is underpinned by the high level of integration throughout the Austrian Raiffeisen sector, the bank's vital role in the proper functioning of the local Raiffeisen banks, and its own prominent position in the regional market. Overall, the Austrian Raiffeisen banking group comprises the leading institution in Austrian retail and SME banking, positioned well ahead of its competitors. This also underpins our view that the probability of systemic support for RLB Vorarlberg is high. Foreign Currency Deposit Rating RLB Vorarlberg's foreign currency deposit ratings are A3/Prime-2 with a negative outlook. Foreign Currency Debt Rating RLB Vorarlberg's foreign currency debt ratings are A3/Prime-2 with a negative outlook. ABOUT MOODY'S BANK RATINGS Bank Financial Strength Rating Moody's Bank Financial Strength Ratings (BFSRs) represent Moody's opinion of a bank's intrinsic safety and soundness and, as such, exclude certain external credit risks and credit support elements that are addressed by Moody's Bank Deposit Ratings. BFSRs do not take into account the probability that the bank will receive such external support, nor do they address risks arising from sovereign actions that may interfere with a bank's ability to honour its domestic or foreign currency obligations. Factors considered in the assignment of BFSRs include bank-specific elements such as financial fundamentals, franchise value, and business and asset diversification. Although BFSRs exclude the external factors specified above, they do take into account other risk factors in the bank's operating environment, including the strength and prospective performance of the economy, as well as the structure and relative fragility of the financial system, and the quality of banking regulation and supervision. Global Local Currency Deposit Rating A deposit rating, as an opinion of relative credit risk, incorporates the BFSR as well as Moody's opinion of any external support. Specifically, Moody's Bank Deposit Ratings are opinions of a bank's ability to repay punctually its deposit obligations. As such, they are intended to incorporate those aspects of credit risk relevant to the prospective payment performance of rated banks with respect to deposit obligations, which includes: intrinsic financial strength, sovereign transfer risk (in the case of foreign currency deposit ratings), and both implicit and explicit external support elements. Moody's Bank Deposit Ratings do not take into account the benefit of deposit

5 insurance schemes which make payments to depositors, but they do recognize the potential support from schemes that may provide assistance to banks directly. According to Moody's joint default analysis (JDA) methodology, the global local currency deposit rating of a bank is determined by the incorporation of external elements of support into the bank's Baseline Credit Assessment. In calculating the Global Local Currency Deposit rating for a bank, the JDA methodology also factors in the rating of the support provider, in the form of the local currency deposit ceiling for a country, Moody's assessment of the probability of systemic support for the bank in the event of a stress situation and the degree of dependence between the issuer rating and the Local Currency Deposit Ceiling. National Scale Rating National scale ratings are intended primarily for use by domestic investors and are not comparable to Moody's globally applicable ratings; rather they address relative credit risk within a given country. A Aaa rating on Moody's National Scale indicates an issuer or issue with the strongest creditworthiness and the lowest likelihood of credit loss relative to other domestic issuers. National Scale Ratings, therefore, rank domestic issuers relative to each other and not relative to absolute default risks. National ratings isolate systemic risks; they do not address loss expectation associated with systemic events that could affect all issuers, even those that receive the highest ratings on the National Scale. Foreign Currency Deposit Rating Moody's ratings on foreign currency bank obligations derive from the bank's local currency rating for the same class of obligation. The implementation of JDA for banks can lead to high local currency ratings for certain banks, which could also produce high foreign currency ratings. Nevertheless, it should be noted that foreign currency deposit ratings are in all cases constrained by the country ceiling for foreign currency bank deposits. This may result in the assignment of a different, and typically lower, rating for the foreign currency deposits relative to the bank's rating for local currency obligations. Foreign Currency Debt Rating Foreign currency debt ratings are derived from the bank's local currency debt rating. In a similar way to foreign currency deposit ratings, foreign currency debt ratings may also be constrained by the country ceiling for foreign currency bonds and notes; however, in some cases the ratings on foreign currency debt obligations may be allowed to pierce the foreign currency ceiling. A particular mix of rating factors are taken into consideration in order to assess whether a foreign currency bond rating pierces the country ceiling. They include the issuer's global local currency rating, the foreign currency government bond rating, the country ceiling for bonds and the debt's eligibility to pierce that ceiling. About Moody's Bank Financial Strength Scorecard Moody's bank financial strength model (see scorecard below) is a strategic input in the assessment of the financial strength of a bank, used as a key tool by Moody's analysts to ensure consistency of approach across banks and regions. The model output and the individual scores are discussed in rating committees and may be adjusted up or down to reflect conditions specific to each rated entity. Rating Factors Raiffeisenlandesbank Vorarlberg Rating Factors [1] A B C D E Total Score Trend Qualitative Factors (50%) C- Factor: Franchise Value C- Neutral Market share and sustainability x Geographical diversification x Earnings stability x Earnings Diversification [2] Factor: Risk Positioning D- Neutral Corporate Governance [2] x

6 - Ownership and Organizational Complexity - Key Man Risk - Insider and Related-Party Risks x Controls and Risk Management x - Risk Management x - Controls x Financial Reporting Transparency x - Global Comparability x - Frequency and Timeliness x - Quality of Financial Information x Credit Risk Concentration x - Borrower Concentration x - Industry Concentration x Liquidity Management x Market Risk Appetite x Factor: Operating Environment B Neutral Economic Stability x Integrity and Corruption x Legal System x Financial Factors (50%) C+ Factor: Profitability D+ Neutral PPI % Average RWA (Basel II) 0.55% Net Income % Average RWA (Basel II) 1.35% Factor: Liquidity B- (Market Funds - Liquid Assets) % Total Assets 1.35% Liquidity Management x Factor: Capital Adequacy B+ Neutral Tier 1 Ratio (%) (Basel II) 10.07% Tangible Common Equity % RWA (Basel II) 10.72% Factor: Efficiency D Neutral Cost / Income Ratio 74.18% Factor: Asset Quality B+ Neutral Problem Loans % Gross Loans 1.76% Problem Loans % (Equity + LLR) 7.30% Lowest Combined Financial Factor Score (15%) D+ Economic Insolvency Override Neutral Aggregate BFSR Score C Aggregate BCA Score a3 Assigned BFSR C- Assigned BCA baa2 [1] - Where dashes are shown for a particular factor (or sub-factor), the score is based on non-public information. [2] - A blank score under Earnings Diversification or Corporate Governance indicates the risk is neutral 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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