Fitch Ratings has affirmed
A full list of rating actions is below.
Key Rating Drivers
ZABA's IDRs reflect the high likelihood of support from its parent,
The affirmation of the VR considers the bank's improving asset quality and profitability metrics in the post-pandemic recovery. The VR is also underpinned by the bank's strong sector positioning, prudent risk management framework, strong capitalisation and stable funding and liquidity profiles.
We have revised up our assessment of the operating environment for Croatian banks to 'bbb-' with stable outlook. This factors in the sovereign's stronger credit profile and its better capacity to support market stability, the country's expected resilience to external shocks, reasonable growth opportunities for banks following the country's entry to the eurozone and the expected inflow of sizeable EU funds. Banks' asset quality and profitability have improved post-pandemic, while solvency and liquidity metrics were consistently strong.
Dominant Market Position: ZABA is the largest bank in
Stabilising Asset Quality: ZABA's impaired loans decreased to 3.5% of loans at end-3Q22 from 5.0% at end-2021, with coverage by specific loan loss allowances at around 70%. Economic challenges, inflationary and energy price pressures will weigh on borrowers' performance over 2023 and we expect moderate increase in impairments, but this comes from the lower levels as asset quality metrics continued to improve in 2H22.
Solid Profitability: Operating profit to risk-weighted assets (RWA) improved further to 3.4% 1H22 from 2.9% in 2021, thanks to the stronger credit growth and lower risk and funding costs as operating conditions remained favourable for Croatian banks. We expect this core profitability metric to moderate to closer to 3% in the next two years, following deceleration in lending in a slowing economy and normalisation of risk costs at around 40-50bp.
Robust Capitalisation: ZABA's capital position is a rating strength. At end-1H22, its common equity Tier 1 (CET1) ratio remained high at 27.6% (end-2021: 32.1%), after cash payout at 100% of ZABA's standalone 2021 profit. It is highly likely that the bank will reinstate its policy to pay out a very high share of current year profits in dividends. We also think that fungibility of capital within the group has increased following
Strong Deposit Franchise: Deposit funding is core (95% of liabilities at end-3Q22), with a sizable share of granular and sticky retail depositors (51% of the total). Strong deposit inflows in 2020-1H22 underpin ZABA's solid market positioning and support robust liquidity profile. ZABA is part of
Rating Sensitivities
Factors that could, individually or collectively, lead to negative rating action/downgrade:
ZABA's IDRs and SSRs would be downgraded in case of any of the following: (i) a downgrade of
The bank's VR could be downgraded in case of material and sustained deterioration in the bank's core financial metrics. This would be triggered, for example, by a combination of a weakening in asset quality, in particular if the Stage 3 loans ratio was above 8% on a sustained basis, operating profitability (operating profit/RWA ratio is below 1% on a sustained basis) and capital position (CET1 ratio below 13%).
Factors that could, individually or collectively, lead to positive rating action/upgrade:
ZABA's IDRs and SSR would be upgraded in case of an upgrade of
An upgrade of ZABA's VR would require a record of stabilised asset quality metrics, evidenced by low generation of impaired loans and moderation of risks in other credit exposures, while maintaining strong profitability levels and reasonable capital cushion.
VR ADJUSTMENTS
The business profile score has been assigned above the implied score of 'bb' due to the following adjustment reason(s): business model (positive).
The earnings & profitability score has been assigned below the implied category score of 'bbb' due to the following adjustment reason(s): earnings stability (negative)
The capitalisation & leverage score has been assigned below the implied category score of 'a' due to the following adjustment reason(s): risk profile and business model (negative).
Best/Worst Case Rating Scenario
International scale credit ratings of Financial Institutions and Covered Bond issuers have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of three notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of four notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from '
REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING
The principal sources of information used in the analysis are described in the Applicable Criteria.
Public Ratings with Credit Linkage to other ratings
ZABA's IDRs and SSR are linked to
ESG Considerations
Unless otherwise disclosed in this section, the highest level of ESG credit relevance is a score of '3'. This means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. For more information on Fitch's ESG Relevance Scores, visit www.fitchratings.com/esg
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