January 05, 2006 | Cbonds
| Following Erste Bank's announcement to pay EUR3.75 billion for a 61.9% stake in Banca Comerciala Romana S.A. |
Moody's Investors Service decided to review for possible downgrade the A1 senior unsecured and B- financial strength ratings of Erste Bank der Oesterreichischen Sparkassen AG (Erste Bank). The ratings for Erste Bank's subordinated debt and hybrid capital securities were also put under review for downgrade. The Prime-1 short-term debt rating of the Austrian bank is not affected. This rating action results from Erste Bank's plan to acquire a 61.9% stake in Romania's largest bank, Banca Comerciala Romana S.A. (BCR, rated Ba2/Not Prime/D-), for a consideration of EUR3.75 billion.
In a related rating action, the A2/P-1 long- and short-term deposit ratings of Erste Bank's subsidiaries in the Czech Republic, Slovakia and Hungary, Ceska Sporitelna, Slovenska Sporitelna and Erste Bank Hungary, were also put under review for possible downgrade. The banks' financial strength ratings were affirmed.
At the end of June 2005, BCR had total assets of around EUR7.7 billion, risk-weighted assets of close to EUR5 billion and equity of EUR967 million, according to Erste Bank. Erste Bank expects to close the transaction, which would assign a total value of about EUR6 billion to BCR, in the second quarter of 2006.
Moody's stressed that the planned acquisition would result in a very significant shift in the balance of earnings Erste Bank derives from, and of the capital it will have invested in, markets of markedly different maturity, and would also create a substantial level of goodwill. In this context Moody's noted that Romania currently still carries a Ba2 foreign currency debt rating, albeit with a positive outlook, implying a significantly higher risk than those countries in which Erste Bank has invested so far.
The rating agency said that the review for possible downgrade would therefore focus on Erste Bank's earnings composition and notably on whether the progress it has achieved in the Austrian market would provide a sufficiently strong and resilient base to mitigate the risks inherent in its investments in economically less mature markets in Eastern Europe. In addition, Moody's emphasised that it would look at the future allocation of Erste Bank's economic capital and whether its level and quality would still be consistent with current rating levels.
Moody's acknowledged that the planned acquisition of BCR was fully consistent with Erste Bank's strategic objective of expanding its presence in Central & Eastern Europe, and notably in the local retail markets. According to the rating agency, Erste Bank demonstrated throughout recent years that it is capable of turning around initially less well performing banks in these markets, sharpening their commercial strength and enhancing their financial health. At the same time, Moody's recognized that Erste Bank typically raised fresh equity in order to finance major acquisitions and that it currently intends to increase its equity by around EUR2.4 billion in the first quarter of 2006.
Erste Bank der Oesterreichischen Sparkassen is domiciled in Vienna, Austria. At the end of September 2005, it reported total assets of EUR156.9 billion and capital of EUR7.3 billion.
Banca Comerciala Romana S.A. is based in Bucharest, Romania. At the end of June 2005, it recorded total assets of about EUR 7.7 billion and equity of EUR1 billion.