Rating Action: Moody's assigns first time Baa2 deposit ratings to Coop Pank; stable outlook
Global Credit Research - 25 Aug 2020
Stockholm, August 25, 2020 -- Moody's Investors Service, ("Moody's") has today assigned first time foreign and local currency, long- and short-term deposit ratings to AS Coop Pank (Coop Pank) of Baa2/Prime-2. A ba1 baseline credit assessment (BCA) and adjusted BCA were also assigned, as were long-term and short-term counterparty risk ratings of Baa1/Prime-2. The outlook on the long-term deposit ratings is stable.
The deposit ratings of Baa2/Prime-2 reflects 1) the ba1 BCA, which balances the strong fundamentals of the bank, including current strong capital levels, low levels of problem loans and good profitability against the bank's aggressive growth targets, and a challenging operating environment relating to Coronavirus; and 2) the very low level of expected loss faced by junior depositors in the event of a bail-in given the volumes of loss absorbing obligations cushioning their exposure, which results in two notches of rating uplift under Moody's advanced loss given failure (LGF) analysis. The counterparty risk ratings (CRR) of Baa1/Prime-2 and the counterparty risk assessment (CRA) of Baa1 (cr)/Prime-2(cr) both incorporate the adjusted BCA and three notches of uplift as indicated by the LGF analysis.
The long-term bank deposit ratings carry a stable outlook, reflecting Moody's view that over the next 12-18 months the bank will maintain a steady performance and credit profile in the context of the challenging operating environment.
The deposit ratings of Baa2/Prime-2 reflect standalone credit characteristics of Coop Pank as a fast growing lender to Estonian households and small and medium-sized enterprises, which translates into a BCA of ba1, together with a two-notch rating uplift which captures the very low loss level faced by junior depositors under Moody's LGF analysis.
The bank's standalone fundamentals are strong, but aggressive growth, with annual lending growth of more than 30% creates key credit challenges, including operational risks and the unseasoned nature of the loan book, in a weak macro-economic environment. High levels of capital and strong internal capital generation are among the bank's key strengths, supporting the bank's strategy to scale up its franchise. The bank is also closely interlinked with the Coop retail brand and therefore enjoys a strong linkage to a large share of the Estonian population offering significant cross selling opportunities.
However, Moody's expects the bank's capitalization, in the form of tangible common equity-to-risk-weighted assets (TCE/RWA) ratio to decline by nearly six percentage points by 2022 from 20.5% at the end of June 2020. This reflects the bank's very high expected loan growth, with the bank planning to add more than 30% to the balance sheet on a yearly basis. Despite this, the ratio still compares well with the bank's Estonian peers.
While the bank's asset risk, illustrated by a problem loans ratio of 1.5% at end of year 2019, appears low in an international comparison, it is significantly higher than the system average of 0.4%. Furthermore, the bank's aggressive approach loan growth, with a doubling its loan portfolio in under three years means that the largely unseasoned part of the loan book, may under-represent the potential for future problem loan general and is reflective of a higher risk appetite than Estonian peers with more mature portfolios.
Furthermore, Moody's regards the coronavirus outbreak as a social risk under our ESG framework, given substantial implications for public health and safety. While Coop Pank's direct exposure to the higher risk industry sectors is constrained at relatively low levels, we expect its asset quality risk to remain elevated over the period due to uncertainty and reduced economic activity in Estonia.
Moody's views Coop Pank's profitability as being solid. Moody's expects the bank to continue improving its efficiency during the outlook period, but the challenges arising from the coronavirus, resulting in higher loan loss provisions, has led to a deterioration of net income to tangible assets of 0.8% for the first half year 2020 compared to 0.9% during 2019. Moody's expects that earnings will be volatile during the next few years.
Coop Pank's assets are primarily funded by deposits and to sustain the ambitious growth targets, Coop Pank gathers a growing share of non-resident deposits from platforms such as Raisin in Germany. While Moody's considers these deposits to be more volatile than Estonian deposits, they are term deposits with limited refinancing hurdles as they are continuously gathered. Also, with a liquid assets-to-total tangible assets ratio at 20.7% at the end of 2019, the bank has adequate volumes of liquid assets to cover the fluctuations in deposit flows and larger withdrawals by its ordinary deposit base.
Corporate governance is highly relevant for Coop Pank, as it is to all players in the banking industry. Coop Pank's ba1 BCA incorporates a negative corporate behavior adjustment to reflect the limited track record of the bank under the control of Coop since 2017, making it more difficult to assess the quality of assets and earnings over a longer period of time and the willingness and ability of management to maintain the bank's risk profile. For Coop Pank, risks related to governance are considered in the context of the aggressive growth strategy, signaling an elevated risk appetite, and an increase in the bank's exposure to adverse developments.
LOSS GIVEN FAILURE
Moody's applies the advanced LGF analysis to Coop Pank as the bank is subject to the European Union Bank Resolution and Recovery Directive (BRRD), which Moody's considers to be an operational resolution regime. In a bail-in scenario, the bank's junior deposits are likely to face a very low loss given failure, owing to the buffer provided by the high volumes of loss absorbing obligations, including junior deposits. As a result, Coop Pank's deposits are rated two notches above the ba1 adjusted BCA, owing to a significant buffer of liabilities eligible for bail-in, protecting junior depositors in the event of a failure. The CR Assessment is positioned at Baa1(cr), and the CR Ratings is placed at Baa1, three notches above the adjusted BCA of ba1 as indicated by LGF.
The ratings reflect a low assumption of government support resulting in no uplift. This reflects the small market share of 2% of deposits in Estonia. Moody's considers that the bank's lack of systemic importance does not justify any explicit rating uplift from government support.
The long-term bank deposits carry a stable outlook, with the ratings incorporating that over the next 12-18 months the bank will continue growing its loan book rapidly leading to lower capitalisation and heightened asset risk, but that the bank will manage these challenges by continuing to focus on improving internal capital generation and managing excess capital buffers prudently. The stable outlook also takes into account the mounting challenges due to the spread of the coronavirus, which will negatively affect both asset risk and profitability during 2020 and possibly into 2021.
FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS
Factors that could lead to an upgrade include: 1) a more gradual and sustained loan growth while maintaining a low problem loan ratio, signaling a less aggressive growth strategy; 2) maintaining long-term capitalization above 18%; 3) a lower reliance on non-resident deposits; or 4) substantial issuances of senior unsecured debt that would clearly demonstrate access to market funding and increase the volumes of loss absorbing obligations.
Factors that could lead to a downgrade include: 1) continued fast growth leading to deterioration in capital levels beyond Moody's expectations and buildup of additional asset risk; 2) rapid increase in problem loans; 3) deteriorating levels of liquidity; or 4) lower levels of subordinated debt, which lead to lower levels of loss absorbing obligations, increasing loss rates for depositors in case of failure.
LIST OF AFFECTED RATINGS ..Issuer: AS Coop Pank Assignments:
.... Adjusted Baseline Credit Assessment, Assigned ba1
.... Baseline Credit Assessment, Assigned ba1
.... Short-term Counterparty Risk Assessment, Assigned P-2(cr)
.... Long-term Counterparty Risk Assessment, Assigned Baa1(cr)
.... Short-term Counterparty Risk Rating, Assigned P-2
.... Long-term Counterparty Risk Rating, Assigned Baa1
.... Short-term Bank Deposits, Assigned P-2
.... Long-term Bank Deposits, Assigned Baa2, Outlook Assigned Stable
.... Outlook, Assigned Stable
The principal methodology used in these ratings was Banks Methodology published in November 2019 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1147865. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.
For further specification of Moody's key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. Moody's Rating Symbols and Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.
For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.
For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.
The ratings have been disclosed to the rated entity or its designated agent(s) and issued with no amendment resulting from that disclosure.
These ratings are solicited. Please refer to Moody's Policy for Designating and Assigning Unsolicited Credit Ratings available on its website www.moodys.com.
Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.
Moody's general principles for assessing environmental, social and governance (ESG) risks in our credit analysis can be found at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1133569.
At least one ESG consideration was material to the credit rating action(s) announced and described above.
Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.
Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.
Niclas Boheman Vice President - Senior Analyst Financial Institutions Group Moody's Investors Service (Nordics) AB Norrlandsgatan 20 Stockholm 111 43 Sweden JOURNALISTS: 44 20 7772 5456 Client Service: 44 20 7772 5454 Sean Marion MD - Financial Institutions Financial Institutions Group JOURNALISTS: 44 20 7772 5456 Client Service: 44 20 7772 5454 Releasing Office: Moody's Investors Service (Nordics) AB Norrlandsgatan 20 Stockholm 111 43 Sweden JOURNALISTS: 44 20 7772 5456 Client Service: 44 20 7772 5454
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