Moody’s placed Finland’s OP-Pohjola Group and Pohjola Bank on review for downgrade yesterday (Wednesday), but said that any cuts should not affect the Aaa rating of covered bonds issued by OP Mortgage Bank.

A weakening of the Finnish co-operative financial group’s performance metrics in recent years prompted Moody’s to place its B- bank financial strength rating (BSFR) on review for downgrade, with this move in turn triggering the review for downgrade of the Aa2 rating of Pohjola Bank.

The rating agency said it will focus on reviewing OP-Pohjola Group’s earnings profile, concentration risk – particularly related to real estate – and its liquidity in a stress scenario.

Any downgrade to OP-Pohjola’s BSFR and Pohjola Bank’s long term ratings are expected to be limited to one notch, said Moody’s, meaning a possible downgrade should not affect the Aaa rating of covered bonds issued by OP Mortgage Bank, a subsidiary of OP-Pohjola Group.

Under Moody’s framework the covered bonds have a TPI leeway of four notches and the rating this is related to in Moody’s analysis is that of Pohjola Bank – OP Mortgage Bank is unrated.

The rating agency noted that it expects the weakening of OP-Pohjola Group’s credit metrics to continue, and that the group’s B- BFSR has carried a negative outlook since September 2009, “reflecting Moody’s concern that the group’s financial fundamentals could deteriorate beyond a level compatible with the current standalone ratings”.

Moody’s identified as concerns a weakening of OP-Pohjola Group’s earning capacity, the deterioration of industry concentration, and asset quality deterioration.

OP-Pohjola Group’s dependence on market funding remains high, said Moody’s, with the group’s market funds ratio, which takes into account liquid assets, amounting to 13.6% at H1 2011. This is the case for many Nordic issuers, the rating agency added.

The review of the debt and deposit ratings of Pohjola Bank follows the review for downgrade of the BSFR of its parent, OP-Pohjola Group.

“The C-/Baa1 standalone ratings at Pohjola Bank continued to reflect that institution’s higher risk profile compared with the group overall,” said Moody’s. “In line with its focus on corporate lending, the group’s large real estate exposures are booked at Pohjola Bank.”