Oct 5 - Fitch Ratings has affirmed Ceska Sporitelna (CS) and Komercni Banka's
(KB) Long-term Issuer Default Ratings (IDR) at 'A', and Ceskoslovenska Obchodni Banka's (CSOB) IDR at 'BBB+'. The Outlook on CS and CSOB is Stable and Negative on KB. The agency has also affirmed the banks' Viability Ratings (VRs) at 'bbb+'. A full list of rating actions is at the end of this commentary.
RATING ACTION RATIONALE AND DRIVERS: LONG-TERM IDRS CS's and KB's IDRs and Support ratings are driven by potential support from their parent banks. CSOB's IDRs are driven by its VR, but also underpinned at the 'BBB+' level by potential shareholder support.
CS's Long-term IDR is equalised with that of its 98% shareholder, Erste Group Bank AG (EB, 'A'/Stable/'a-'), reflecting what Fitch views as an extremely high propensity to provide support to CS. Fitch classifies CS as a core subsidiary for EB, given the high level of operational and management integration between CS and EB, CS's substantial contribution to the group's balance sheet and income statement, the geographical proximity of the Czech and Austrian markets, the high strategic importance of the broader Central and Eastern Europe (CEE) region for EB, and EB's almost full ownership of CS.
KB's Long-term IDR is driven by potential support from its majority shareholder, Societe Generale (SG; 'A+'/Negative/'a-'). Fitch classifies KB as a strategically important subsidiary for KB given the strategic importance of the broader CEE region for SG, KB's role as SG's largest and best performing subsidiary in the CEE, common branding of SG and KB, and SG's majority ownership of the subsidiary. SG holds a 60% stake in KB, with the remainder broadly held.
CSOB's Long-term IDR is underpinned by potential support from its sole shareholder, KBC Bank (KBCB; 'A-'/Stable/'bbb-'). Fitch classifies CSOB as a strategically important subsidiary for KBCB given the latter's strong commitment to the Czech market (reflected in its decision in 2011 not to dilute its stake in CSOB as part of its plan to repay state aid), CSOB's importance for KBCB's overall operational performance, and the brand association between the two banks.
RATING SENSITIVITIES: LONG-TERM IDRS Each of the three banks could be upgraded if the parent bank ratings were upgraded. However, this is unlikely in the foreseeable future, as the parent banks' Long-term IDRs are each driven by potential sovereign support, and Fitch expects state support for banks in developed markets to reduce in the medium term. CSOB's Long-term IDR could also be upgraded if its VR was upgraded.
CS's and KB's Long-term IDRs could be downgraded if their parent banks' IDRs were downgraded. The Negative Outlook on KB's Long-term IDR reflects that on SG, which in turn reflects the Negative Outlook on France's 'AAA' sovereign ratings. CSOB's Long-term IDR could be downgraded if its VR and KBCB's Long-term IDR were downgraded.
RATING ACTION RATIONALE AND DRIVERS: VIABILITY RATINGS The banks' VRs reflect their broad domestic franchises and leading market positions (the three banks together accounted for around 56% of sector assets at end-H112), their solid profitability track records through the crisis, stable asset quality, sound capital and liquidity positions, moderate loan/deposit ratios (in the 70%-80% range) and low refinancing risk.
The VRs also factor in the sluggish current performance of the Czech economy (Fitch forecasts a contraction of 1% in 2012, before a return to growth of 1.2% in 2013) and its high exposure to any further escalation of the eurozone crisis. In addition, the VRs consider the banks' sizable exposure to the property market (mainly through residential mortgage lending, although direct exposure to the real estate and construction sectors is also significant for all three banks in the range of 80%-100% of Fitch core capital) and some pressure on margins due to competition and the low interest rate environment.
RATING SENSITIVITIES: VIABILITY RATINGS An improvement in the outlook for the Czech economy, coupled with continued strong financial metrics at the banks, could generate upside potential for the VRs. In such a scenario, CS and KB's VRs are somewhat more likely to be upgraded than that of CSOB. This reflects CSOB's more moderate capitalisation and profitability levels relative to peers, and the somewhat greater risk of further capital distributions to the parent, given KBCB's plans to repay state aid.
At their current levels, the banks' VRs would likely be resilient to a moderate further deterioration in the operating environment. However, if there was a sharp escalation of the eurozone crisis, or a deeper and more prolonged recession in the Czech Republic than Fitch currently anticipates, the VRs could be downgraded.
The rating actions are as follows:
Ceska Sporitelna Long-term foreign currency IDR: affirmed at 'A'; Outlook Stable Short-term foreign currency IDR: affirmed at 'F1' Support Rating: affirmed at '1' Viability Rating: affirmed at 'bbb+' Komercni Banka Long-term foreign currency IDR: affirmed at 'A'; Outlook Negative Short-term foreign currency IDR: affirmed at 'F1' Support Rating: affirmed at '1' Viability Rating: affirmed at 'bbb+' Ceskoslovenska Obchodni Banka Long-term foreign currency IDR: affirmed at 'BBB+'; Outlook Stable Short-term foreign currency IDR: affirmed at 'F2' Support Rating: affirmed at '2' Viability Rating: affirmed at 'bbb+'
Additional information is available at
. The ratings of Komercni Banka were unsolicited and have been provided by Fitch as a service to investors. The ratings of Ceska Sporitelna and Ceskoslovenska Obchodni Banka were solicited by, or on behalf of, the issuer, and therefore, Fitch has been compensated for the provision of the ratings.
Applicable criteria, 'Global Financial Institutions Rating Criteria', dated 15 August 2012; 'Rating FI Subsidiaries and Holding Companies', dated 10 August 2012 and 'Evaluating Corporate Governance', dated 13 December 2011; are available at
. Applicable Criteria and Related Research: Global Financial Institutions Rating Criteria Rating FI Subsidiaries and Holding Companies Evaluating Corporate Governance (New York Ratings Team)