Austria-Based Oberbank AG Rated 'A/A-1'; Outlook Stable

  • As a midsize bank in Austria, Oberbank has weaker diversity than larger rated peers, but we consider this to be offset by its proven stable and strong franchise in core markets, above-average cost efficiency, and strong capitalization.
  • The material buffer of loss-absorbing capacity at Oberbank would likely help to protect senior unsecured creditors, since we think that, despite Oberbank's relatively modest size, it would be subject to a bail-in-led resolution if it were to fail.
  • We are assigning our 'A/A-1' long- and short-term issuer credit ratings and 'A+/A-1' long- and short-term resolution counterparty ratings to Oberbank.
  • The stable outlook reflects our view that Oberbank will maintain its competitive advantage and that expansion in foreign markets will not materially affect the bank's risk profile or its strong capitalization. It also reflects our view that the bank will keep a buffer of additional loss capacity instruments above 5% of our risk-weighted assets metric.
FRANKFURT (S&P Global Ratings) Jan. 9, 2019--S&P Global Ratings said today 
that it assigned its 'A/A-1' long- and short-term issuer credit ratings to 
Austria-based Oberbank AG. The outlook is stable. 

We also assigned our 'A+/A-1' long- and short-term resolution counterparty 
ratings (RCRs) to Oberbank.

With total assets of about €21 billion, Oberbank is a midsize universal bank 
in Austria with a strong regional focus, mainly in the Upper Austria and 
Salzburg regions, complemented by supplementary business in some neighboring 
countries. While Oberbank is relatively small in a broader European context 
and has significant geographic concentration, our ratings recognize the bank's 
proven stability and franchise strength in one of the lower-risk European 
banking markets, as well as its strong capitalization. The ratings also take 
into account the bank's good efficiency when compared with other banks active 
in the same region, such as UniCredit Bank Austria, Erste Bank Group AG, the 
Austrian Landesbanks, or the savings banks in Germany, for example. 

The ratings also reflect our view that the bank would most likely be subject 
to an open bank resolution if it failed, and that it already has a meaningful 
base of loss-absorbing capacity, upon which we expect it will build. We 
reflect this buffer though one notch of uplift above our 'a-' assessment of 
the bank's standalone credit profile (SACP).

Our starting point for the ratings on Oberbank is the 'a-' anchor, which 
represents our view of the economic environment of the markets where the bank 
operates and the banking industry risk in Austria.

We regard Oberbank as having an adequate business position, when compared with 
peers in Austria and European markets with a similar industry risk profile. 
This assessment balances the bank's limited size and regional and business 
concentration with its strong regional franchise and sound cost efficiency. We 
also note its strong track record in delivering sound and stable risk-adjusted 
profits over the past few decades. 

We primarily base our view of Oberbank's capital and earnings as a rating 
strength on our risk-adjusted capital (RAC) ratio, which we project will be in 
the 12.5%-13.5% range by year-end 2020, compared with 11.3% as of Dec. 31, 
2017. The anticipated increase mainly stems from our expectation of ongoing 
sound earnings retention over that period, highlighted by an expected dividend 
payout ratio of 15%-20%, which exceeds the expected annual increase of 3%-4% 
in our risk-weighted asset (RWA) metric for 2018-2020. 

We consider Oberbank's concentration in corporate banking activities--mainly 
in Austria, and in particular in Upper Austria--as one of the main weaknesses 
to our assessment. Furthermore, Oberbank's material and concentrated equity 
participations in Austrian corporates leaves the bank's earnings substantially 
vulnerable to adverse swings in the local economy in Upper Austria.  

While we acknowledge the bank has an established presence in neighboring 
countries such as Germany, Czech Republic, and Hungary, we still consider the 
benefits in terms of geographic diversification as limited. Domestic business 
continues to represent about 85% of net profits. Following the ongoing opening 
of new branches, mainly in Germany, we expect the share of revenues from 
German business will increase over the coming years. 

The recent expansion in Germany, and in the Austrian regions Lower Austria and 
Vienna, has contributed to annual customer loan growth of 7.7% since 2017, 
materially above the industry average in Austria. However, we expect this 
expansion will slow down, returning to the 5% annual levels that we observed 
in 2012-2016, partly because some of Oberbank's domestic peers have completed 
restructuring. That said, we expect growth will remain at the upper end of 
banks operating in Austria, as Oberbank's lean structure and efficiency give 
it some advantage compared to peers in the region.  

Apart from the abovementioned regional and business concentration risks, we 
think Oberbank's risk appetite and exposure to unexpected losses compare 
favorably with peers'. We consider the bank's risk management to be sound, 
supported by the bank's nonperforming loan (NPL; 90 days past due) ratio at 
2.6% of gross customer loans at end-September 2018. This compares well with 
the 3.1% NPL ratio we calculate for the consolidated Austrian banking sector 
when including foreign operations (see "Industry Report Card: The Austrian 
Banking System Is Likely To Remain Resilient In A Downturn," published Nov. 
23, 2018).

The stable outlook reflects our expectation that the bank will be able to 
maintain its competitive advantage and internal capital generation, and that 
expansion in foreign markets will remain contained and will not weaken the 
bank's risk profile or deplete its strong capital buffer in the medium term.

The outlook also reflects our view that management will be able to uphold the 
buffer of ALAC-eligible instruments above 5% of our RWAs, and that the 
resolution scenario for Oberbank would likely be bail-in-led, as we anticipate 
for the larger, more systemically important banks in Austria.

We would lower the rating if we expected that Oberbank's ALAC buffer was to 
drop below our 5% threshold for one notch of support, or if we anticipated 
that the intended resolution strategy for Oberbank could differ from our 
current expectations. We expect more clarity regarding resolution details and 
regulatory bail-in buffer thresholds over the course of 2019.

While a more remote scenario, we could also lower the ratings if the bank were 
hit by tail events or if it pursued strong expansion that led to the 
deterioration of the capital buffer, with a risk-adjusted capital ratio 
falling below 10%. Offering more risky products, expanding into regions with 
higher risks than in Austria, or tail risk in its equity holdings may harm the 
bank's risk profile or materially increase its capital consumption--this could 
also lead to a downgrade

We consider an upgrade to be a remote scenario. We think Oberbank's strengths 
are unlikely to compensate for its regional concentrations in revenues and 
risks to the extent that we would consider raising the ratings, thus bringing 
Oberbank in line with 'A+' rated peers.
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