SC Citadele Banka -- Moody's affirms Citadele Banka's Baa3 deposit rating; outlook changed to positive

Rating Action: Moody's affirms Citadele Banka's Baa3 deposit rating; outlook changed to positiveGlobal Credit Research - 17 Feb 2021Stockholm, February 17, 2021 -- Moody's Investors Service ("Moody's") has today affirmed SC Citadele Banka's (Citadele) deposit ratings of Baa3/P-3. Furthermore, the rating agency affirmed the Baseline Credit Assessment (BCA) and Adjusted BCA of ba2. The long-term Counterparty Risk Ratings (CRRs) of Baa2 and long-term Counterparty Risk Assessment (CRA) of Baa2 (cr) were also affirmed. The outlook on the long-term deposit ratings changed to positive from stable.The rating action follows the positive revision of the macro profiles of Lithuania to Strong - from Moderate +, and Latvia to Moderate + from Moderate. The rating affirmation reflects a changed weighted macro profile for Citadele of Strong - from Moderate + and the bank's improving fundamentals in terms of asset risk and capital generation, balanced against a high level of non-performing loans.The positive outlook on Citadele's long-term deposit ratings reflects Moody's expectation that the acquisition of the SIA UniCredit Leasing (UCL), completed on 4 January 2021, will support a recovery in bank's profitability during 2021, and will not result in any material deterioration in asset quality. Although the bank's capital ratio has dipped as a result of the acquisition, Moody's forecasts that the tangible common equity (TCE) ratio will move above 14% over the outlook period and that profitability will strengthen.For a detailed list of the affected ratings please refer to the end of this press release. RATINGS RATIONALE BASELINE CREDIT ASSESSMENT The improved macro profile of Strong - reflects the higher Latvian macro profile of Moderate + (previously Moderate) incorporating lower risks in the banking system's funding conditions, and the Lithuanian Strong - macro profile, with Lithuania's economy having outperformed most European peers during the pandemic. The strengthening operating environment has allowed Citadele to improve its problem loans ratio to 3.7% at the end of September 2020, down from 4.8% in 2019 and 9.1% in 2018. We forecast the ratio to stabilize well below 6% following the consolidation of the UCL portfolio and some future movement of stage 2 loans into stage 3.The bank's management has built up capital and liquidity over the past couple of years to facilitate an acquisition with a tangible common equity to risk weighted assets (TCE/RWA) of 18.2% at the end of September 2020. Moody's expects that the acquisition will initially lead to the TCE ratio falling to around 14% before improving. Although the majority of deposits raised to fund the acquisition were domestic, a significant proportion was sourced from deposit platforms outside of the bank's home markets. Moody's except this funding to be substituted with depositors in the Baltic countries and with market funding, and the bank maintaining ample levels of liquidity.Moody's forecast the bank's profitability, which was temporarily hit during the first nine months of 2020 due to a one off to non-interest income, to normalize with net income of around 0.8% of tangible banking assets in 2021.Moody's decision to revise Lithuania's macro profile to Strong - from Moderate + follows the upgrade of Lithuania's issuer and senior unsecured rating to A2 from A3, on 12 February 2021. This rating action reflects Lithuania's strong medium-term growth prospects and Moody's expectation that Lithuania's debt burden will remain lower than that of most A2 rated peers notwithstanding the impact of the crisis, with fiscal strength supported by strong debt affordability metrics and a reduction of foreign currency debt.Moody's also decided to revise Latvia's macro profile to Moderate+ from Moderate, as a result of lower risks in the banking system's funding conditions. A decline in the number of non-resident deposits (to 21% of total deposits as of the end of June 2020 from 53% at end-2015) and the Latvian authorities' efforts to reduce money laundering risk, has led the rating agency to reduce the negative adjustment to Latvia's funding conditions score to one notch from two previously.LOSS GIVEN FAILURE (LGF)Citadele's depositors are likely to face very low loss given failure because of the bank's high volume of junior deposits, meaning that losses would be spread over a large depositor base. As a result, the deposit ratings of Baa3 includes two notches of rating uplift due to LGF.The CRRs and CRA are positioned three notches above the Adjusted BCA, as indicated by LGF.FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGSFactors that could lead to an upgrade include: a strengthening of the solvency of the bank post acquisition with TCE/RWA ratio remaining comfortably above 14%, together with a recurring net income to tangible assets around 0.8% and problem loans to gross loans below 5.5%.The ratings could be downgraded if the bank's TCE/RWA ratio falls and remains lower than 14% during the outlook period; combined with higher problem loans or credit related costs, for example as a result of a significant deterioration in the Baltic economies due to a resurgence of the coronavirus.The ratings could also be downgraded due to lower volumes of loss absorbing liabilities protecting creditors and depositors in case of failure. LIST OF AFFECTED RATINGS Issuer: SC Citadele Banka ..Affirmations: ....Long-term Counterparty Risk Ratings, affirmed Baa2....Short-term Counterparty Risk Ratings, affirmed P-2....Long-term Counterparty Risk Assessment, affirmed Baa2(cr)....Short-term Counterparty Risk Assessment, affirmed P-2(cr)....Baseline Credit Assessment, affirmed ba2....Adjusted Baseline Credit Assessment, affirmed ba2....Long-term Bank Deposits, affirmed Baa3, outlook changed to Positive from Stable....Short-term Bank Deposits, affirmed P-3..Outlook Action:....Outlook changed to Positive from StableThe 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.REGULATORY DISCLOSURESFor 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. 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