HYPO NOE Landesbank fur Niederosterreich und Wien AG

Transcription

1 HYPO NOE Landesbank fur Niederosterreich und Wien AG Primary Credit Analyst: Michal Selbka, Frankfurt +49 (0) ; Secondary Contact: Anna Lozmann, Frankfurt (49) ; Table Of Contents Major Rating Factors Outlook Rationale Related Criteria Related Research NOVEMBER 13,

2 HYPO NOE Landesbank fur Niederosterreich und Wien AG SACP bbb + Support +3 + Additional Factors 0 Anchor Business Position bbb+ Weak -2 ALAC Support 0 Issuer Credit Rating Capital and Earnings Strong +1 Risk Position Adequate 0 Funding Liquidity Average Adequate 0 GRE Support +3 Group Support 0 Sovereign Support 0 A/Stable/A-1 Major Rating Factors Strengths: Weaknesses: Strong capitalization compared with peers. Very strong link to and important role for the 100% owner, the State of Lower Austria. One of the lowest net interest margins and highest cost-to-income ratios among peers. Limited geographic diversity and large reliance on public sector related business. NOVEMBER 13,

3 Outlook: Stable Our outlook on Austria-based HYPO NOE Landesbank für Niederösterreich und Wien AG (HYPO NOE) is stable. This reflects our expectation that the State of Lower Austria will remain highly supportive of HYPO NOE and that the bank will preserve its strong capitalization over the next two years. Since HYPO NOE is a government-related entity (GRE), the ratings are sensitive to the creditworthiness of Lower Austria and any rating action on Lower Austria would lead to a review of our ratings on the bank. We could upgrade HYPO NOE if banking industry risk in Austria reduced and our forecast risk-adjusted capital (RAC) ratio for the bank increased sustainably above 15%. An improvement of industry risk alone could strengthen HYPO NOE's stand-alone credit profile (SACP) and lead to an upgrade of HYPO NOE's nondeferrable senior subordinated debt. We could lower the ratings if, contrary to our base-case expectations, any potential sizable losses or extraordinary dividend pay-outs caused a significant fall in the bank's capitalization, triggering a deterioration of our RAC ratio below 10%. We consider this scenario as unlikely though, given the bank's current strong buffer above the threshold. Rationale Our starting point for the ratings on HYPO NOE is the anchor of 'bbb+', which represents our view of the economic environment and banking industry risk in Austria. In our opinion, HYPO NOE's overall economic risk is in line with that for the anchor, since the bank operates mainly in the domestic market and does not plan to expand its foreign activities. We assess HYPO NOE's SACP at 'bbb'. We consider the bank's business position to be weak, mainly due to its concentrated business model. The effects of the cost base reduction stemming from the September 2017 intra-group merger of the HYPO NOE Gruppe Bank AG with its fully owned subsidiary HYPO NOE Landesbank AG are still to be observed. We assess the bank's capital and earnings as strong, driven by our base-case expectation that the RAC ratio will remain around 14.5%-15.0% over the next two years. Our assessment of HYPO NOE's risk position is adequate, largely reflecting our view that the bank will continue to focus on low-risk areas, such as public-sector-related lending and public-sector leasing. We view funding as average and liquidity as adequate, including the implicit benefits from the bank's link with the state. The ratings also factor in the bank's status as a GRE and our view that there is a high likelihood of timely and sufficient extraordinary support for the bank from its sole owner, Lower Austria, if needed. Our assessment is based on HYPO NOE's important role as one of Lower Austria's largest GREs and its very strong links with Lower Austria's government. This provides three notches of rating uplift above the bank's SACP, resulting in a long-term issuer credit rating of 'A'. Anchor: 'bbb+' reflecting mainly domestic exposure The anchor reflects the bank's economic risk in countries of operations--predominantly Austria--and banking industry risk for Austria. NOVEMBER 13,

4 Our economic risk assessment is based on Austria's highly competitive and diverse economy, with strong economic fundamentals, high integration with Western European economies, and strong ties to Eastern and Southeastern Europe. With regard to industry risk, the Austrian banking industry benefits from a high share of core customer deposits, which limits dependence on external borrowing. We continue to see significant overcapacity in banks' domestic operations, which results in lower returns for Austrian banks than for many international peers. We believe the Austrian banking system needs further material and sustainable efficiency improvements to achieve greater stability. However, we already see a positive trend for banking industry risk in Austria. If the current positive momentum persists, in particular with regards to efficiency and asset quality improvement, we think returns will likely be more stable in the future. HYPO NOE's overall economic risk is in line with the anchor because, in our view, the bank's exposure outside Austria does not increase this risk materially. As of June 30, 2017, 86% of the bank's corporate and retail loan book exposure related to Austria, 5% to Germany, and about 3% to the Central and Eastern European countries that belong to the EU. The bulk of the remaining 6% was to Western European countries with a higher economic risk than Austria. Our ratings on HYPO NOE would be sensitive to a material increase in exposure to countries that pose a higher economic risk than Austria, for example, the neighboring Central and Eastern European markets. However, we do not expect the bank to change its foreign markets strategy or exposure breakdown over the next few years. Table 1 HYPO NOE Landesbank fur Niederosterreich und Wien AG Key Figures --Year-ended Dec (Mil. ) 2017* Adjusted assets 15, , , , ,207.6 Customer loans (gross) 10, , , , ,590.6 Adjusted common equity Operating revenues Noninterest expenses Core earnings (31.0) 53.6 *Data as of June 30. N.A.--Not available. N/A--Not applicable. N.M.--Not meaningful. Business position: Concentrated business model with weak cost-income efficiency HYPO NOE is a small commercial bank based in Lower Austria, with reported total assets of 16 billion on June 30, We consider HYPO NOE's business position to be weak compared with that of other banks operating in Austria and other countries with similar industry risk. Compared with better diversified peers (both in geographic terms and with regard to types of lending), we see the main weakness of HYPO NOE's business model as its regional focus and stronger concentration on the public sector and on public sector-related real estate. Therefore, and in the light of a continued low interest environment, net interest margin has been falling since reaching about 0.86% in December the bank also has one of the highest cost-to-income ratios among its peers. Although higher operating efficiency may result from the September 2017 intra-group merger of the HYPO NOE Gruppe Bank AG with its fully owned subsidiary HYPO NOE Landesbank AG, we will need to observe this improvement on the cost side. The main NOVEMBER 13,

5 aim of the recent merger is a re-integration of retail and housing finance businesses under one umbrella, while reducing the organizational and operational complexity at the same time. HYPO NOE's business focus is leasing, real estate lending, project and public finance, and financing of other public-sector-related entities. We expect the bank to remain the dominant player in Lower Austria in this business niche. Outside Austria, the bank is active in Germany and has limited activities in Poland, Czech Republic, and Slovakia. The bank also considers Bulgaria and Romania to be extended core markets, even though exposure there is marginal. We view strategic ownership support from Lower Austria and implicit funding benefits as critical for the stability of HYPO NOE's business model. In our view, the benefits of HYPO NOE's retail and corporate banking remain limited, but we notice that the bank has started efforts to optimize HYPO NOE's future balance sheet and cost-efficiency structure. Table 2 HYPO NOE Landesbank fur Niederosterreich und Wien AG Business Position --Year-ended Dec (%) 2017* Total revenues from business line (mil. ) Commercial & retail banking/total revenues from business line Return on equity (5.6) 10.2 *Data as of June 30. N.A.--Not available. N/A--Not applicable. N.M.--Not meaningful. Capital and earnings: The strongest component in the stand-alone analysis HYPO NOE's capital and earnings are strong, in our opinion. This is mainly based on our expectation that the bank's RAC ratio will remain in the range of 14.5%-15.0% over the next two years, compared with 15.1% as of June 30, An increase from 14.6% as of year-end 2016 resulted mainly from the optimization of the bank's over-the-counter (OTC) derivative portfolio that we see as a one-time effect. Despite the significant increase in HYPO NOE's capitalization demonstrated by a regulatory Tier 1 ratio increase to 17.3% as of June 30, 2017, from 13.5% in December 2015, our RAC ratio remained more or less unchanged. This results from our higher risk-weighted assets (RWAs) recognition for the credit valuation adjustment in relation to HYPO NOE's OTC derivative positions. We now reflect counterparty risk in our RAC ratio following our update to our capital methodology published July 20, On the other hand, our calculation of total adjusted capital increased in line with the regulatory figure, by about 57 million over 2016 from 544 million in December 2015, predominantly due to a positive solution to the HETA dispute and a related provisions write-back. We see a low 7 million extraordinary dividend pay-out to Lower Austria in 2017 as a sign of the owner's strong support of HYPO NOE's future capitalization. We expect that, due to the costs of bank stability contribution payments and IFRS9 implementation, the bank's capital base will remain stagnant over , accompanied by a slight NOVEMBER 13,

6 increase in HYPO NOE's RWAs over the same period. Our expectation of limited capital build-up also results from the very tight operating margins and vulnerability to negative tail events. However, we do not regard the RAC ratio as likely to deteriorate below 14.5%, in the absence of a material one-time event. The projected earnings buffer is low, indicating a low capacity for earnings to cover normalized losses. However, in our view, the bank's low internal capital generation capability is not a major rating consideration. This is because HYPO NOE's management is not targeting aggressive growth, and we expect real risk costs to remain significantly below our normalized loss expectations. We base our expectation for the next two years on the following assumptions: Marginal shrinkage of the loan portfolio, reflecting an ongoing decrease of less profitable public-sector-related lending. Although the bank has moved away from low-margin budget financing into higher-margin, long-term public-sector financing, and related leasing services, we expect improvements in bottom-line earnings to be negligible in the next two years, reflecting pressure from the low interest rate environment. We assume a reduction in noninterest expenses by about 5% over the next two years. Credit losses of a 7 million maximum annually. Low dividend payouts at 1 million per year. Table 3 HYPO NOE Landesbank fur Niederosterreich und Wien AG Capital And Earnings --Year-ended Dec (%) 2017* Criteria reflected in RAC ratios 2017 RAC Criteria 2017 RAC Criteria 2010 RAC Criteria 2010 RAC Criteria 2010 RAC Criteria Tier 1 capital ratio S&P RAC ratio before diversification S&P RAC ratio after diversification Adjusted common equity/total adjusted capital Net interest income/operating revenues Fee income/operating revenues Market-sensitive income/operating revenues (4.5) (1.6) (18.2) (75.6) (3.0) Noninterest expenses/operating revenues Preprovision operating income/average assets (0.2) 0.5 Core earnings/average managed assets (0.2) 0.4 *Data as of June 30. N.A.--Not available. N/A--Not applicable. N.M.--Not meaningful. NOVEMBER 13,

7 Table 4 HYPO NOE Landesbank fur Niederosterreich und Wien AG Risk-Adjusted Capital Framework Data Exposure* Basel III RWA Average Basel III RW (%) S&P Global RWA Average S&P Global RW (%) Credit risk Government and central banks 6,452,475, ,013, ,830,240 4 Institutions and CCPs 1,085,900, ,234, ,312, Corporate 4,004,070,488 1,802,085, ,729,790, Retail 2,841,846, ,080, ,242, Of which mortgage 1,442,372, ,961, ,768, Securitization 10,108, ,268 3 Other assets 378,594, ,247, ,392, Total credit risk 14,772,996,646 3,263,661, ,308,872, Credit valuation adjustment Total credit valuation adjustment ,567, ,499, Market risk Equity in the banking book Trading book market risk Total market risk Operational risk Total operational risk ,300, ,166, Basel III RWA S&P Global RWA % of S&P Global RWA Diversification adjustments RWA before diversification 3,698,528,588 4,130,537, Total Diversification/Concentration Adjustments -- 1,252,055, RWA after diversification 3,698,528,588 5,382,593, Tier 1 capital Tier 1 ratio (%) Total adjusted capital S&P Global RAC ratio (%) Capital ratio Capital ratio before adjustments 604,533, ,001, Capital ratio after adjustments 604,533, ,001, *Exposure at default. Securitisation exposure includes the securitisation tranches deducted from capital in the regulatory framework. Other assets includes Deferred Tax Assets (DTAs) not deducted from ACE. Adjustments to Tier 1 ratio are additional regulatory requirements (e.g. transitional floor or Pillar 2 add-ons). RWA--Risk-weighted assets. RW--Risk weight. RAC--Risk-adjusted capital. Sources: Company data as of Dec. 31, 2016, S&P Global. Risk position: Exposure mainly in low-risk areas, such as public-sector lending and public-sector-related leasing We consider HYPO NOE's risk position to be adequate relative to other banks with similarly weighted average economic risk scores and a similar product mix. We expect the bank to pursue lending growth mainly in low-risk areas--such as public-sector lending and public-sector related leasing--without compromising its risk appetite. We do not expect HYPO NOE to move away from its high concentration on financing public-sector real estate, but we believe NOVEMBER 13,

8 it will maintain a fairly favorable risk profile. The RAC ratio, in our view, adequately reflects HYPO NOE's main risks. Owing to the collateralized nature of the bank's lending and the comparably high quality of its clients, primarily related to the public sector, we expect it to report lower loan losses than the normalized losses we anticipate for comparable portfolios over the cycle. The main risk not fully covered by the RAC ratio is the concentration on real estate. However, risk is offset by HYPO NOE's focus on the public-sector clients, in our opinion. The ratio of nonperforming assets (NPAs) to total loans was 1.74% as of June 30, 2017, down from 3.68% at year-end 2015, mainly following a solution to the HETA dispute in We expect NPAs in the loan portfolio to remain low, reflecting the bank's geographic focus on Austria, its public-sector-related business and currently very favorable economic conditions of the low-interest-rate environment. Coverage of NPLs by loan loss provisions improved in June 2017 to 46.6% (24% at year-end 2015). Table 5 HYPO NOE Landesbank fur Niederosterreich und Wien AG Risk Position --Year-ended Dec (%) 2017* Growth in customer loans (9.1) (5.9) (1.3) Total diversification adjustment / S&P RWA before diversification N/A Total managed assets/adjusted common equity (x) New loan loss provisions/average customer loans (0.0) 0.1 (0.0) Net charge-offs/average customer loans Gross nonperforming assets/customer loans + other real estate owned Loan loss reserves/gross nonperforming assets *Data as of June 30. The increase results mainly from the revised concentration factor parameters implemented under our updated risk-adjusted capital criteria published on July 20, N.A.--Not available. N/A--Not applicable. N.M.--Not meaningful. Funding and liquidity: Benefits from implicit state support HYPO NOE's funding is average and its liquidity adequate, in our view, and we expect these factors to remain in line with the industry average. We regard state ownership as a key element in our assessment as it materially reduces the bank's sensitivity to market confidence. Since we believe that HYPO NOE will continue to rely on wholesale capital markets, parental backing will remain critical in our assessment of its funding and liquidity. We expect deposit levels to remain strong in the next two years, following vast increases in 2015 and Deposits covered about one-third of the bank's loan book as of Dec. 31, Covered bonds make up 31% of the total funding. We expect the bank to continue to shift its funding structure toward a matched model in terms of maturities and to further strengthen liquidity. At year-end 2016, our stable funding ratio for HYPO NOE was 92%, and the liquidity ratio was 0.84x, which was temporarily below the level of peers due to the large concentration of senior debt expiries in However, we note that all of the 2017 refinancing efforts have been successful. NOVEMBER 13,

9 Table 6 HYPO NOE Landesbank fur Niederosterreich und Wien AG Funding And Liquidity --Year-ended Dec (%) 2017* Core deposits/funding base Customer loans (net)/customer deposits Long term funding ratio Stable funding ratio Short-term wholesale funding/funding base Broad liquid assets/short-term wholesale funding (x) Net broad liquid assets/short-term customer deposits Short-term wholesale funding/total wholesale funding Narrow liquid assets/3-month wholesale funding (x) *Data as of June 30. N.A.--Not available. N/A--Not applicable. N.M.--Not meaningful. Support: Three notches of uplift for government support (13.8) We regard HYPO NOE as a GRE, for which we factor in three notches of uplift above the bank's SACP. We expect Lower Austria to remain a highly supportive long-term shareholder of the bank. We believe that the prospect of extraordinary government support for Austrian banks is uncertain, following the full implementation of the EU Bank Recovery and Resolution Directive, including bail-in powers, in January However, we currently believe that resolution frameworks are less likely to impede the state owners' willingness to provide extraordinary support to banks we consider as GREs, including HYPO NOE. Despite the reduced predictability of government support to systemically important commercial banks, we expect Lower Austria to remain highly supportive of HYPO NOE. We assess the Lower Austria government's propensity to support as not doubtful. In addition, the government has sufficient financial resources to support HYPO NOE. Our view of a high likelihood of extraordinary government support for HYPO NOE is based on our assessment of HYPO NOE's: Important role for Lower Austria, because a default could tarnish Lower Austria's reputation. In addition, the bank supports regional economic and social objectives; and Very strong link with the government of Lower Austria, owing to its very strong and durable relationship with the state. The 'BB+' issue ratings on HYPO NOE's nondeferrable subordinated debt are two notches lower than the bank's SACP, and the SACP indicates our view of a bank's credit risk without extraordinary support from the government. We believe that by notching from the SACP assessment, instead of from the issuer credit rating, we better capture the risk of an increased uncertainty of government support for subordinated debt issues under the bank resolution regime. NOVEMBER 13,

10 Additional rating factors: None Related Criteria Criteria - Financial Institutions - General: Risk-Adjusted Capital Framework Methodology, July 20, 2017 General Criteria: Methodology For Linking Long-Term And Short-Term Ratings, April 7, 2017 Criteria - Financial Institutions - Banks: Bank Rating Methodology And Assumptions: Additional Loss-Absorbing Capacity, April 27, 2015 General Criteria: Rating Government-Related Entities: Methodology And Assumptions, March 25, 2015 Criteria - Financial Institutions - Banks: Bank Hybrid Capital And Nondeferrable Subordinated Debt Methodology And Assumptions, Jan. 29, 2015 General Criteria: Group Rating Methodology, Nov. 19, 2013 Criteria - Financial Institutions - Banks: Quantitative Metrics For Rating Banks Globally: Methodology And Assumptions, July 17, 2013 Criteria - Financial Institutions - Banks: Banks: Rating Methodology And Assumptions, Nov. 9, 2011 Criteria - Financial Institutions - Banks: Banking Industry Country Risk Assessment Methodology And Assumptions, Nov. 9, 2011 General Criteria: Use Of CreditWatch And Outlooks, Sept. 14, 2009 Criteria - Financial Institutions - Banks: Commercial Paper I: Banks, March 23, 2004 Related Research Positive Rating Actions Taken On Four Austrian Banks On Improving Industry Conditions, Oct 30, 2017 Banking Industry Country Risk Assessment Update: October 2017, Oct 04, 2017 Banking Industry Country Risk Assessment: Austria, May 29, 2017 Research Update: State of Lower Austria 'AA/A-1+' Ratings Affirmed; Outlook Stable, Nov 25, 2016 Anchor Matrix Industry Risk Economic Risk a a a- bbb+ bbb+ bbb a a- a- bbb+ bbb bbb bbb a- a- bbb+ bbb+ bbb bbb- bbb- bb bbb+ bbb+ bbb+ bbb bbb bbb- bb+ bb bb - 5 bbb+ bbb bbb bbb bbb- bbb- bb+ bb bb- b+ 6 bbb bbb bbb- bbb- bbb- bb+ bb bb bb- b+ 7 - bbb- bbb- bb+ bb+ bb bb bb- b+ b bb+ bb bb bb bb- bb- b+ b bb bb- bb- b+ b+ b+ b b+ b+ b+ b b b- NOVEMBER 13,

11 Ratings Detail (As Of November 13, 2017) HYPO NOE Landesbank fur Niederosterreich und Wien AG Counterparty Credit Rating Senior Unsecured Short-Term Debt A-1 Subordinated Counterparty Credit Ratings History 13-Aug Jun Jun Dec-2012 Sovereign Rating Austria (Republic of) Related Entities Lower Austria (State of) Issuer Credit Rating A/Stable/A-1 A BB+ A/Stable/A-1 A/Watch Neg/A-1 A/Positive/A-1 A/Negative/A-1 AA+/Stable/A-1+ AA/Stable/A-1+ *Unless otherwise noted, all ratings in this report are global scale ratings. S&P Global Ratings credit ratings on the global scale are comparable across countries. S&P Global Ratings credit ratings on a national scale are relative to obligors or obligations within that specific country. Issue and debt ratings could include debt guaranteed by another entity, and rated debt that an entity guarantees. Additional Contact: Financial Institutions Ratings Europe; FIG_Europe@spglobal.com NOVEMBER 13,

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