Hypo Vorarlberg Bank AG

The negative outlook reflects our view that Hypo Vorarlberg faces heightened asset quality risk, which could increase its credit losses and reduce its after-tax earnings over the next 12 months. We consider Hypo Vorarlberg to be a GRE and our rating on the bank is supported by our credit view of the owner. As such, a downgrade of the State of Vorarlberg by one notch would lead us to downgrade the bank. A change in Hypo Vorarlberg's role or link with the state could also lead us to reassess the bank's status as a GRE and result in a lower rating, although this is a remote scenario. We could lower our rating on Hypo Vorarlberg over the next 12 months

...Our rating on Hypo Vorarlberg Bank AG (Hypo Vorarlberg) reflects its solid franchise in its core region of Vorarlberg. We expect that the bank will maintain its leading franchise in corporate and retail banking in Vorarlberg, we consider this as the bank's key rating strength. The bank also operates in other parts of Austria, as well as in Germany, Switzerland, Liechtenstein, and northern Italy, which--in our view--contributes to business diversity. However, we think that the bank's relatively small size and geographical concentration makes it more vulnerable to economic swings in the regional economy. Hypo Vorarlberg's asset quality might deteriorate if the stress in the construction and real estate development sector persists. We anticipate materially higher credit losses in the next 12-24 months, reflecting the high exposure of the...

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