The ratings on HBOR (the Croatian Bank for Reconstruction and Development) are equalized with those on the Republic of Croatia (BBB-/Negative/A-3). We assess as "almost certain" the likelihood that the sovereign would provide sufficient and timely extraordinary support to HBOR in the event of financial distress. We base our assessment of HBOR on our view of the bank's:
-- "Critical" role, as it plays a central role in meeting key economic, social, and political objectives of the government and the implementation of a key national policy, namely the development of the Croatian economy and the promotion of the country's exports; and
-- "Integral" link with the Croatian government through full state ownership, the government's representation on HBOR's supervisory board, and the government's ongoing financial support in the form of regular annual contributions to HBOR's capital and statutory unconditional guarantees, ensuring HBOR can repay its debts.
HBOR is Croatia's government-owned specialized development and export credit agency. It benefits from a public policy mandate and strong government support, and operates under an explicit state guarantee. Under article 8 of the HBOR Act, the Republic of Croatia guarantees HBOR's liabilities unconditionally, irrevocably, and on first demand. The supervisory board--which approves HBOR's strategy--includes government ministers and members of parliament, giving the state close control over the bank. Since its creation, HBOR has been fully owned by the state and we expect it will remain so.
Notwithstanding adjustments made to comply with the EU state aid rules as a part of Croatia's EU accession process, HBOR's overall mandate and lending program both continue to fully align with governmental policies.
HBOR's main activities are financing the reconstruction and development of the Croatian economy; financing infrastructure projects; promoting exports; supporting the development of small and midsize enterprises; promoting environmental protection; and insuring exports of Croatian goods and services against nonmarketable risks. HBOR lends to both the public and the private sectors and manages funds on behalf of several ministries.
Since 1992, HBOR's role has widened from the original strategy of financing the reconstruction of the Croatian economy. In line with its public policy mandate, however, all of HBOR's current principal areas of business relate to promoting the development of the Croatian economy by extending loans, insuring export transactions against political and commercial risks, and issuing guarantees.
Total assets for HBOR at end-2011 reached Croatian kuna (HRK) 21.99 billion ($3.8 billion), of which 93% were net loans. Despite the recession in Croatia, HBOR continues to be profitable; it reported a HRK148.1 million ($25.4 million) profit in 2011. Nonperforming loans in 2011 (defined as overdue receivables that are more than 90 days overdue) accounted for 1.9% of gross loans, an increase from 1.5% in 2010 and 1.1% in 2009. In 2011, the 10 largest problem loans, totaling HRK225.7 million, were related mainly to manufacture, tourism, agriculture, fishery, and construction as well as water and electric supply and other infrastructure.
The negative outlook on HBOR reflects the outlook on the Republic of Croatia. We could lower the ratings or revise the outlook to stable if the sovereign ratings on Croatia were lowered or if its outlook were revised to stable. We could also lower the ratings on HBOR if we revised our view of the likelihood of sufficient and timely extraordinary support from the Republic of Croatia, in case of financial distress, in the unlikely event of a reduction or withdrawal of sovereign support. While the bank has adapted its activities to comply with EU rules on state aid, as well as export guarantees and financing, we do not expect those developments to affect its important role in the Croatian government's economic development plans and policies.
Related Criteria And Research
-- Rating Government-Related Entities: Methodology and Assumptions, Dec. 9, 2010
Hrvatska banka za obnovu i razvitak
Sovereign Credit Rating BBB-/Negative/A-3
Senior Unsecured BBB-