ratings the baa2 bca reflects vbw's moderate asset risk ... · please see the ratings section...

FINANCIAL INSTITUTIONS

CREDIT OPINION15 August 2017

Update

RATINGS

Volksbank Wien AGDomicile Austria

Long Term Debt Not Assigned

Type Not Assigned

Outlook Not Assigned

Long Term Deposit Baa2

Type LT Bank Deposits - FgnCurr

Outlook Stable

Please see the ratings section at the end of this reportfor more information. The ratings and outlook shownreflect information as of the publication date.

Contacts

Swen Metzler, CFA 49-69-70730-762VP-Senior [email protected]

Alexander Hendricks,CFA

49-69-70730-779

Associate ManagingDirector - [email protected]

Carola Schuler 49-69-70730-766Managing Director [email protected]

Volksbank Wien AGSemiannual Update

Summary Rating RationaleWe assign Baa2/P-2 bank deposit ratings to Volksbank Wien (VBW). We also assign a baa2Baseline Credit Assessment (BCA) and Adjusted BCA as well as A2(cr)/P-1 Counterparty RiskAssessments (CR Assessments) to VBW. The long-term ratings' outlook is stable.

VBW’s ratings reflect: (1) the bank's baa2 BCA and Adjusted BCA; and (2) the results of ourAdvanced Loss Given Failure (LGF) analysis, which takes into account the severity of lossfaced by the different liability classes in resolution, which, however, does not result in ratinguplift for the bank's deposit ratings from its Adjusted BCA.

The baa2 BCA reflects VBW's moderate asset risk, adequate capitalisation, weak profitabilityand strong liquidity profile. At the same time, the BCA takes into account the ongoingsignificant restructuring of the Austrian Volksbanken sector as well as challenges that thebank and the Verbund member banks face from the low interest rate environment.

In assigning VBW ratings, the central organization of Austria's cooperative Volksbanken-Verbund, we base our opinion on consolidated financial statements of the cooperative groupbecause of the statutory mutualist support framework, codified in the Austrian bankingact, and the cohesion and solidarity within the Verbund, as demonstrated by a contractualmutual obligation to support each member institution in case of need.

Exhibit 1

Rating Scorecard - Key Financial Ratios

5.2%

12.6%

-0.5%

8.1%

17.3%

-4%

0%

4%

8%

12%

16%

20%

24%

28%

32%

-2%

0%

2%

4%

6%

8%

10%

12%

14%

16%

Asset Risk:Problem Loans/

Gross Loans

Capital:Tangible Common

Equity/Risk-WeightedAssets

Profitability:Net Income/

Tangible Assets

Funding Structure:Market Funds/

Tangible BankingAssets

Liquid Resources:Liquid Banking

Assets/TangibleBanking Assets

Solvency Factors (LHS) Liquidity Factors (RHS)

Volksbank Wien AG (BCA: baa2) Median baa2-rated banks

So

lve

ncy F

acto

rs

Liq

uid

ity F

acto

rs

Note: Volksbank Wien AG's Key Financial Ratios are calculated on the basis of the consolidated financial statements of thecooperative group.Source: Moody's Financial Metrics

https://www.surveygizmo.com/s3/1133212/Rate-this-research?pubid=PBC_1081554

MOODY'S INVESTORS SERVICE FINANCIAL INSTITUTIONS

Credit Strengths and Challenges

» Very sound funding profile benefiting from a large deposit base and moderate dependence on market funds

» Adequate capitalisation but limited ability to retain capital

» Moderate asset and tail risks underpinned by low level of problem loans, but real estate sector concentrations exist

» Sector-wide profitability is challenged by low interest rates and restructuring costs

» VBW’s BCA is supported by its Strong+ Macro Profile

Rating Outlook

» The stable outlook on VBW’s long-term deposit ratings reflects our expectation of stability in the bank's and the Verbund’s impliedcreditworthiness, the existing mutualist support framework, including the cohesion and solidarity within the Verbund, as well as theresult of our LGF analysis.

Factors that Could Lead to an Upgrade

» An upgrade of VBW's deposit ratings could be triggered following: (1) an upgrade of the bank's BCA; and/or (2) a reduction ofthe expected loss severity following a shift in its funding structure, for example through an increase in outstanding volumes ofinstruments that absorb losses prior to deposits.

» Upward pressure on VBW's BCA would be prompted by (1) a significant lowering of the Verbund’s industry concentration risks; (2)a significant improvement of the sector’s capital ratios; and/or (3) a meaningful and persistent strengthening of recurring earningswithout compromising the risk profile.

» VBW's deposit ratings could be upgraded if the volume of subordinated instruments increases significantly relative to the Verbund'stangible banking assets. This could result in additional notches of uplift resulting from our LGF analysis.

Factors that Could Lead to a Downgrade

» A downgrade of VBW’s deposit ratings could be triggered following a downgrade of the bank's BCA.

» Downward pressure on VBW's BCA could arise from: (1) a weakening of the Macro Profile of Austria; (2) a weakening of theVolksbanken sector's capitalisation and asset quality; and/or (3) a meaningful weakening of the strong funding profile.

» Further, a support scenario for individual member banks, in which necessary funds significantly compress the sector's overallcapitalisation, could exert downward pressure on the rating.

This publication does not announce a credit rating action. For any credit ratings referenced in this publication, please see the ratings tab on the issuer/entity page onwww.moodys.com for the most updated credit rating action information and rating history.

2 15 August 2017 Volksbank Wien AG: Semiannual Update


Key Indicators

Exhibit 2

Volksbank Wien AG (Consolidated Financials) [1]12-162 12-152 12-142 12-133 Avg.

Total Assets (EUR billion) 10 10 3 4 71.34

Total Assets (USD billion) 11 11 4 5 59.94

Tangible Common Equity (EUR billion) 0.4 0.3 0.2 0.2 46.24

Tangible Common Equity (USD billion) 0.4 0.4 0.2 0.2 36.54

Problem Loans / Gross Loans (%) 3.6 4.3 4.1 - 4.05

Tangible Common Equity / Risk Weighted Assets (%) 12.9 11.9 - - 12.46

Problem Loans / (Tangible Common Equity + Loan Loss Reserve) (%) 31.8 38.9 43.5 - 37.95

Net Interest Margin (%) 1.0 1.1 1.7 1.4 1.35

PPI / Average RWA (%) 0.7 0.5 - - 0.36

Net Income / Tangible Assets (%) 0.3 0.3 0.9 0.2 0.45

Cost / Income Ratio (%) 92.4 92.7 68.3 76.0 87.15

Market Funds / Tangible Banking Assets (%) 46.6 55.0 2.5 8.0 34.75

Liquid Banking Assets / Tangible Banking Assets (%) 49.5 57.3 26.3 31.8 44.35

Gross loans / Due to customers (%) 92.7 93.2 80.1 - 88.75

Note: The increase in VBW's total assets from 2014 to 2015 is a result of the transfer of assets from the former central organisation Oesterreichische Volksbanken AG (VBAG, now renamedimmigon portfolioabbau ag) in July 2015.[1] All figures and ratios are adjusted using Moody's standard adjustments [2] Basel III - fully-loaded or transitional phase-in; IFRS [3] Basel III - fully-loaded or transitional phase-in; LOCALGAAP [4] IFRS reporting periods have been used for average calculation [5] Compound Annual Growth Rate based on IFRS reporting periods [6] Basel III - fully-loaded or transitional phase-in & IFRS reporting periods have been used for average calculation.Source: Moody's Financial Metrics

Exhibit 3

Oesterreichischer Volksbanken-Verbund (Consolidated Financials) [1]12-162 12-152 12-142 12-133 Avg.

Total Assets (EUR billion) 24 28 37 41 -15.54

Total Assets (USD billion) 26 30 44 56 -22.74

Tangible Common Equity (EUR billion) 1.7 1.8 2.4 2.7 -14.84

Tangible Common Equity (USD billion) 1.8 1.9 2.9 3.7 -22.14

Problem Loans / Gross Loans (%) 4.3 4.4 7.0 7.8 5.95

Tangible Common Equity / Risk Weighted Assets (%) 12.6 11.9 10.1 9.8 11.56

Problem Loans / (Tangible Common Equity + Loan Loss Reserve) (%) 40.4 44.2 57.0 55.3 49.25

Net Interest Margin (%) 1.6 1.5 1.6 - 1.65

PPI / Average RWA (%) 0.3 0.8 0.6 - 0.66

Net Income / Tangible Assets (%) -0.3 -0.2 -1.0 -0.2 -0.45

Cost / Income Ratio (%) 94.4 81.0 84.7 86.1 86.55

Market Funds / Tangible Banking Assets (%) 8.1 7.3 21.2 26.8 15.85

Liquid Banking Assets / Tangible Banking Assets (%) 17.3 16.1 17.8 18.0 17.35

Gross loans / Due to customers (%) 96.8 101.3 110.0 118.3 106.65

Note: The decrease in the Verbund's todal assets from 2014 to 2015 is a result of the demerger of the former central organisation Oesterreichische Volksbanken AG (VBAG, now renamedimmigon portfolioabbau ag) in July 2015.[1] All figures and ratios are adjusted using Moody's standard adjustments [2] Basel III - fully-loaded or transitional phase-in; IFRS [3] Basel II; IFRS [4] IFRS reporting periods have been usedfor average calculation [5] Compound Annual Growth Rate based on IFRS reporting periods [6] Basel III - fully-loaded or transitional phase-in & IFRS reporting periods have been used foraverage calculation.Source: Moody's Financial Metrics



Detailed Rating ConsiderationsWe assess the bank on the basis of consolidated financial statements of the Austrian Volksbanken-Verbund. This approach takes intoconsideration the statutory mutualist support framework, codified in the Austrian banking act, and the cohesion and solidarity withinthe Verbund, as demonstrated by a mutual obligation to support each member institution in case of need. As a result, the Verbundmember banks, with the exception of VBW, are exempt from reporting individual capital and other regulatory ratios to the EuropeanCentral Bank, its supervisor. The high level of cooperation within the Verbund is further demonstrated by VBW’s role as central bankinstitution which provides ample control rights to the Vienna-based bank, including centralized management for capital, funding,liquidity, and risk management.

Low level of problem loans but real estate concentrations existDespite some concentrations to the Austrian real estate market, VBW's moderate to low level of problem loans underpins the bank'ssound asset risk profile. Exposures from the Verbund's lending activities are the group's main risk driver as demonstrated by gross loanswhich accounted for 79% of the Verbund's total assets at year-end 2016. The sector’s total exposure of €30.4 billion, as of year-end2016, was split into €5.9 billion to residential mortgages (20% of total), €3.1 billion to commercial real estate (10% of total), €4.2billion to the public sector (14%), and €3.0 billion to non-mortgage related lending to retail customers. The remaining exposure issplit across other industries, including financial institutions, tourism, industry, and trade and services. While VBW’s and the Verbund'sreal estate exposures are spread across multiple Austrian regions, we believe the high concentrations to real estate renders the bankand the Verbund vulnerable to a downturn in the domestic real estate markets. At end-2016, exposures to residential mortgages andcommercial real estate accounted for 360% and 188% of the Verbund’s Common Equity Tier 1 (CET1) capital (YE2015: 371% and217%).

At end-Decmber 2016, the Verbund’s level of problem loans slightly decreased to 4.3% compared with 4.4% in 2015 (2014: 7.0%).The substantial reduction reflects the significant restructuring of the Austrian Volksbanken sector since 2014, including the separationfrom immigon portfolioabbau ag (senior unsecured Ba1 stable, BCA ba3)1 in July 2015. The problem loan ratio in 2014, excluding VBAG,was 5.1%. Over the medium-term, we expect a further improvement of the asset quality, as the Verbund continues to consolidate ordispose of non-core entities.

Further, we expect that credit conditions in Austria will remain stable, supporting the favourable credit conditions for the Verbund'sdomestic exposures which are predominately geared towards small and medium-sized (SME) and retail customers which representedaround 95% of its overall lending activities as of end-March 2017.

Our assigned Asset Risk score of baa2 captures the above mentioned strengths, but also includes a negative adjustment for real estateconcentration risks. The adjustments also take into account the higher NPL ratios we observe for VBW’s and the Verbund’s SMEexposures, which are mitigated by their very granular loan portfolios and moderate loan-to-values.

Adequate capitalization but limited ability to retain capitalWe consider VBW's and the Verbund's capital ratios adequate for their risk profiles which are supportive for the bank's BCA. At year-end 2016, the Verbund’s transitional Common Equity Tier 1 (CET1) ratio was 12.4% compared with 12.1% in 2015, reported under theCapital Requirements Regulation and Directive (CRR/CRD IV). In absolute terms the CET1 capital decreased to €1.6 billion from €1.8billion. The reduction mainly reflects the deconsolidation effect of previous member banks which was fully compensated for by lowerrisk-weighted assets. We believe that the Verbund’s capital ratios could improve as a result of planned and executed restructuringmeasures, thereby also increasing the buffer to regulatory minima.

However, while no direct links exist anymore to immigon, the Verbund is obliged to repay the remainder of the original €300 millionof participation rights (Genussrechte) until end-2023 which the Republic of Austria (Aa1 stable) granted in order to rescue the formercentral bank organisation VBAG. We believe the repayment will materially limit the Verbund’s ability to internally generate capital until2023, and thus limits its ability to grow its balance sheet. Our baa1 Capital score for VBW reflects these observations.

Sector-wide profitability is challenged by low interest rates and restructuring costsWe believe that the Volksbanken sector’s profitability will continue to face the challenge of low interest rates, persistently highcompetition in the Austrian banking system, and continued restructuring and integration costs. The ongoing competition for marketshare may additionally pressure margins, while rising loan loss charges, from a currently very low level, could further constrain the



sector's profitability prospects. Upon a successful implementation of the sector’s comprehensive restructuring, which we do not expectbefore mid-2017, we believe efficiency gains may only evolve over the medium-term.

For 2016, the Verbund reported net loss of €79 million versus €67 million in 2015. The sector's weak annual result was burdened bynonrecurring charges of €39 million in compensation paid to the Austrian government in-line with the restructuring agreement andthe special bank levy of €28 million. Net interest income decreased to €423 million in 2016 (2015: €489 million) on the back of lowerlending levels and margin pressures, whilst rising loan loss charges (2016: €92 million; 2015: €53 million) further constrained thesector's profitability.

We believe that the sector is particularly challenged by the persistent low rate environment combined with its high cost base; netinterest income accounts for around 60% of the group's total revenues. Based on our calculations, the sector’s cost-to-income ratioincreased to 85% in 2016 from 81% in 2015. Because we expect further restructuring costs for 2017, and meaningful revenue synergieswill only arise from 2018 onwards, we consider the Verbund’s medium-term profitability prospects to be weak. This view is reflected inour assigned Profitability score of b3.

Solid funding profile benefiting from a large deposit base, low dependence on market fundsThe Verbund's funding profile strongly supports VBW’s BCA, which is reflected in our a1 Funding Structure score for the bank. The scorealso captures the high granularity of the sector's deposits, which we consider generally more stable than those of large, institutionaldeposits. As of December 2016, deposits accounted for 82% of the Verbund’s total liabilities (2015: 80%), mainly including currentaccounts and savings deposits from retail clients, and its gross loan-to-deposit ratio was 97% (2015: 102%). The Volksbanken-Verbundexhibits a low dependence on market funds, as underpinned by issued covered bonds, liabilities to banks, senior unsecured debt, andsubordinated debt which in total represented around 7% of its balance sheet’s assets at end-2016. However, during 2017 and beyond,we expect that the Verbund’s dependence on market funding will gradually increase in particular considering the regulatory minimumrequirements for own funds and eligible liabilities.

We consider VBW’s and the Verbund's liquidity satisfactory to cover their short-term liquidity needs. Our assigned Liquid Resourcesscore of baa2 includes no adjustments and reflects the high quality of the Verbund’s financial security portfolio that also positivelycontributes to the sector’s favorable Liquidity Coverage Ratio (LCR) of 112% in 2016.

VBW’s domestic exposures determine its Strong+ Macro ProfileVBW and the Verbund are predominantly active in Austria. The strong domestic economic environment, with a strong institutionaland legal framework, sound government finances, and low susceptibility to adverse events thus support the bank's BCA. Operatingconditions for the Austrian banking system are, however, constrained by high fragmentation in an over-saturated market, low feeincome generation and intensifying competition for domestic business. A deterioration of the bank's Macro Profile may negativelyaffect its financial profile, ceteris paribus.

Notching ConsiderationsLoss-Given-Failure (LGF) AnalysisThe Volksbanken-Verbund currently represents a conglomerate of nine regional Volksbanken and two specialised financial institutionsin Austria which will be further consolidated to reach the target structure of eight regional Volksbanken and one specialised financialinstitutions. The Verbund is considered a banking group in the context of the European CRR and, therefore, it is regulated as a group.This means that with the exception of the central institution Volksbank Wien AG all of its affiliated institutions are exempt fromapplicable regulation for banks or other financial institutions. As a result, the EU's Bank Recovery and Resolution Directive (BRRD),which we consider to be an Operational Resolution Regime, does apply to the Verbund, but not to its member entities individually.

We therefore apply VBW's LGF analysis on the basis of the Verbund's consolidated liabilities, considering the risks faced by the differentdebt and deposit classes across the liability structure at failure. We assume residual tangible common equity of 3% and losses post-failure of 8% of tangible banking assets, a 25% run-off in “junior” wholesale deposits and a 5% run-off in preferred deposits. These arein line with our standard assumptions. Because of the Verbund’s clear focus on retail banking we assume that only a small percentage(10%) of VBW's deposit base can be considered junior (or institutional) deposits.



For VBW’s deposits, our LGF analysis indicates a moderate loss-given-failure, leading us to position the deposit ratings in line with thebank's baa2 Adjusted BCA.

Government SupportWe believe that the wider scope of the BRRD implementation in Austria and its application, triggering a resolution of Heta AssetResolution AG (Carinthian-state-guaranteed senior unsecured debt Ca with stable outlook), illustrates the Austrian government'swillingness to apply burden-sharing to bondholders. In addition, because of Volksbanken-Verbund’s relatively low importance tothe domestic deposit-taking market (market share of 5.9% at end-March 2016), we do not consider the Verbund to be of domesticsystemic relevance. Consequently, we do not assign any rating uplift for VBW's long-term deposit rating from government support, inline with all other Moody’s rated banks in Austria.

Counterparty Risk AssessmentThe Counterparty Risk (CR) assessment assigned to VBW is positioned at A2(cr)/P-1(cr), three notches above the bank’s Adjusted BCAof baa2, based on the cushion against default provided to the senior obligations represented by the CR Assessment by subordinatedinstruments.

CR Assessments are opinions of how counterparty obligations are likely to be treated if a bank fails and are distinct from debt anddeposit ratings in that they (1) consider only the risk of default rather than both the likelihood of default and the expected financial losssuffered in the event of default; and (2) apply to counterparty obligations and contractual commitments rather than debt or depositinstruments. The CR Assessment is an opinion of the counterparty risk related to a bank's covered bonds, contractual performanceobligations (servicing), derivatives (e.g., swaps), letters of credit, guarantees and liquidity facilities.

CR assessments for banks subject to a going-concern ORR, reflect the loss absorption that capital and more junior debt instrumentsprovide in the bank’s liability structure. In Austria, counterparty obligations rank above senior unsecured debt and junior deposits, butnot above preferred deposits.



Rating Methodology and Scorecard Factors

Exhibit 4

Oesterreichischer Volksbanken-VerbundMacro FactorsWeighted Macro Profile Strong + 100%

Factor HistoricRatio

MacroAdjusted

Score

CreditTrend

Assigned Score Key driver #1 Key driver #2

SolvencyAsset RiskProblem Loans / Gross Loans 5.2% baa2 ← → baa2 Sector concentration Expected trend

CapitalTCE / RWA 12.6% a3 ← → baa1 Capital retention Expected trend

ProfitabilityNet Income / Tangible Assets -0.5% caa1 ← → b3 Expected trend

Combined Solvency Score baa3 baa3LiquidityFunding StructureMarket Funds / Tangible Banking Assets 8.1% a1 ← → a1 Deposit quality Expected trend

Liquid ResourcesLiquid Banking Assets / Tangible Banking Assets 17.3% baa2 ← → baa2 Quality of

liquid assetsExpected trend

Combined Liquidity Score a3 a3Financial Profile baa2

Business Diversification 0Opacity and Complexity 0Corporate Behavior 0

Total Qualitative Adjustments 0Sovereign or Affiliate constraint: Aa1Scorecard Calculated BCA range baa1-baa3Assigned BCA baa2Affiliate Support notching 0Adjusted BCA baa2

Balance Sheet in-scope(EUR million)

% in-scope at-failure(EUR million)

% at-failure

Other liabilities 3,143 12.8% 3,143 12.8%Deposits 20,018 81.8% 20,018 81.8%

Preferred deposits 18,016 73.6% 17,115 70.0%Junior Deposits 2,002 8.2% 1,501 6.1%

Senior unsecured bank debt 244 1.0% 244 1.0%Dated subordinated bank debt 137 0.6% 137 0.6%Junior subordinated bank debt 116 0.5% 116 0.5%Preference shares (bank) 72 0.3% 72 0.3%Equity 734 3.0% 734 3.0%Total Tangible Banking Assets 24,464 100% 24,464 100%



De Jure waterfall De Facto waterfall NotchingDebt classInstrumentvolume +

subordination

Sub-ordination

Instrumentvolume +

subordination

Sub-ordination

De Jure De FactoLGF

NotchingGuidance

vs.Adjusted

BCA

AssignedLGF

notching

Additionalnotching

PreliminaryRating

Assessment

Counterparty Risk Assessment 11.5% 11.5% 11.5% 11.5% 3 3 3 3 0 a2 (cr)Deposits 11.5% 4.3% 11.5% 5.3% 0 0 0 0 0 baa2

Instrument class Loss GivenFailure notching

AdditionalNotching

Preliminary RatingAssessment

GovernmentSupport notching

Local CurrencyRating

ForeignCurrency

RatingCounterparty Risk Assessment 3 0 a2 (cr) 0 A2 (cr) --Deposits 0 0 baa2 0 Baa2 Baa2Source: Moody's Financial Metrics

Rating Methodology and Scorecard FactorsOur Scorecard is designed to capture, express and explain in summary form our Rating Committee's judgment. When read inconjunction with our research, a fulsome presentation of our judgment is expressed. As a result, the output of our Scorecardmay materially differ from that suggested by raw data alone (though it has been calibrated to avoid the frequent need for strongdivergence). The Scorecard output and the individual scores are discussed in rating committees and may be adjusted up or down toreflect conditions specific to each rated entity.

Ratings

Exhibit 5Category Moody's RatingVOLKSBANK WIEN AG

Outlook StableBank Deposits Baa2/P-2Baseline Credit Assessment baa2Adjusted Baseline Credit Assessment baa2Counterparty Risk Assessment A2(cr)/P-1(cr)

Source: Moody's Investors Service



Endnotes1 The rating shown is immigon’s senior unsecured debt rating and outlook and its Baseline Credit Assessment.



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Additional terms for Japan only: Moody's Japan K.K. (“MJKK”) is a wholly-owned credit rating agency subsidiary of Moody's Group Japan G.K., which is wholly-owned by Moody’sOverseas Holdings Inc., a wholly-owned subsidiary of MCO. Moody’s SF Japan K.K. (“MSFJ”) is a wholly-owned credit rating agency subsidiary of MJKK. MSFJ is not a NationallyRecognized Statistical Rating Organization (“NRSRO”). Therefore, credit ratings assigned by MSFJ are Non-NRSRO Credit Ratings. Non-NRSRO Credit Ratings are assigned by anentity that is not a NRSRO and, consequently, the rated obligation will not qualify for certain types of treatment under U.S. laws. MJKK and MSFJ are credit rating agencies registeredwith the Japan Financial Services Agency and their registration numbers are FSA Commissioner (Ratings) No. 2 and 3 respectively.

MJKK or MSFJ (as applicable) hereby disclose that most issuers of debt securities (including corporate and municipal bonds, debentures, notes and commercial paper) and preferredstock rated by MJKK or MSFJ (as applicable) have, prior to assignment of any rating, agreed to pay to MJKK or MSFJ (as applicable) for appraisal and rating services rendered by it feesranging from JPY200,000 to approximately JPY350,000,000.

MJKK and MSFJ also maintain policies and procedures to address Japanese regulatory requirements.

REPORT NUMBER 1081554


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Mark C JenkinsonAssociate Analyst


ratings the baa2 bca reflects vbw's moderate asset risk ... · please see the ratings section...

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