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Fitch Downgrades Zagrebacka Banka d.d.'s VR to 'bb'; Affirms IDR at 'BBB-'
February 9, 2015 / 4:02 PM / 3 years ago

Fitch Downgrades Zagrebacka Banka d.d.'s VR to 'bb'; Affirms IDR at 'BBB-'

(The following statement was released by the rating agency) WARSAW/LONDON, February 09 (Fitch) Fitch Ratings has downgraded Zagrebacka Banka d.d.'s (ZABA) Viability Rating (VR) to 'bb' from 'bb+' and removed it from Rating Watch Negative (RWN). The bank's Long-Term foreign currency Issuer Default Rating (IDR) has been affirmed at 'BBB-' with a Stable Outlook. A full list of rating actions is at the end of this rating action commentary. KEY RATING DRIVERS - IDRS, SUPPORT RATING ZABA's Long- and Short-term IDRs and Support Rating are based on the potential support available from its ultimate parent, UniCredit S.p.A. (UC; BBB+/Negative/bbb+). Fitch believes that UC continues to have a strong propensity to support ZABA given the importance of the Central and Eastern Europe (CEE) region to its strategy and would normally rate ZABA one notch below UC's IDR. However, ZABA's Long-term IDR is capped by the Country Ceiling of Croatia (BBB-). Croatia's Long-Term foreign currency IDR is 'BB'/Stable and the Stable Outlook on ZABA's IDR mirrors that on the sovereign. Fitch does not incorporate into ZABA's ratings any potential support coming directly from ZABA's direct owner, UniCredit Bank Austria AG (UCBA, A/Negative/bbb+). This is because UCBA's Long-term IDR currently benefits from Fitch's view of potential support from the Austrian sovereign due to its systemic importance. Fitch believes that the Austrian authorities would probably look to UC to provide support to its CEE subsidiaries before allowing any Austrian sovereign support to flow through to these entities. Fitch also considers its expectation of weakening sovereign support (for more details see 'Fitch Revises Outlooks on 18 EU Commercial Banks to Negative on Weakening Support' at as well as 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 - IDRS, SUPPORT RATING ZABA's IDRs could 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 was lowered. An upgrade of ZABA's Long-term IDR would require an upward revision of the Country Ceiling, which is unlikely at present given the recent affirmation of the sovereign rating with Stable Outlook. KEY RATING DRIVERS - VR The downgrade of ZABA's VR to the level of Croatia's Long-Term foreign currency IDR reflects Fitch's view of the high correlation between the sovereign and the bank's credit profile. The agency believes that ZABA's high direct exposure to the sovereign (around 27% of total balance sheet assets at end-3Q14, or 180% of its Fitch core capital), the broader operating environment, and its marginal geographical diversification mean that the bank would most likely require extraordinary liquidity and capital support in case of the sovereign default. Fitch has also taken into consideration the negative impact that the macroeconomic environment has had on the bank's credit profile, in particular on its asset quality. ZABA's VR continues to be supported by its leading market position, sound funding profile and adequate capitalisation, although these do not fully mitigate the above risks. The prolonged period of economic recession has resulted in a rapid inflow of non-performing loans (NPLs), which rose to account for 17.8% of total gross loans at end-3Q14 from 4.0% at end-2008. In 2015, Fitch envisages a further moderate deterioration in the bank's loan quality despite expecting a marginal GDP yoy growth of 0.5%, because of the lag effect of the six years of economic recession on the loan book combined with subdued new lending. ZABA's material exposure to the troubled construction and real estate sectors, high private sector indebtedness and unemployment amplify the credit risks. The expected regulatory one-year fixing of the CHF/HRK exchange rate for retail loan repayments should somewhat mitigate new defaults, although CHF-denominated mortgages accounted for a relatively moderate 6.5% of ZABA's total gross loans at end-2014 ZABA's funding profile is its key rating strength. The bank sources most of its funding from customer deposits, while its wholesale funding is obtained largely from the parent bank. The stability of the deposit base is underpinned by the bank's strong customer deposit market share (around one quarter of the system's total at end-1H14), mostly from retail customers. The bank's liquidity position is comfortable. However, the liquidity buffer is predominantly held in Croatian government debt and thus is sensitive to sovereign stress. Fitch views ZABA's capitalisation as adequate in view of the challenging operating environment, the bank's risk concentrations and only moderate coverage of outstanding NPLs. The loss absorption capacity is substantial. If all NPLs were covered with impairment reserves, the FCC ratio would drop to 15.3 % at end-3Q14. ZABA's pre-impairment profitability has been relatively resilient, which can be attributed to its strong market franchise, large overall size (cost efficiencies) and extensive lending to the broader public sector. However, the bank has suffered from high loan impairment charges (LICs) and continued private sector deleveraging. In 2015, Fitch expects ZABA's profit to drop due to likely loan book contraction, elevated LICs and the sale of its subsidiary, Istraturist, in 2014. The one-year fixing of CHF/HRK exchange rate will have a limited negative impact on the bank's revenue and LICs. RATING SENSITIVITIES - VR The VR is sensitive to the further deterioration in the operating environment, including that evidenced by a potential downgrade of the sovereign. If growing NPLs and reduced profitability lead to markedly higher pressure on the bank's capital, this could result in a downgrade of the VR. The rating actions are as follows: Long-term IDR affirmed at 'BBB-'; Outlook Stable Short-term IDR affirmed at 'F3' Viability Rating downgraded to 'bb' from 'bb+', removed from RWN Support Rating affirmed at '2' Contact: Primary Analyst Artur Szeski Senior Director +48 22 338 6292 Fitch Polska S.A. Krolewska 16, 00-103 Warsaw Secondary Analyst Agata Gryglewicz Associate Director +48 22 330 6970 Committee Chairperson Claudia Nelson Senior Director +44 20 3530 1191 Media Relations: Elaine Bailey, London, Tel: +44 203 530 1153, Email: Additional information is available on Applicable criteria, Global Financial Institutions Rating Criteria, dated 31 January 2014 are available at Applicable Criteria and Related Research: Global Financial Institutions Rating Criteria here Additional Disclosure Solicitation Status here 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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