Hypo Vorarlberg Bank AG

The negative outlook reflects our view that Hypo Vorarlberg continues to face heightened asset quality risk, which could translate into higher credit losses and put pressure on the bank's 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. A downgrade of the State of Vorarlberg by one notch would therefore lead us to also 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 scenario is unlikely. We could also lower our rating on Hypo

...Our rating on Hypo Vorarlberg Bank AG (Hypo Vorarlberg) reflects the bank's 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, and consider this the bank's key rating strength. Hypo Vorarlberg also operates in other parts of Austria, as well as in Germany, Switzerland, Liechtenstein, and northern Italy, which 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 than its larger and better diversified peers. This sensitivity was highlighted in 2023 and 2024 (our estimate), when the bank had to book material risk provisions related to its commercial real estate exposures. We expect Hypo Vorarlberg's asset quality to start recovering after deterioration due to stress in the Austrian construction and real estate sector. We anticipate credit losses will...

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