Moody's Investors Service has changed to negative from stable the outlook on the Baseline Credit Assessment (BCA) of the Croatian Bank for Reconstruction and Development (HBOR). The outlook on the bank's A3 issuer rating and A3 backed unsecured debt rating was also changed to negative from stable.
Moody's noted that although HBOR'S fundamentals remain healthy, primarily supported by high capitalisation and unobstructed access to international funding, the negative outlook placed on the bank's BCA reflects the increasingly negative impact of the global economic crisis on the Croatian economy and rising risks related to the country's financial institutions. The rating agency notes in particular that the projected slowdown of the economy in 2009, expectations for much reduced foreign investment and the country's substantial re-financing needs (in foreign currency) have — since October 2008 — exerted material pressure on the Croatian kuna exchange rate (exacerbating first quarter seasonal exchange rate pressures, reflecting larger external debt maturities and lower foreign currency tourism proceeds).
Current conditions are exerting pressures of a systemic nature on Croatian banks, thereby placing demands on resources of the state. Given the Croatian financial sector's high degree of euroisation, its stability has — in recent months — become increasingly dependent on the authority's capacity to maintain foreign exchange stability by using state reserves which are not unlimited.
All obligations that HBOR assumes under domestic or international loan arrangements or bond issues are guaranteed by the Republic of Croatia unconditionally, irrevocably and on first demand as stipulated by the 2006 revised HBOR Act.
Moody's changes outlook on Zagrebacka Banka (Croatia) to negative
Moody's also changed to ‘negative’ from ‘stable’ the outlook on the D+ bank financial strength rating (BFSR) of Zagrebacka Banka (Croatia) (ZABA). At the same time, the outlook on the bank's A2/Prime-1 global local currency (GLC) deposit ratings, and its A2 long-term foreign currency debt rating were changed to ‘negative’ from ‘stable’. The bank's foreign currency deposit ratings remain capped by Croatia's foreign currency deposit ceiling and were affirmed at Ba1/Not Prime.
Given the high euroisation of Croatia's financial sector, a potential devaluation of the kuna would likely have considerable implications for both the country's financial sector and the real economy. Foreign currency funding accounts for 71% of ZABA's group liabilities, while foreign-currency-denominated or foreign-currency-linked lending stood at around 72% of the group's loan book as at YE 2008.
The outlook on ZABA's ratings is affected by the fact that asset quality problems would rise in the event of a devaluation of the kuna (as un-hedged debt-servicing obligations of foreign currency borrowers rise in kuna terms, while rising inflation further weakens customers' financial circumstances, particularly retail customers). Likewise, the negative outlook takes into account that even in the absence of a kuna devaluation scenario the performance of the bank during 2009 is expected to reflect the performance of the Croatian economy.
Concerns are growing regarding the potential increase of credit costs, particularly in relation to ZABA's large mortgage loan book as well as its exposures to the construction and real estate sectors (whose performance appears increasingly lacklustre following recent years of dynamic growth). The bank's solid retail deposit base notwithstanding, prospects of potentially higher funding costs — partly due to widening spreads on parental funding and partly due to the fluctuation of kuna interest rates — also support the negative outlook. Although ZABA remains strongly capitalised, the extent to which the aforementioned affect its performance would exert downward pressure on the bank's BFSR.
Given the bank's size and importance to the system, Moody's continues to assess as "very high" the likelihood that the Croatian authorities would extend systemic support to Zagrebacka banka in case of need. Nonetheless, current pressures on Croatian banks are of a systemic nature, placing demands on state resources.
Meanwhile, the global financial sector crisis has affected the performance of Unicredito (ZABA's ultimate parent, through Bank Austria), and is giving rise to concerns over the group's exposure to Eastern Europe.
