Thus, the financial rating agency has affirmed 'A' long-term and 'A-1' short-term counterparty credit ratings on Austria-based Erste Group Bank AG, while the outlook remains negative.
Standard&Poor’s has also affirmed BB+ credit rating on Banca Comerciala Romana, ‘A’ rating for Erste Bank’s Czech subsidiary, Ceska Sporitelna and on the Slovak Republic's Slovenska Sporitelna, despite pressure on their stand-alone credit profiles.
"The rating affirmation reflects our view of Erste Bank as a highly systemically important institution to Austria and the funding and 1.9 billion euro non-voting capital support Erste Bank will receive from the Austrian
Government," said Standard & Poor's credit analyst Markus Schmaus.
"We believe that the government would continue to provide support to Erste Bank in case of need," reads the report.
Although we consider government support temporary, it largely mitigates our more cautious view on the future development of Erste Bank's stand-alone credit profile in light of the pressure we expect on the bank's earnings from increasing credit risk, particularly in Central and Eastern Europe (CEE).
The affirmations also reflect increasing macroeconomic risks from the global recession, which might materially affect the financial profile and business prospects of Erste Bank's major operations in the CEE region as well as in its home country. Specifically, the large operations in Romania and Hungary may put pressure on Erste Bank if the operating environment were to deteriorate further.
Erste Bank's capitalization has been the primary negative rating factor over the past few years. By the intended issuance of 2.7 billion euro in participation capital, up to 1.9 billion euro of which will be subscribed by the Austrian government, we expect its Tier 1 ratio to increase to about 10% from 7.2% as of Dec.
"The outlook is negative because of our view that Erste Bank will face a challenging operating environment in its key markets, which might lead to rising credit losses that could materially weaken its financial profile if the recession turns out to be deeper and longer than we currently anticipate," Schmaus added.
S&P could also consider a rating downgrade, if they considered the government less willing to provide support or if losses appear likely to erode the bank’s capital base or impair its business model, notwithstanding S&P expectation on the likelihood of further support.
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