Rating action

Scope Ratings GmbH (Scope) has affirmed Hypo-Bank Burgenland AG’s (Bank Burgenland) issuer rating of A-, preferred senior unsecured debt rating of A-, a senior non-preferred debt rating of BBB+ and short-term debt rating of S-2, all with a Stable Outlook.

The full list of rating actions and rated entities is at the end of this rating action release.

Key rating drivers

Business model assessment: Consistent (Low). The assessment has been changed from ‘Consistent’ to ‘Consistent (Low)’. With total consolidated assets of EUR 6.5bn as of YE 2023, Bank Burgenland operates a well-established, profitable, regionally focused banking model in the Austrian federal states of Burgenland and Carinthia, as well as in the two metropolitan areas of Vienna and Graz. Bank Burgenland is a universal bank with a focus on real estate financing for private and corporate customers, small and medium-sized enterprises (SME) and the public sector. The bank has assumed the function of an umbrella institution and consolidates the other financial services entities of the GRAWE banking group, which are active in private banking, asset management and custodian services.

In September 2024, Bank Burgenland has successfully closed the acquisition of all 10 branches of Anadi Bank in Carinthia, together with the retail customer base and employees of these branches and a current business volume of around EUR 1.7bn. The bank has also acquired a selected portfolio of SME loans and real estate financing with a focus on Carinthia, as well as the specialised team that had managed this financing. Scope sees this integration as a strategic move to catalyse further regional expansion, underlining Bank Burgenland's commitment to sustainable growth and stability.

Operating environment assessment: Supportive (High). The assessment has been changed from ‘Supportive’ to ‘Supportive (High)’. The operating environment in Austria is highly supportive for banking activities, given the country's euro area membership, its wealthy, diversified and internationally competitive economy and its commitment to medium-term fiscal consolidation. GDP per capita in Austria is much higher than the EU average. The government has a favourable public debt profile and private sector debt is low. However, the real GDP growth is expected to stagnate in 2024 and 2025, due to subdued external demand, investment activity and private demand.

The Austrian banking system is highly fragmented and overbanked, with the largest financial institutions having extensive operations in the Central and Eastern European region. The Austrian banking sector remains strong, underpinned by robust capital and liquidity buffers. Sound profits contribute to the sector's resistance to heightened geopolitical and credit risks. The latter relate in particular to construction and commercial real estate (CRE), as well as lending to SME, which are sensitive to the ongoing tense economic situation in Austria. Compared to historical figures, however, an average non-performing loans ratio is still moderate.

The regulatory environment is sound, with a well-established and proactive banking supervisor, a comprehensive resolution regime and a consistent track record of promoting financial stability. Bank Burgenland is jointly supervised by the Single Resolution Board as well as the Financial Market Authority, the Austrian financial supervisory authority.

Scope arrives at an initial mapping of bbb based on a combined assessment of the issuer’s operating environment and business model.

Long-term sustainability assessment (ESG factor): Developing. The assessment reflects Scope’s view that the issuer is embracing changes to ensure the long-term sustainability of its business model. Progress made may be tangible but does not warrant further credit differentiation.

Bank Burgenland has a clear commitment to sustainability. This is particularly evident in the private banking subsidiary Schelhammer Capital Bank AG and the asset management company Security Kapitalanlage AG. The social exposure remains neutral, primarily influenced by the regional business profile. Scope sees considerable development potential in the environmental sector for Bank Burgenland's loan portfolio in the coming years. With a view to issuing green bonds in the future, the bank is working on its ESG strategy and a green bond framework.

Bank Burgenland is making good progress in the area of digital transformation with its successful online banking offering through DADAT Bank, custodian bank services, Die Plattform, and an online broker, Traders Place.

Due to the GRAWE group’s mutual ownership structure, the associated checks and balances are the central component of the governance structure.

The long-term sustainability assessment leads to an adjusted rating anchor of bbb.

Earnings capacity and risk exposures assessment: Supportive (+1 notch). The assessment reflects Scope’s view that earnings capacity is stable through economic cycles and provides a strong buffer against losses. Risks are well managed and are highly unlikely to lead to losses capable of undermining the issuer’s viability. The assessment has been changed from ‘Very Supportive’ to ‘Supportive’.

The bank's high intrinsic profitability supports the accumulation of loss absorption buffers and provides a significant cushion for integration costs related to the transaction with Anadi Bank. Scope expects the level of profitability to decline slightly but remain supportive for the rating. The assets transferred as part of the transaction are in line with the bank's prudent underwriting standards and generally resulted in a further geographic and sector diversification of the loan book.

Since 2022, in response to economic uncertainties, Bank Burgenland has been significantly bolstering risk provisions by adjusting risk parameters, effectively mitigating credit risk stemming from exposures to real estate and SME lending. Despite this adjustment, the overall cost of risk remained manageable. The bank also manages market and operational risks from its private banking activities and guarantees to its parent company related to certain insurance products.

Credit quality has started to deteriorate slightly in late 2023, and we expect a further mild deterioration in asset quality in 2024 and 2025 amid an uncertain economic situation and the lagged effects of higher borrowing costs mainly for the CRE sector, but also for general corporate lending, and in particular for SMEs. The bank's stringent underwriting standards and resilient earnings capacity serves as a buffer against potential asset quality deterioration, positioning Bank Burgenland to navigate these challenges effectively.

Financial viability management assessment: Comfortable (+1 notch). The assessment reflects Scope’s view that the issuer’s maintains comfortable buffer to relevant regulatory requirements and Scope expects it to continue to do so. The issuer’s financial viability is largely resilient to tail-risk events.

Bank Burgenland's regulatory capitalisation is very solid, especially considering the high regulatory risk intensity of its assets. The bank has maintained a very healthy capital base and a strong regulatory capital position also after the transaction with Anadi Bank. The transitional Common Equity Tier 1 ratio landed at 17.8% at YE 2023, with a strong regulatory capital buffer of 9.7 ppt. The sound capitalisation is also underpinned by a high leverage ratio of 12.1% at YE 2023, which also compares well to its Austrian and international peers.

Bank Burgenland's balanced funding profile is bolstered by solid and steadily growing customer deposits, senior preferred issuance and covered bond programme. Funding remains comfortable following the acquisition of the retail business in Carinthia. This makes Bank Burgenland less dependent on market funding and more resilient to potential material deposit outflows. The bank also took over four covered bonds issued by Anadi Bank, which Bank Burgenland adequately reflected in its funding plan. Scope believes the bank’s intention to issue green bonds could also lead to a better positioning of Bank Burgenland on the capital market and expand funding opportunities.

Bank Burgenland maintains a strong liquidity position, evident in its robust liquidity coverage ratio of 199% and the net stable funding ratio at 125% as of YE 2023, comfortably exceeding regulatory requirements. The bank's liquidity portfolio primarily comprises highly liquid assets, aligning with Basel III liquidity standards. Looking ahead, we anticipate Bank Burgenland's liquidity to remain stable, supported by its prudent liquidity management practices and adherence to regulatory guidelines.

One or more key drivers of the credit rating action are considered an ESG factor.

Outlook and rating sensitivities

The Stable Outlook reflects Scope’s view that the risks to the current rating level are balanced.

The upside scenarios for the ratings and Outlooks are (individually or collectively):

1. Significant increase in market shares at national level and greater diversification of revenue streams without material change in risk profile, leading to a higher Business Model assessment.
    
2. Evidence of higher capital and liquidity buffers and strengthening of funding structure could lead to a higher assessment of Financial Viability Management.

The downside scenarios for the ratings and Outlooks are (individually or collectively):

1. Any unexpected change in profitability as a result of the execution risks associated with the acquisition of Anadi Bank's business activities, higher-than-expected credit losses or an inability to sustain cost efficiencies could lead to a downgrade of the Earnings Capacity and Risk Exposures assessment.
    
2. Considerable reduction in capital adequacy metrics could lead to a lower Financial Viability Management assessment.

Debt ratings

Preferred senior unsecured debt: A-/Stable. The rating is aligned with the issuer rating and applies to senior unsecured debt ranking above other classes of senior unsecured debt.

Non-preferred senior unsecured debt: BBB+/Stable. The rating is one notch lower than the issuer rating, reflecting statutory subordination.

Short-term debt: S-2/Stable. Bank Burgenland’s S-2 short-term credit rating is derived from the long-term issuer credit rating. The rating is consistent with Scope’s long-term/short-term rating correspondence table.

Environmental, social and governance (ESG) factors

Please refer to the ‘long-term sustainability assessment’ under the ‘key rating drivers’ section above for the ESG analysis.

All rating actions and rated entities

Bank Burgenland

Issuer rating: A-/stable, affirmed

Preferred senior unsecured debt rating: A-/stable, affirmed

Non-preferred senior unsecured debt rating: BBB+/stable, affirmed

Short-term debt rating: S-2/stable, affirmed
 
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, 6 February 2024), 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/or Outlooks and the principal grounds on which the Credit Ratings and/or Outlooks are based. Following that review, the Credit Ratings and/or Outlooks 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: Milya Safiullina, Analyst
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 9 January 2024.

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, as well as a list of Ancillary Services and certain non-Credit Rating Agency services provided to Rated Entities and/or Related Third Parties.

Conditions of use / exclusion of liability
© 2024 Scope SE & Co. KGaA and all its subsidiaries including Scope Ratings GmbH, Scope Ratings UK Limited, Scope Fund Analysis GmbH, Scope Innovation Lab GmbH and Scope ESG Analysis GmbH (collectively, Scope). All rights reserved. The information and data supporting Scope’s ratings, rating reports, rating opinions and related research and credit opinions originate from sources Scope considers to be reliable and accurate. Scope does not, however, independently verify the reliability and accuracy of the information and data. Scope’s ratings, rating reports, rating opinions, or related research and credit opinions are provided ‘as is’ without any representation or warranty of any kind. In no circumstance shall Scope or its directors, officers, employees and other representatives be liable to any party for any direct, indirect, incidental or other damages, expenses of any kind, or losses arising from any use of Scope’s ratings, rating reports, rating opinions, related research or credit opinions. Ratings and other related credit opinions issued by Scope are, and have to be viewed by any party as, opinions on relative credit risk and not a statement of fact or recommendation to purchase, hold or sell securities. Past performance does not necessarily predict future results. Any report issued by Scope is not a prospectus or similar document related to a debt security or issuing entity. Scope issues credit ratings and related research and opinions with the understanding and expectation that parties using them will assess independently the suitability of each security for investment or transaction purposes. Scope’s credit ratings address relative credit risk, they do not address other risks such as market, liquidity, legal, or volatility. The information and data included herein is protected by copyright and other laws. To reproduce, transmit, transfer, disseminate, translate, resell, or store for subsequent use for any such purpose the information and data contained herein, contact Scope Ratings GmbH at Lennéstraße 5, D-10785 Berlin.