Moody’s Downgrades HBOR Rating to Ba2, Outlook Negative

Moody’s agency downgraded the credit rating of the Croatian Bank for Reconstruction and Development (HBOR) in foreign currency from Ba1 to Ba2 on Monday and maintained a negative outlook, after it downgraded Croatia’s rating on Friday.

The downgrade of HBOR’s rating is a consequence of the weakening credit profile of Croatia, after its credit rating in foreign currency was downgraded from Ba1 to Ba2 on Friday, with negative outlooks retained, Moody’s stated. 

“The downgrade of the issuer and debt program ratings of HBOR, a development bank wholly owned by the state, reflects the reduced ability of the Government to provide support, as indicated by the downgrade of Croatia’s rating,” the agency noted in its report.

As HBOR’s obligations enjoy unconditional and irrevocable state guarantees, Moody’s indicated that it aligns HBOR’s rating with that of the state.

The negative outlook for HBOR’s rating is consistent with the negative outlooks on Croatia’s rating, reflecting the interconnection between HBOR’s credit profile and that of the state, as well as the challenging business conditions in the domestic environment, which Moody’s estimates will continue to limit credit growth and exert pressure on the bank’s asset quality and profitability.

Last year, Croatia emerged from a six-year recession with a modest real GDP growth of 1.6 percent, Moody’s noted, estimating that in 2016, economic growth will remain subdued at around 1.5 percent as the accumulation of household and corporate sector debt, along with high unemployment, will continue to limit private investment and consumption and diminish the impact of export growth to Europe.

Moody’s expects that the weak asset quality metrics of HBOR – with non-performing loans accounting for 6.6 percent of loans in September 2015 – will continue to constrain profitability through high reserve requirements. In the nine months to September 2015, the return on average assets was 0.6 percent, the agency stated.

However, Moody’s confirmed HBOR’s standalone baseline credit assessment at ba2, reflecting the bank’s strong capitalization and high reserves for credit losses, which should continue to provide the bank with protection against unforeseen credit losses.

At the end of September 2015, HBOR’s equity capital accounted for 38 percent of total assets, while reserves for bad loans were a high 194 percent of bad loans, providing a high assurance that the bank will absorb losses, Moody’s noted.

As the negative outlooks indicate, there is currently limited pressure on the growth of HBOR’s rating, while the weakening creditworthiness of Croatia could exert pressure on the downgrade of HBOR’s rating, the agency concludes.