Oberoesterreichische Landesbank AG

Our negative outlook on Hypo OÖ reflects that on Upper Austria, and our view of increasing profitability pressure in both the Austrian banking system and at the bank. We could lower our ratings within the next two years if Austrian banking industry risk increased, or if we expected our RAC ratio for Hypo OÖ to deteriorate toward or below 10% due to, for example, increased credit losses or lower operating profitability. In addition, a downgrade to Upper Austria would trigger a negative rating action on the bank. While less likely, a change in Hypo OÖ's role for or link with the state could also lead us to reassess the bank's status as a GRE and result in a downgrade. We

... (Hypo O+) runs a concentrated-but-conservative business model. The bank operates primarily in its core region of Upper Austria with a modest market share of around 1.5% nationwide. It targets primarily low-risk sectors, including public-sector-related lending and the promotion of subsidized housing. As a result, the bank's nonperforming loan ratio of 0.7% at end-2020 is among the lowest in Austria, which helps balance its regional and sector concentration. Hypo O+ faces risks in light of its low profitability and weak operating efficiency. Its new strategy specifically targets performance improvements under its new CEO. Following return on equity of 2.0%-3.5% and cost-to-income ratios of 75%-80% over the past four years, the strategy could bring financial performance closer to domestic peers'. However, we expect tangible improvements only in the medium term, and believe a competitive market environment and increased need to digitalization...

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