Moody's downgrades OTP Slovak unit

The rating action reflects (i) OBS's weakening market share in the Slovakian market; (ii) its ongoing challenges to return to a satisfactory level of profitability and efficiency, despite an improving operating environment; and (iii) its asset-quality deterioration, istockAnalyst.com reported citing a press release.

Moody's notes that OBS, a subsidiary of Hungary's OTP Bank Nyrt (rated Baa3, negative outlook), has been facing significant financial challenges since 2009 and, as a consequence, it has been deleveraging in all its business segments, even at a time when the operating environment in Slovakia has started to offer growth opportunities.

As a result, its market share has weakened, reaching 2.8% for loans and 2.5% for deposits at the end of 2010. Moody's believes OBS now occupies a weaker position in the Slovakian market, especially in retail lending, which is currently offering good growth prospects.

In addition, OBS faces growing competition in the retail sector from larger banks with stronger credit profiles.

Moody's notes that OBS reported losses in 2009 and 2010, due to sizeable loan losses and weaker income generation, which was partially due to a decline in revenues from FX-related activities.

In addition, OBS's high cost- to-income ratio ─ at 73% in 2010 versus a 55% average for the system ─ also reflects inefficiencies in the relatively large, but loss-making, branch network. Whilst some financial improvements are expected for 2011, the rating agency acknowledges that OBS's capacity to return to a satisfactory level of profitability and efficiency will be highly challenging for the foreseeable future. OBS's asset quality worsened significantly during 2009, and gross non-performing loans (NPLs) as a percentage of gross loans deteriorated to 12.3% at the end of 2010, mainly due to OBS's corporate portfolio.

Moody's notes that during 2010, OBS sold about €36.5 million of NPLs to the OTP group in Hungary. Moody's expects asset quality for OBS to weaken further in 2011, albeit at slower pace, reflecting some benefits of the improving economic environment in Slovakia.

The rating agency also noted the high borrower concentration in OBS's loan book, which represents a significant credit risk. Moody's believes that OBS's Tier 1 capital ratio of 8.4% at the end of 2010 represents a modest cushion relative to the challenges and risks faced by OBS. OBS's E+ BFSR maps to B1 on the long-term rating scale.

Moody's said that the negative outlook on the long-term ratings reflects the possibility that the challenges faced by OBS in the current market environment ─ and its difficulty to attain a satisfactory profitability level ─ could lead to OBS becoming more weakly positioned in the E+ BFSR category, resulting in a lowering of OBS's standalone rating of B1.

In addition, the negative outlook also reflects the negative outlook on the parent's ratings. OBS currently benefits from a three-notch uplift from its standalone rating of B1 due to a combination of a high expectation of parental and a moderate expectation of systemic support.

The rating agency notes that if support from the parent declines in the future -- as a result of changes to the parent bank's strategic priorities and cost-benefit rationale ─ this would negatively affect OBS's deposit ratings.

OBS's ratings could be downgraded if it fails to (i) establish a more sustainable business model, with growth opportunities in the retail segment; and (ii) return to a satisfactory level of profitability and efficiency. OBS's ratings could be also lowered if the parent were to be downgraded. An upgrade of OBS's ratings is unlikely at present given the current negative outlook on the ratings.