Rating action

Scope Ratings GmbH (Scope) has today affirmed the issuer rating of A- on Hypo-Bank Burgenland AG (Bank Burgenland). Scope has also affirmed the bank’s senior unsecured debt (preferred) rating of A- and the bank’s senior unsecured debt (subordinated) rating of BBB+. In addition, Scope has affirmed the short-term debt rating of S-2. All credit ratings have a Stable Outlook.

Rating rationale

At the end of December 2023, Bank Burgenland announced the acquisition of parts of the Austrian Anadi Bank (Anadi Bank), including all branches of Anadi Bank in the Austrian federal state of Carinthia, together with the retail customer base and employees of these branches. Bank Burgenland will also acquire a selected portfolio of SME loans and real estate financing with a focus on Carinthia, as well as the specialised team that has managed this financing to date. The transaction is expected to close in September 2024, subject to the fulfilment of agreed conditions, including antitrust clearances and the approval of the Austrian Financial Market Authority (FMA).

The transaction will significantly expand Bank Burgenland's retail business regionally and almost double its retail customer base. In Scope's view, this transaction complements the bank's existing regional focus on Burgenland and the two metropolitan areas of Vienna and Graz very well. At the same time, we view this expansion as consistent with the existing A-/Stable rating, which reflects Bank Burgenland's well-established, profitable, regionally focused banking model, complemented by good access to real estate markets in its home markets and the rest of Austria. The success of Bank Burgenland's institutional banking divisions in asset management and custodian services also continues to be reflected in the rating.

We consider execution risks arising from the transaction to be material given the high number of new customer relationships. At the same time, the bank’s high intrinsic profitability offers a significant buffer to integration costs. In an environment of rising interest rates, Bank Burgenland was able to further improve its already strong profitability, thanks to growth in both net interest income and fee and commission income. We expect the level of profitability to remain very supportive for the credit after the closing of the transaction.

Bank Burgenland maintains good asset quality due to conservative underwriting standards and a well diversified loan book for its small size. The assets to be transferred as part of the transaction are also in line with the bank's prudent underwriting standards and will generally result in a further diversification of the loan book. We expect asset quality to remain resilient even in a deteriorating economic environment.

Bank Burgenland's regulatory capitalisation is very solid, especially considering the high regulatory risk intensity of its assets. At the end of 2022, the CET1 ratio was at a strong level of 19.1% and the leverage ratio stood at 12.8%, very high compared to domestic and international peers,. We expect the capital ratios to decline slightly by end-2024 as a result of the transaction. In principle, however, the bank is very well positioned to absorb this effect thanks to high earning retention in 2023 and 2024. The impact of the transaction on capital adequacy will therefore be very moderate, and even after the transaction Bank Burgenland will maintain comfortable capital position. The bank's rating could come under pressure if loan growth were to lead to a sustained deterioration in the bank's capital ratios, although Scope currently considers this to be highly unlikely.

Bank Burgenland's solid funding profile is supported by solid and steadily growing customer deposits. The acquisition of the retail business in Carinthia will further strengthen the deposit base. Scope also expects Bank Burgenland to take over various covered bonds issued by Anadi Bank, which we believe the bank will adequately reflect in its funding plan. The bank's liquidity management is also sound and continues to result in healthy regulatory ratios.

Bank Burgenland has a clear commitment to sustainability (ESG factor). This is particularly evident in the private banking subsidiary Schelhammer Capital Bank and the asset management company Security Kapitalanlage AG. Bank Burgenland is making good progress in the area of digital transformation with its successful online banking offering (DADAT Bank) and custodian bank services (Die Plattform). With regard to Bank Burgenland's loan portfolio, Scope sees considerable development potential in the environmental sector over the next few years.

One or more key drivers for the credit rating action are considered ESG factors.

Outlook and rating-change drivers

The outlook is stable and reflects Scope’s expectation that the rating is unlikely to change over the next 12 months.

What could move the rating up

• Significant increase in market share at national level, leading to greater diversification of revenue streams without material change in risk profile

What could move the rating down

• Any unexpected change in Bank Burgenland's profitability as a result of the execution risks associated with the acquisition of Anadi Bank's business activities. In general, a weakened earnings base or increased risk appetite of subsidiaries or the parent company could lead to a downgrade.
   
• Significant deterioration in the bank's economic environment, i.e. the economy in eastern and southern Austria and particularly the real estate market
   
• Considerable reduction in capital adequacy metrics resulting from continued, strong loan growth

Overview of the rating construct

Operating environment: supportive

Business model: consistent

Initial mapping refinement: low

Initial mapping: bbb-/bbb

Long-term sustainability: developing

Adjusted anchor: bbb-

Earnings capacity and risk exposures: very supportive

Financial viability management: comfortable

Additional rating factors: neutral factor

Standalone assessment: a-

External support: not applicable

Issuer rating: A-

Stress testing & cash flow analysis
No stress testing was performed. No cash flow analysis was performed.

Methodology
The methodology used for these Credit Ratings and/or Outlooks, (Financial Institutions Rating Methodology, 7 February 2023), is available on https://scoperatings.com/governance-and-policies/rating-governance/methodologies.
Information on the meaning of each Credit Rating category, including definitions of default, recoveries, Outlooks and Under Review, can be viewed in ‘Rating Definitions – Credit Ratings, Ancillary and Other Services’, published on https://www.scoperatings.com/governance-and-policies/rating-governance/definitions-and-scales. Historical default rates of the entities rated by Scope Ratings can be viewed in the Credit Rating performance report at https://scoperatings.com/governance-and-policies/regulatory/eu-regulation. Also refer to the central platform (CEREP) of the European Securities and Markets Authority (ESMA): http://cerep.esma.europa.eu/cerep-web/statistics/defaults.xhtml. A comprehensive clarification of Scope Ratings’ definitions of default and Credit Rating notations can be found at https://www.scoperatings.com/governance-and-policies/rating-governance/definitions-and-scales. Guidance and information on how environmental, social or governance factors (ESG factors) are incorporated into the Credit Rating can be found in the respective sections of the methodologies or guidance documents provided on https://scoperatings.com/governance-and-policies/rating-governance/methodologies.
The Outlook indicates the most likely direction of the Credit Ratings if the Credit Ratings were to change within the next 12 to 18 months.

Solicitation, key sources and quality of information
The Rated Entity and/or its Related Third Parties participated in the Credit Rating process.
The following substantially material sources of information were used to prepare the Credit Ratings: public domain, the Rated Entity and Scope Ratings’ internal sources.
Scope Ratings considers the quality of information available to Scope Ratings on the Rated Entity or instrument to be satisfactory. The information and data supporting these Credit Ratings originate from sources Scope Ratings considers to be reliable and accurate. Scope Ratings does not, however, independently verify the reliability and accuracy of the information and data.
Prior to the issuance of the Credit Rating action, the Rated Entity was given the opportunity to review the Credit Ratings and Outlooks and the principal grounds on which the Credit Ratings and Outlooks are based. Following that review, the Credit Ratings were not amended before being issued.

Regulatory disclosures
These Credit Ratings and/or Outlooks are issued by Scope Ratings GmbH, Lennéstraße 5, D-10785 Berlin, Tel +49 30 27891-0. The Credit Ratings and/or Outlooks are UK-endorsed.
Lead analyst: Christian van Beek, Director
Person responsible for approval of the Credit Ratings: Marco Troiano, Managing Director
The Credit Ratings/Outlooks were first released by Scope Ratings on 20 December 2021. The Credit Ratings/Outlooks were last updated on 15 November 2023.

Potential conflicts
See www.scoperatings.com under Governance & Policies/Regulatory for a list of potential conflicts of interest disclosures related to the issuance of Credit Ratings.

Conditions of use / exclusion of liability
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