Austria’s Erste, Raiffeisen Downgraded by Moody’s

Erste Group Bank AG (EBS), UniCredit Bank Austria AG and Raiffeisen Bank International AG (RBI) were downgraded by Moody’s Investors Service on their eastern Europe business and as Europe’s sovereign-debt crisis weighs on Austria’s biggest lenders.

Erste, Austria’s largest bank, had its long-term debt rating cut two grades to A3, Moody’s said today in a statement. Bank Austria, the second biggest, and Raiffeisen, the third biggest, were lowered one level to A3 and A2 respectively.

The downgrades of the firms “reflect their vulnerability to the adverse operating conditions in some of their core markets” in eastern Europe, Moody’s analysts Carola Schuler and Gregory Winans Bauer said in the statement. The lenders, which have “limited capital buffers to absorb losses in a stressed environment,” also face “increased risk of further shocks from the ongoing euro area debt crisis,” they said.

Moody’s in May cut the ratings of 26 Italian banks, including UniCredit SpA (UCG), which owns Bank Austria, and of 16 banks in Spain, including Banco Santander SA. (SAN) It also cut six German banks, including Commerzbank AG, today.

Bank Review

The downgrades are the result of a review of more than 100 European banks and an additional eight non-European firms with large capital-market businesses Moody’s started in February to assess the impact of Europe’s debt crisis. Ratings downgrades may raise bank borrowing costs and force lenders to increase collateral.

The rating cut has “limited impact on Erste, since we benefit from a robust liquidity situation underpinned by very large and resilient deposit base, committed long-term funding from institutional and private investors, as well as proven access to short term refinancing and capital markets for issuance of unsecured and secured bonds even in challenging times,” Michael Mauritz, a spokesman for Erste, said by e-mail. Erste has already covered it’s full funding needs for 2012, he said.

Raiffeisen also doesn’t “expect a significant impact on funding costs,” spokesman Michael Palzer said by phone. Bank Austria declined to comment, citing company policy.

Zero Exposure

Austria’s major banks have reduced to practically zero their holdings of debt from the euro area’s periphery nations such as Greece, Ireland, Portugal and Spain. Their business in eastern European countries such as Hungary and Romania is the main risk monitored by investors and rating companies. Bank Austria, Erste and Raiffeisen through their local units are the biggest, second-biggest and third-biggest bank, respectively, in the former communist bloc.

Erste declined 0.6 percent to 14.245 euros at the 5:30 p.m. close in Vienna. Raiffeisen fell 0.3 percent to 23.035 euros. The 43-member Bloomberg Europe Banks and Financial Services Index rose 3.9 percent today, with only Bankinter SA falling besides Erste and Raiffeisen. The two banks still are among the best performers of that index this year, with Raiffeisen having advanced 15 percent and Erste 4.9 percent, compared to the index’s 5.4 percent decline.

Erste’s “sizable exposure to Hungary and Romania which together with a less diversified franchise in the region makes the bank more dependent on developments in the remaining performing central and eastern European countries,” Moody’s said in the statement. This also affected the rating company’s outlook for Erste, which was set at negative.

Bad Loans

Erste swung to a loss last year because it wrote down its banks in Hungary and Romania as bad debts soared, and because of losses on previously undisclosed credit default swaps. Moody’s started its rating review already at the time. The lender said April 30 that bad loans in those two countries will remain a drag on profit for longer than it predicted.

While Raiffeisen’s risk profile is “more geared toward riskier” countries in eastern Europe and the former Soviet Union, the bank “has sound non-performing loans coverage ratios, which mitigate the potential credit-negative effects if losses were to materialize,” the Moody’s analysts said, giving the lender’s rating a stable outlook.

While both banks managed to fill capital gaps found by the European Banking Authority in the past two quarters, the asset- weighted average Tier 1 ratio for Austrian banks “still ranked below several western European peers,” Moody’s said.

‘Preconceived Opinion’

“We oppose the points of criticism as we have substantially increased our capital base over the last years, fulfilling all requirements,” Erste’s Mauritz said. “In our point of view the criticism on central and eastern Europe is a preconceived opinion.”

Erste, which filled a 753 million-euro ($941 million) capital gap found by the EBA, had core Tier 1 ratio stood at 8.6 percent excluding state aid and other non-voting capital at the end of the first quarter. Raiffeisen’s core Tier 1 ratio, excluding those measures, stood at 7.3 percent at the end of March.

Raiffeisen and 78.5 percent-owner Raiffeisen Zentralbank Oesterreich AG, which was also cut one level to A3, filled a 2.1 billion-euro capital hole found by the EBA in the past quarters by selling assets and converting capital into forms accepted by EBA.

The downgrade of Bank Austria, which owns most of Italy’s UniCredit’s eastern European business, was because of its weakened asset quality combined with a “low problem loan coverage and the bank’s relatively high gearing into wholesale funding,” the analysts said. “This renders the bank more vulnerable to confidence-sensitive funding than its Austrian peers,” Moody’s said, giving the rating a negative outlook.

Debt Crisis

Moody’s is overhauling the way it rates European banks and firms with global securities operations to reflect the adverse effects of the sovereign-debt crisis, dwindling economic growth and the latest round of capital rules set by the Basel Committee on Banking Supervision. Moody’s ratings review of European banks follows its decision on Feb. 13 to cut the credit rating of Italy and five other countries, including Spain and Portugal, on doubts over the region’s ability to solve the debt crisis. Moody’s in February also revised its outlook on France’s and U.K.’s top Aaa ratings to “negative.”

Austria lost its AAA rating at Standard & Poor’s in February as the ratings company cited the risk that its banks need further state bailouts. S&P confirmed Erste’s and Raiffeisen’s own ratings after the sovereign downgrade. The Alpine republic still has the highest rating at Moody’s and Fitch Ratings, while both are citing the banks as the biggest risk to the rating.

Moody’s is still reviewing for downgrade the ratings of Hypo Tirol Bank AG and Oesterreichische Volksbanken AG (VBPS), which was partially nationalized earlier this year.

The rating company’s didn’t review the stable Baa2 rating of Bawag PSK Bank AG. It had already cut by two steps in February the rating of Kommunalkredit Austria AG, a former Volksbanken unit that was the first Austrian lender to be nationalized in 2008. Kommunalkredit’s Baa3 rating is stable.

To contact the reporter on this story: Boris Groendahl in Vienna at bgroendahl@bloomberg.net

To contact the editor responsible for this story: Frank Connelly at fconnelly@bloomberg.net

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