Moody’s ratings of Erste Group Bank’s covered bonds remain on review for downgrade after the rating agency cut the issuer by two notches today (Wednesday) as part of various rating actions taken on Austrian banks.

Moody’s downgraded the ratings of the three largest Austrian banking groups, with Erste cut from A1 to A3, UniCredit Bank Austria from A2 to A3, and Raiffeisen Bank International from A1 to A2.

The rating agency said that the public sector backed and mortgage backed covered bond programmes of Erste remain on review for downgrade because, following the downgrade of the issuer, collateral levels in the programme are not sufficient to maintain their current ratings. It said that the OC necessary to maintain the Aaa ratings are 20.5% on a net present value (NPV) basis and 17.5% on a nominal value basis for the public sector covered bonds and 31% on an NPV basis for the mortgage covered bonds. Moody’s noted that its Timely Payment Indicator framework does not constrain the ratings of either programme.

Moody’s affirmed the rating of UniCredit Bank Austria’s public sector covered bonds because: the expected loss of the covered bonds remains commensurate with their current ratings; and the TPI framework does not constrain the ratings below their current level.

Moody’s said that the downgrades of the three Austrian banks reflect their vulnerability to the adverse operating conditions in some of their core markets in central and eastern Europe and the Commonwealth of Independent States (CIS) and the increased risk of further shocks from the euro area debt crisis.

It identified as the main drivers underlying its rating actions: risks to asset quality; limited capital buffers to absorb losses in a stressed environment; and moderate reliance on wholesale funds which, while manageable, renders the banks susceptible to the increased risk of possible disruptions amidst an adverse and highly uncertain current environment.

However, it said that several mitigating factors limited the extent and scope of its actions on Austrian banks, including that the three largest banks’ solid franchises generate solid pre-provision earnings, a relatively stable domestic environment, and the benefits derived from being an integral part of the intrinsically strong Austrian cooperative or savings banks sector (in the case of RBI and Erste), and the broader franchise and access to funding that Unicredit Bank Austria obtains via its parent UniCredit.