Moody`s Investors Service

FINANCIAL INSTITUTIONS
CREDIT OPINION
20 July 2016
Raiffeisen Zentralbank Oesterreich AG
Update following rating affirmation and outlook change to
positive
Update
Summary Rating Rationale
RATINGS
Raiffeisen Zentralbank Oesterreich AG
Domicile
Vienna, Austria
Long Term Rating
Baa2
Type
LT Bank Deposits - Fgn
Curr
Outlook
Positive
Please see the ratings section at the end of this report
for more information. The ratings and outlook shown
reflect information as of the publication date.
On 27 June, we affirmed the Baa2 long-term deposit ratings and Baa2 long-term backed
debt ratings of Raiffeisen Zentralbank Oesterreich AG (RZB) and changed the outlook to
positive from negative. We further affirmed RZB's Baa2(cr)/P-2(cr) Counterparty Risk (CR)
Assessment. The bank's short-term debt and deposit ratings are P-2.
RZB's Baa2 rated backed debt ratings benefit from an unconditional and irrevocable
guarantee from Raiffeisen Bank International AG (RBI; Baa2 positive/Baa2 positive, ba3)1.
With the implementation of bank resolution legislation in Austria, we consider that RZB's
liabilities carry the same risk as RBI's liabilities, reflecting the rating agency's assumption
that resolution tools would be applied at the level of RZB. We therefore apply RZB's LGF
analysis, considering the risks faced by the different debt and deposit classes across the
liability structure at failure.
Credit Strengths
Analyst Contacts
Swen Metzler, CFA
49-69-70730-762
VP-Senior Analyst
[email protected]
Alexander Hendricks,
49-69-70730-779
CFA
Associate Managing
Director - Banking
[email protected]
Carola Schuler
49-69-70730-766
Managing Director Banking
[email protected]
»
Contemplated merger of RZB's and RBI's fully correlated risk profiles
Credit Challenges
»
Vulnerable capital ratios in a stressed economic environment
Rating Outlook
»
The positive outlook on RZB's long-term ratings follows the positive outlook on RBI's
long-term ratings.
»
The positive outlook on RBI's long-term ratings reflects our expectation that the bank
will be able to further improve its solvency metrics. We anticipate that RBI will continue
to free up capital and further strengthen its loss-absorption buffers, a key objective from
its main subsidiary's strategic review program announced in February 2015.
»
The positive outlook also reflects scope for stronger sector support for RBI, subject to
successful execution of the planned merger of the two entities and sustained signals of
stronger cohesion within the co-operative group.
FINANCIAL INSTITUTIONS
MOODY'S INVESTORS SERVICE
Factors that Could Lead to an Upgrade
»
RZB's and RBI's long-term ratings could be upgraded following (1) the upgrade of the RBI's BCA; or (2) an increase in our affiliate
support assumptions from Austria's RBG factored into RBI's adjusted BCA.
»
Upward pressure on RBI's ba3 BCA could be triggered by (1) a sustained reduction in the stock of problem loans; (2) a further
stabilisation of market conditions Russia and Ukraine; (2) a further strengthening of common equity levels; and (3) the resumption
of the bank's full earnings potential.
Factors that Could Lead to a Downgrade
»
RZB's and RBI's long-term ratings could be downgraded following (1) a downgrade of RBI's ba3 BCA; (2) a reduction of our affiliate
support assumptions from Austria's RBG in RBI's adjusted BCA; and/or (3) a significant decrease in RZB's bail-inable debt cushion,
leading to fewer notches of rating uplift as a result of our LGF analysis.
»
Downward pressure on RBI's ba3 BCA could be triggered by (1) a material set-back in the bank's effort to contain asset risks,
including targets announced under the strategic review program; (2) substantial additional credit charges beyond those currently
expected; (3) an extended period of declining earnings and internal capital generation; and/or (4) a decline in capitalisation and
regulatory capital buffers.
Key Indicators
Exhibit 1
Raiffeisen Zentralbank Oesterreich AG (Consolidated Financials) [1]
Total Assets (EUR billion)
Total Assets (USD billion)
Tangible Common Equity (EUR billion)
Tangible Common Equity (USD billion)
Problem Loans / Gross Loans (%)
Tangible Common Equity / Risk Weighted Assets (%)
Problem Loans / (Tangible Common Equity + Loan Loss Reserve) (%)
Net Interest Margin (%)
PPI / Average RWA (%)
Net Income / Tangible Assets (%)
Cost / Income Ratio (%)
Market Funds / Tangible Banking Assets (%)
Liquid Banking Assets / Tangible Banking Assets (%)
Gross loans / Due to customers (%)
12-152
12-142
12-133
12-123
12-113
Avg.
135.5
147.2
4.5
4.9
11.5
6.3
84.4
2.5
2.6
0.4
65.0
30.4
27.2
101.8
139.9
169.2
4.3
5.2
11.2
5.5
92.0
2.8
2.4
-0.3
68.6
35.0
24.8
116.7
143.7
198.0
5.6
7.7
10.7
6.3
84.3
2.7
2.4
0.6
68.2
34.6
27.4
119.7
146.0
192.4
5.8
7.7
10.8
6.7
81.5
2.3
2.4
0.6
66.7
42.3
25.5
128.8
150.1
194.8
4.7
6.1
9.2
4.7
80.3
2.6
2.4
0.5
63.8
43.6
28.5
125.2
-2.54
-6.84
-1.14
-5.44
10.75
5.96
84.55
2.65
2.56
0.35
66.55
37.25
26.75
118.45
[1] All figures and ratios are adjusted using Moody's standard adjustments [2] Basel III - fully-loaded or transitional phase-in; IFRS [3] Basel II; IFRS [4] Compound Annual Growth Rate based
on IFRS reporting periods [5] IFRS reporting periods have been used for average calculation [6] Basel III - fully-loaded or transitional phase-in & IFRS reporting periods have been used for
average calculation
Source: Moody's Financial Metrics
Detailed Rating Considerations
Contemplated merger of RZB's and RBI's fully correlated risk profiles
We consider RZB's risk profile to be closely aligned with that of RBI. RZB operates as a holding company for the sector's major financial
subsidiaries, in particular RBI. RZB owns 60.7% of RBI's shares and generates a very large percentage of its pre-tax earnings from RBI's
banking activities. The remainder results from RZB's low-margin/low-risk operations as the Austrian primary Raiffeisen banks' and
This publication does not announce a credit rating action. For any credit ratings referenced in this publication, please see the ratings tab on the issuer/entity page on
www.moodys.com for the most updated credit rating action information and rating history.
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20 July 2016
Raiffeisen Zentralbank Oesterreich AG: Update following rating affirmation and outlook change to positive
MOODY'S INVESTORS SERVICE
FINANCIAL INSTITUTIONS
Raiffeisenlandesbanks' central institution, the co-operative sector's leasing activities in Austria and CEE, and its 31.5 % equity stake in
the sector's insurance company UNIQA (unrated).
RZB consolidates the profits of RBI and remains dependent on dividend up streaming to exploit RBI's profit generation capacity.
Following RBI's reported net loss for 2014 and the subsequent announcement of a strategic review programme, RBI has no longer
upstreamed dividends to its owners. We do not expect RBI to pay dividends during the duration of is restructuring programme which
goes until end-2017.
The contemplated merger between RZB and RBI, which was announced on 10 May 2016, is intended to streamline the corporate
structure and to raise efficiencies within both entities. Further, the merger anticipates to improve RZB's regulatory capital which may
suffer from the deduction of €3.3 billion minority interest at end-2015 because this capital portion is derecognised as capital in the
Basel III framework. A significant part of the minority interest results from the 39.3% minority share in RBI that is floated.
Vulnerable capital ratios in a stressed economic environment
We consider RZB's capitalisation a rating constraint because of the risks imbedded at the level of RBI, the main operating entity of RZB,
and only sufficient in a mild downturn.
However, RBI's strategic review program announced in February 2015 helped to strengthen its credit metrics by reducing business
risks, in particular to higher risk countries like Russia (Ba1 negative2) and Ukraine (Caa3 stable3). This is reflected in RZB's transitional
common equity Tier 1 (CET1) ratio which has improved to 10.6% % at end-2015 compared with 10.2% in 2014.
Until end-2017, the programs remaining duration, we expect that RBI will improve its solvency metrics by further reducing higher-risk
assets and thus continue to free up capital to strengthen its loss-absorption buffers. Under these measures, RBI intents to improve its
fully-loaded CET1 ratio to above 12% by end-2017 (1Q2016: 11.5%), which would also help to further improve RZB's capital buffers.
Please also refer to the Credit Opinion of RBI.
Notching Considerations
Affiliate Support
We assess a limited financial capacity of RBG, the Austrian Raiffeisen sector, to provide support to RZB and RBI, respectively, based on
the co-operative group's combined financial strength. We consider the Group's capitalisation as moderate relative to its overall credit
profile, which is focused on -- and therefore strongly correlated with -- its higher-risk CEE exposures, housed at RBI. Higher capital
would be required to protect the sector against likely losses under an adverse scenario.
Subject to successful execution of the planned merger of RZB and RBI and sustained signals of stronger cohesion within the cooperative group, we believe that the prospect of RBI's formal inclusion into the Group's institutional protection scheme (IPS) will not
adversely change our view on the group's mutual support capacity. Therefore, our positive outlook also reflects the possible additional
scope for stronger sector support for RBI.
The cross-sector support attributed to RBI is “moderate”, leading to one notch affiliate support uplift to its Adjusted BCA of ba2. This
support reduces the probability of default as the co-operative group cross-sector support mechanism aims to stabilise its members by
avoiding a bail-in or any form of loss-participation by creditors.
Loss Given Failure
RBI, together with its parent bank RZB, is subject to the EU Bank Recovery and Resolution Directive (BRRD), which we consider to be
an Operational Resolution Regime. We expect RBI to be included in the domestic resolution perimeter of its parent entity RZB. In
accordance with our methodology, we therefore apply RZB's LGF analysis, considering the risks faced by the different debt and deposit
classes across the liability structure at failure. We assume residual tangible common equity of 3% and losses post-failure of 8% of
tangible banking assets, a 25% run-off in "junior" wholesale deposits, a 5% run-off in preferred deposits, and assign a 25% probability
to deposits being preferred to senior unsecured debt. These are in line with our standard assumptions.
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20 July 2016
Raiffeisen Zentralbank Oesterreich AG: Update following rating affirmation and outlook change to positive
FINANCIAL INSTITUTIONS
MOODY'S INVESTORS SERVICE
Under our Advanced LGF analysis, RZB's and RBI's Baa2 deposit and senior unsecured ratings benefit from an extremely low loss-givenfailure reflecting the banks' substantial volume of deposit funding as well as the amount of senior unsecured debt and securities more
subordinated to it, leading to three notches of rating uplift from RBI's ba2 Adjusted BCA.
The Ba2 ratings for RZB's subordinated debt are positioned in line with RBI's ba2 Adjusted BCA, reflecting a moderate loss-given-failure
under our Advanced LGF analysis for this junior debt class.
Hybrid Capital Instruments
Non-cumulative preferred securities issued RZB Finance (Jersey) III and IV and transferred to RBI are rated B2(hyb), which is three
notches below RBI's ba2 Adjusted BCA, reflecting their deeply subordinated claims in a liquidation scenario and the non-cumulative
coupon-skip mechanism tied to the breach of a balance-sheet loss trigger.
Government Support
While we consider the group of Austrian Raiffeisen co-operative banks, including RZB and RBI, to be domestically systemically relevant,
we only attribute a "low" probability of Austrian government support, which results in no ratings uplift from government support.
We believe that the wider scope of the BRRD implementation in Austria and its recent application, triggering a resolution of Heta
Asset Resolution AG (Heta; Carinthian-state-guaranteed senior unsecured debt Ca, on review for upgrade), illustrates the Austrian
government's willingness to apply burden-sharing to bondholders. Consequently, we do not assign any rating uplift for RZB's and RBI's
long-term ratings from government support.
Issuer Profile
RZB is the central institution of the Austrian co-operative Raiffeisen Banking Group (RBG, unrated) accounting for around half of
sector's consolidated assets. At end-2015, RZB reported consolidated assets of €138 billion (2014: €145 billion, restated) and net profits
of €237 million compared to a net loss of €399 million (restated) in 2014.
Ratings
Exhibit 2
Category
RAIFFEISEN ZENTRALBANK OESTERREICH AG
Outlook
Bank Deposits
Counterparty Risk Assessment
Issuer Rating
Bkd Senior Unsecured
Bkd Senior Subordinate -Dom Curr
Moody's Rating
Positive
Baa2/P-2
Baa2(cr)/P-2(cr)
Baa2
Baa2
Ba2
RAIFFEISEN BANK INTERNATIONAL AG
Outlook
Bank Deposits
Baseline Credit Assessment
Adjusted Baseline Credit Assessment
Counterparty Risk Assessment
Senior Unsecured
Senior Subordinate -Dom Curr
Commercial Paper -Dom Curr
Other Short Term -Dom Curr
Positive
Baa2/P-2
ba3
ba2
Baa2(cr)/P-2(cr)
Baa2
Ba2
P-2
(P)P-2
Source: Moody's Investors Service
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20 July 2016
Raiffeisen Zentralbank Oesterreich AG: Update following rating affirmation and outlook change to positive
FINANCIAL INSTITUTIONS
MOODY'S INVESTORS SERVICE
Endnotes
1 The ratings shown are RBI's long-term deposit rating and outlook and the senior unsecured debt rating and outlook and the BCA.
2 The rating shown is Russia's long-term issuer rating and outlook.
3 The rating shown is Ukraine's long-term issuer rating and outlook.
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20 July 2016
Raiffeisen Zentralbank Oesterreich AG: Update following rating affirmation and outlook change to positive
FINANCIAL INSTITUTIONS
MOODY'S INVESTORS SERVICE
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REPORT NUMBER 1033927
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20 July 2016
Raiffeisen Zentralbank Oesterreich AG: Update following rating affirmation and outlook change to positive
FINANCIAL INSTITUTIONS
MOODY'S INVESTORS SERVICE
Contacts
Torsten-Alexander
Thebes
Associate Analyst
7
20 July 2016
CLIENT SERVICES
Christina Gerner
Associate Analyst
Americas
1-212-553-1653
Asia Pacific
852-3551-3077
Japan
81-3-5408-4100
EMEA
44-20-7772-5454
Raiffeisen Zentralbank Oesterreich AG: Update following rating affirmation and outlook change to positive

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