Analytics, Baltic, Banks, Financial Services, Investments, Rating

The downgrades conclude the review process for the six banks that was initiated on June 8, 2009, although Moody's notes that the long-term debt and deposit ratings of Parex Bank and Swedbank remain on review for possible downgrade. These reviews were initiated on May 11 2009 and April 27, respectively, and both are expected to be concluded in the next month following the release of further information on Parex Bank and the conclusion of the review on Swedbank AS parent bank, Swedbank, reports LETA.

The rating actions of Moody's were driven by the speed and depth of the deterioration of the Baltic economies and its impact on the banks' standalone creditworthiness, as measured by their bank financial strength ratings (BFSRs).

With the three economies in deep recession, corporate defaults are rising and Moody's expects this to lead to significantly increased losses on the banks' corporate loan portfolios. Moreover, the rating agency expects delinquencies in the banks' retail portfolios to rise, reflecting higher unemployment, lower income levels and a likely further decline in house prices.

Moody's expects these potential losses and substantial provisioning needs to weaken Baltic banks' profitability and capital positions over the next two years. The declining profitability trends were already seen in the banks' first quarter financials. Also, a significant deterioration in asset quality ratio indicators was visible in 2008 and has continued this year.

Moody's notes, however, that the banks' funding positions remain relatively comfortable with customer deposits being the major source of funding for most of the entities. However, the fierce competition for deposits will exert pressure on some of the banks' funding. In particular, the rating agency remains concerned about the future prospects of those banks that are reliant on non-resident deposits for funding. A business model that mainly relies on non-resident business could potentially be adversely affected in the ongoing financial crisis.

Moody's notes that there has been speculation that the Bank of Latvia may be forced to devalue the lat and outlined its opinion on a devaluation scenario in a recently published Special Comment entitled, "Living on the edge: Latvian devaluation speculation and implications for the sovereign rating".

Although the probability of devaluation has recently declined due to the Latvian parliament's approval of a fiscal package that was welcomed by the EU and IMF, Moody's stresses that a devaluation cannot be ruled out completely, as economic and social pressure in Latvia will continue to be high for some time. Therefore, "Moody's" already incorporates a moderate risk of devaluation into its estimates of expected bank credit losses. However, the ratings of some banks would likely be downgraded further if the risk of devaluation were to increase. The rating agency notes that devaluation would lead to a further deterioration in the banks' asset quality, given the significant amount of loans in foreign currency. On average, foreign-exchange loans account for around 90% of the Moody's rated banks' total customer loans.

The long-term deposit and debt ratings of all the rated Baltic banks carry negative outlooks, reflecting the negative outlook that "Moody's" has placed on all three banking systems.

Moody's took the following rating actions on the Baltic banks.

Baltic International Bank E+ BFSR was affirmed, but now maps to a BCA of B3 (from B2). Consequently, the bank's long-term local and foreign currency deposit ratings were downgraded to B3 from B2. The Not Prime short-term rating was affirmed. The E+ BFSR and the B3 long-term local and foreign currency deposit ratings carry a negative outlook.

The lowering of the bank's BCA reflects its relatively low capital level with a capital adequacy ratio of 10.4% at end-March 2009, which raises its vulnerability to prolonged stress. While acknowledging the bank's relatively small loan portfolio when compared with that of its Baltic peers (25% of total assets), there was a significant increase in problem loans last year. In addition to weakening asset quality, further concerns relate to the bank's loan portfolio concentrations to the real estate sector.

The downgrade also reflects Moody's concerns about how the ongoing recession could affect the bank's business model, which is primarily focused on private banking and non-resident business.

Moody's downgraded BIGBANK's BFSR to E (mapping to the BCA of Caa1) with stable outlook from E+ (mapping to the BCA of B1). The bank's long-term deposit rating was downgraded to Caa1 with a negative outlook from B1 following the downgrade of the BFSR. The Not Prime short-term deposit rating was affirmed.

The magnitude of the downgrade and the negative outlook reflects Moody's view that BIGBANK's capital position will come under significant pressure in the short term because of its 100% exposure to higher-risk consumer finance. Moody's noted that the bank reported an exceptionally high problem loan ratio of 43% at the end of March 2009, a rapid increase from 18% at the beginning of 2008. The rating agency adds that the downgrade reflects its expectation that the bank's capital cushion under financial covenants will narrow as it limits deterioration in the capital adequacy ratio to 15%.

Moody's confirmed MLBL's long-term foreign currency deposit rating at Baa3 and downgraded its BFSR to E+ with a stable outlook (mapping to a BCA of B1) from D- (mapping to a BCA of Ba3). MLBL's long-term foreign currency deposit rating is at the same level as the Latvian sovereign bond rating of Baa3. The outlook on the Baa3 long-term deposit rating is negative, in line with the negative outlook on the Latvian sovereign rating. The Prime-3 short-term rating was confirmed.

The downgrade of the BFSR reflects the bank's weakened profitability and asset quality. It also reflects Moody's expectation of potential losses associated with the bank's significant exposure to the property sector and SMEs. In particular, this is in light of the bank's low loan loss reserves, which provided a low 16% coverage of problem loans at the end of 2008. Furthermore, the bank has reported a rapid increase in problem loans, which accounted for 8.6% of gross loans at the end of 2008 compared with 2.7% at the end of 2007.

Commenting on keeping MLBL's long-term foreign currency deposit rating at the same level as the government bond rating, Moody's notes the government's very high commitment to support the bank.

Moody's downgraded Norvik banka BFSR to E+ with negative outlook (mapping to a BCA of B1) from D- (mapping to a BCA of Ba3). The bank's local and foreign currency deposit ratings were downgraded to B1 from Ba3, due to the downgrade of the BFSR, also with a negative outlook. The Not Prime short-term rating was affirmed.

The downgrade reflects the potential losses stemming from the bank's relatively concentrated corporate portfolio and reduced level of profitability compared with previous years. The swift growth of problem loans is of concern, which accounted for 12.5% of gross loans at the end of 2008, up from 1.5% at the beginning of the same year.

Moody's downgraded Siauliu Bankas BFSR to D- (mapping to a BCA of Ba3) with negative outlook from D (mapping to a BCA of Ba2). The local and foreign currency deposit ratings were also downgraded to Ba3 with negative outlook from Ba2 following the downgrade of the BFSR. The Not Prime short-term rating was affirmed.

The downgrade and negative outlook reflect Moody's view that the bank's profitability and asset quality is expected to be severely impacted by the ongoing economic downturn due its sizeable exposure to SMEs and the real estate sector, which are being adversely affected by the recession.

However, Moody's notes that the bank's customer loan portfolio is not exposed to foreign-exchange risk to the same extent as its Latvian peers. Also, standing at 15.9% at the end of March 2009, the bank reports one of the highest capital adequacy ratios in the Baltic region.

Trasta Komercbanka E+ BFSR was affirmed, but now maps to a BCA of B3, down from B2. Consequently, the bank's long-term local and foreign currency deposit ratings were downgraded to B3 from B2. The Not Prime short-term rating was affirmed. All the ratings carry a negative outlook.