Moody's Investors Service on Monday downgraded the Croatian Bank for Reconstruction and Development's (HBOR) foreign-currency issuer rating to Ba2 from Ba1 and its foreign-currency backed senior unsecured medium-term note programme rating to (P)Ba2 from (P)Ba1. The outlook on the issuer rating remains negative. At the same time, Moody's has affirmed the bank's standalone baseline credit assessment (BCA) of ba2.
The rating actions were prompted by the weakening of the Croatian government's credit profile, as captured by Moody's downgrade of the government bond rating to Ba2 (negative) from Ba1 (negative) on 11 March.
The downgrade of the issuer and debt programme ratings of HBOR, a 100% government-owned development bank, reflects the reduced ability of the government to provide support, as indicated by the downgrade of Croatia's sovereign ratings to Ba2 from Ba1. As HBOR's obligations benefit from an unconditional, explicit and irrevocable state guarantee, Moody's aligns the bank's issuer and debt ratings with Croatia's local-currency bond rating, the credit rating agency said.
The negative outlook on HBOR's issuer rating is aligned with the negative outlook on Croatia's government bond rating and reflects the interlinkages between HBOR's credit profile and that of the sovereign, given the bank's development mandate and operations in Croatia, and the challenging domestic operating environment, which Moody's expects will continue to constrain lending growth and pressure the bank's asset quality and profitability.
In 2015, Croatia emerged from a six-year recession with real GDP expanding by a modest 1.6%. For 2016, Moody's expects growth will remain subdued at around 1.5%, as debt accumulation in the household and corporate sector and high unemployment (at 16.4% at end-January 2016) continue to constrain private investment and consumption and offset the impact of growing exports to Europe.
Moody's expects the bank's weak asset quality metrics -- non-performing loans stood at 6.6% of loans as of September 2015 -- to continue to constrain profitability through high provisioning requirements. In the nine months ending September 2015, return-on-average assets stood at 0.6%, while provisioning expenses absorbed 53% of pre-provision income, the agency said.
However, Moody's affirmation of HBOR's ba2 BCA reflects the bank's strong capitalisation and high loan loss reserve buffers, which the rating agency expects will continue to provide the bank with a substantial cushion against unforeseen credit losses.
As of end-September 2015, shareholders' equity stood at 38% of total assets, while loan loss reserves stood at a high 194% of non-performing loans, providing a high buffer to absorb losses.
As indicated by the negative outlook, there is currently limited upward pressure on HBOR's ratings. A weakening in the creditworthiness of the government of Croatia -- as signalled by a downgrade of Croatia's local-currency bond rating -- would exert downward pressure on HBOR's ratings, says Moody's.
Saturday, March 12, 2016 - 07:25
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