DBRS Ratings GmbH (DBRS Morningstar) has confirmed the ratings of Kommunalkredit Austria AG (KA or the Bank), including the Long-Term Issuer Rating at BBB and the Short-Term Issuer Rating at R-2 (high). The Stable trend for all ratings has been maintained. The Intrinsic Assessment (IA) for the Bank remains BBB, while the Support Assessment remains SA3.
KEY RATING CONSIDERATIONS
The BBB IA incorporates KA’s growing franchise in Infrastructure and Energy (I&E) finance as well as a solid business in public finance. KA has developed an “originate to collaborate” model for I&E finance assets, whereby the Bank works closely with project sponsors and institutional investors to structure longer term investments, which are then retained on balance sheet, or are syndicated to institutional investors and to KA's infrastructure fund, Fidelio, which was launched in 2018. In 2020 and H1 2021, KA has continued to build its franchise across a diverse range of deals. New business volume in H1 2021 was up significantly from prior year numbers despite the severe economic downturn. Profitability is improving and the Bank continues to have zero non-performing loans reflecting the high quality of the public sector portfolio, and the well managed risk of the more newly originated I&E lending. DBRS Morningstar generally considers infrastructure assets as more resilient during time of crises, but we will continue to monitor credit performance closely given the lumpy nature of some of the I&E lending before syndication and the increasing weight of I&E assets in KA’s overall portfolio. Syndication risk remains a key risk for the Bank but continues to be well managed. Funding sources further improved and are well balanced between the growing deposit base and other wholesale sources while liquidity and capital ratios remained robust.
KA’s narrow business focus and the concentration risk inherent in its business model, limits ratings upside. However, further expansion of the franchise, together with longer-term sustainable improvements in profitability, while maintaining solid asset quality, liquidity and capital would lead to a ratings upgrade.
Evidence of the Bank facing significant challenges in syndicating risk, or originating new business would result in a ratings downgrade. A marked deterioration in asset quality, especially in relation to larger exposures, resulting in a weakening of capital ratios would also lead to a ratings downgrade.
Franchise Combined Building Block (BB) Assessment: Weak
KA has established an “originate to collaborate” model for I&E finance assets, whereby the Bank places strong emphasis on its distribution capabilities, and works closely with project sponsors and institutional investors in order to structure long-term investments. The originate to collaborate model is based on sourcing, underwriting and then syndicating I&E assets. The Bank is well established among the top 20 originators in the European I&E finance market. Its relatively small size allows the Bank to remain nimble and less dependent on movements of the overall market. However, DBRS Morningstar also notes the high concentration in only two business lines and the relatively short track record.
Earnings Combined Building Block (BB) Assessment: Good / Moderate
In 2020 and H1 2021, the Bank continued to perform well, withstanding the economic disruptions from the COVID-19 pandemic. In H1 2021, new I&E lending was strong, and margins on new business remained resilient. The Bank reported net profit of EUR 18.6 million (IFRS), up from EUR 12.0 million in H1 2020, driven by increases in net interest income and fee income (including placement results). Costs were tightly managed, but the results also benefited from some one-offs. Income Before Provisions & Taxes (IBPT) was EUR 22.8 million for H1 2021 compared to EUR 19.0 million for the previous year. For the full year 2020 KA reported IBPT of EUR 47.5 million versus EUR 33.2 million in the previous year. Cost efficiency has also continued to improve with the DBRS Morningstar adjusted cost-to-income ratio declining to 56% in H1 2020.
Risk Combined Building Block (BB) Assessment: Strong / Good
KA’s asset quality remained strong with zero impaired loans as of H1 2021, reflecting the high quality of KA’s public sector portfolio and the good performance of the more newly originated I&E lending. DBRS Morningstar notes, however, that the Bank’s loan portfolio has high credit concentrations. These concentrations are substantially mitigated by the high quality of the assets, especially in the public sector loan portfolio. DBRS Morningstar generally considers infrastructure assets more resilient during times of crises, but notes the lumpy nature of some of the assets before syndication as well as the increasing weight of I&E assets as part of the overall portfolio. DBRS Morningstar will continue to closely monitor both the credit performance of the I&E lending book and the ability of the Bank to continue to syndicate the risk.
Funding and Liquidity Combined Building Block (BB) Assessment: Good / Moderate
KA has a diversified funding base comprising a significant and growing deposit base, covered bonds, debt issuance and central bank funding. Public sector covered bonds remain a significant funding source for KA, funding most of the public finance portfolio. In H1 2021, the Bank issued EUR 300 million of public senior preferred bonds and EUR 56 million of senior preferred private placements, as well as EUR 63 million of additional Tier 1 notes, further broadening the funding base. Customer deposits increased by 14.5% YoY in H1 2021, and DBRS Morningstar notes that the bulk of these are term deposits. KA has a robust liquidity profile with a total liquidity reserve of EUR 1,316 million at end-H1 2021, including EUR 252 million of high quality liquid assets (HQLA), and EUR 1,059 million of cash, cash equivalents and balances with central banks, well in excess of total debt maturities to end 2021. At end-H1 2021, the Bank’s Liquidity Coverage Ratio (LCR) was high at 279% and the Net Stable Funding Ratio (NSFR) was also solid at 129%.
Capitalisation Combined Building Block (BB) Assessment: Good
KA reported a CET1 ratio of 18.3% at end-H1 2021 (Bank stand-alone ratio), down from 20.3% at year-end 2020. DBRS Morningstar notes that KA’s CET1 ratio can fluctuate due to its syndication activities. However, the Tier 1 and the total capital ratios both increased as the Bank raised EUR 63 million of additional Tier 1 capital in H1 2021. KA also reported a leverage ratio of 8.8%. The capital ratios are well above the Bank’s minimum regulatory capital requirements. KA is targeting to maintain a Tier 1 ratio exceeding 15% over the long term, and absent any mitigating measures we expect capital ratios to decrease over the medium term as risk-weighted assets (RWAs) increase. In DBRS Morningstar’s view, maintaining solid capital ratios will be important to balance the credit risk concentrations and syndication risk as well as the relative illiquidity of the financed assets. DBRS Morningstar also notes that in the past, KA’s parent has foregone dividend pay-outs, injected capital and authorised additional capital (currently EUR 86 million or about one quarter of CET1 capital) if needed.
Further details on the Scorecard Indicators and Building Block Assessments can be found at: https://www.dbrsmorningstar.com/research/385343
A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework can be found in the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings at https://www.dbrsmorningstar.com/research/373262.
All figures are in EUR unless otherwise noted.
The principal methodology is the Global Methodology for Rating Banks and Banking Organisations (19 July 2021)
Other applicable methodologies include the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings (3 February 2021) https://www.dbrsmorningstar.com/research/373262/dbrs-morningstar-criteria-approach-to-environmental-social-and-governance-risk-factors-in-credit-ratings.
For more information regarding rating methodologies and Coronavirus Disease (COVID-19), please see the following DBRS Morningstar press release: https://www.dbrsmorningstar.com/research/357883
The sources of information used for this rating include Company Documents, KA’s Annual Reports 2017-2020, KA’s Interim Reports 2019-H1 2021 and S&P Global Market Intelligence. DBRS Morningstar considers the information available to it for the purposes of providing this rating to be of satisfactory quality.
DBRS Morningstar does not audit the information it receives in connection with the rating process, and it does not and cannot independently verify that information in every instance.
Generally, the conditions that lead to the assignment of a Negative or Positive trend are resolved within a 12-month period. DBRS Morningstar's outlooks and ratings are under regular surveillance.
For further information on DBRS Morningstar historical default rates published by the European Securities and Markets Authority (ESMA) in a central repository, see: http://cerep.esma.europa.eu/cerep-web/statistics/defaults.xhtml. DBRS Morningstar understands further information on DBRS Morningstar historical default rates may be published by the Financial Conduct Authority (FCA) on its webpage: https://www.fca.org.uk/firms/credit-rating-agencies.
The sensitivity analysis of the relevant key rating assumptions can be found at: https://www.dbrsmorningstar.com/research/385342
This rating is endorsed by DBRS Ratings Limited for use in the United Kingdom.
Lead Analyst: Sonja Förster, Vice President – Global Financial Institutions Group
Rating Committee Chair: Ross Abercromby, Managing Director – Global Financial Institutions Group
Initial Rating Date: September 30, 2015
Last Rating Date: October 2, 2020
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