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Fitch Affirms UniCredit Bank Austria at 'BBB+'; Negative Outlook
March 3, 2017 / 3:57 PM / 5 months ago

Fitch Affirms UniCredit Bank Austria at 'BBB+'; Negative Outlook

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(The following statement was released by the rating agency) LONDON, March 03 (Fitch) Fitch Ratings has affirmed UniCredit Bank Austria AG's Long-Term Issuer Default Rating (IDR) at 'BBB+' with a Negative Outlook and Viability Rating (VR) at 'bbb+'. Fitch has also assigned a Derivative Counterparty Rating (DCR) of 'BBB+(dcr)' to Bank Austria as part of its roll-out of DCRs to significant derivative counterparties in western Europe and the US. DCRs are issuer ratings and express Fitch's view of banks' relative vulnerability to default under derivative contracts with third-party, non-government counterparties. A full list of rating actions is at the end of this rating action commentary. The Negative Outlook on Bank Austria's Long-Term IDR mirrors that of parent bank UniCredit S.p.A. (UC; BBB+/Negative). A downgrade of UC's Long-Term IDR could result in a downgrade of Bank Austria's IDR and VR, and the Outlook reflects the potential negative implications of deterioration in UC's financial strength for Bank Austria's capitalisation and financial flexibility. In particular, Fitch expects the fungibility of capital within the UC group to increase, which could constrain Bank Austria's financial flexibility as it works to realign its business model since becoming a purely domestic bank in 4Q16. KEY RATING DRIVERS IDRS, VR, DCR AND SENIOR DEBT Bank Austria's IDRs, VR and senior unsecured debt ratings reflect our view that the bank should be able to generate sufficient earnings and maintain a conservative risk profile following the transfer of its central and eastern European (CEE) subsidiaries and its 41% stake in its Turkish unit to UC in 4Q16. The transfer has changed Bank Austria's business model considerably by reducing the bank's business scope and geographic diversification. However, we expect the downsized bank to benefit from its focus on domestic assets in light of a solid operating environment in Austria, which is considerably more developed and resilient than most of the CEE economies in which the bank has been operating so far. Asset quality has also benefitted from the shift in focus to the benign domestic market as well as the ongoing restructuring of the bank's retail banking operations. Bank Austria's narrowed domestic focus will result in more stable profits but will also significantly weaken internal capital generation as the CEE segments had historically generated the vast majority of profits until their transfer. Profit generation is now dominated by Bank Austria's domestic corporate activities, which we expect to remain moderately profitable across the cycle. Profitability in the low-margin and high-cost Austrian retail segment is weaker but will benefit from the bank's ongoing restructuring and cost-efficiency measures. Cost pressure in Austria will also remain high due to high regulatory costs (although we expect some medium-term relief following a reduction in the Austrian bank levy decided in 2016) and investment needs - in common with peers - to adapt to the changing competitive landscape and customer behaviour. As per UC's reporting, Bank Austria was loss-making in 2016, driven by one-off pension-related costs, but the bank was profitable on an underlying basis. We expect Bank Austria's consolidated CET1 ratio to have been strong at end-2016 due to a considerable reduction in risk-weighted assets following the spin-off of the CEE operations and a EUR1 billion cash contribution from UC in August 2016 agreed with the regulator. Our view of capitalisation also takes into account our expectation that the fungibility of capital within the UC group will increase. Funding and liquidity remain sound following the transfer given the bank's established domestic deposit franchise and adequate stock of liquid assets. We have assigned a DCR to Bank Austria because we deem its derivatives activities to be significant. The DCR is equalised with the Long-Term IDR because, in Austria, derivative counterparties have no definitive preferential status over other senior obligations in a resolution scenario. SUPPORT RATING Bank Austria's Support Rating is based on institutional support from UC and reflects our view of the latter's high propensity to support its Austrian subsidiary. In our opinion, following the transfer of the CEE operations, Bank Austria's size no longer constrains UC's ability to support. RATING SENSITIVITIES IDRS, VR, DCR AND SENIOR DEBT Bank Austria's VR, IDRs and senior debt rating are sensitive to changes in UC's strategic plans for its Austrian operations and to changes in the fungibility of capital within the UC group. A downgrade of UC's ratings would likely lead to a downgrade of Bank Austria's ratings because in, our opinion, a weakening of UC's financial strength would increase the likelihood that excess capital may be up-streamed from Bank Austria to UC. Bank Austria and UC are both subject to supervision by the ECB, and we believe that this will eventually result in increased capital fungibility within the UC group. However, Bank Austria's ratings could be affirmed at their current level even after a potential downgrade of UC's ratings if the bank demonstrates that it can maintain strong capitalisation and adequate internal capital generation through retained earnings, and if we conclude that its credit profile is sufficiently independent from UC's at that point. Bank Austria's ratings are also sensitive to deterioration of the performance of the bank's domestic retail business. A downgrade of the VR would result in a downgrade of the IDRs only if UC's IDR is also downgraded. Upside for Bank Austria's VR is limited because of the links with UC's ratings, and in light of the bank's own, following the CEE transfer, narrowed geographic diversification and higher reliance on wholesale (corporate) banking for profit generation. This is likely to constrain the VR within the 'bbb' category, at least until the bank establishes a track record of strongly and sustainably improved performance at its domestic retail business. The DCR is primarily sensitive to changes in Bank Austria's Long-Term IDR. In addition, it could be upgraded to one notch above the IDR if changes in legislation (for example as recently proposed by the European Commission) creates legal preference for derivatives over certain other senior obligations and if, in Fitch's view, the volume of all legally subordinated and non-preferred senior obligations provides a substantial enough buffer to protect derivative counterparties from default in a resolution scenario. In such a scenario, however, building up a sufficient buffer could take several years. The extent of a buffer would also depend on UC's plans to pre-place internal total loss absorbing capacity, and whether Bank Austria would be a main beneficiary of this. SUPPORT RATING An upgrade of Bank Austria's Support Rating would be contingent on an upgrade of UC's Long-Term IDR, which is unlikely in the short term given the Negative Outlook on UC's Long-Term IDR. A downgrade could occur if we perceive a weakening in UC's propensity to support, for example through significantly decreasing importance of Bank Austria's role in the group, which is not our expectation, or if UC's ability to provide support weakens materially. The rating actions are as follows: UniCredit Bank Austria AG Long-Term IDR: affirmed at 'BBB+'; Outlook Negative Short-Term IDR: affirmed at 'F2' Viability Rating: affirmed at 'bbb+' Support Rating: affirmed at '2' Derivative Counterparty Rating: assigned at 'BBB+(dcr)' Senior unsecured notes: affirmed at 'BBB+' EMTN programme: affirmed at 'BBB+'/'F2' Contact: Primary Analyst Krista Davies Director +44 20 3530 1579 Fitch Ratings Limited 30 North Colonnade London E14 5GN Secondary Analyst Christian Schindler Associate Director +44 20 3530 1323 Committee Chairperson Christian Scarafia Senior Director +44 20 3530 1012 Media Relations: Elaine Bailey, London, Tel: +44 203 530 1153, Email: elaine.bailey@fitchratings.com. Additional information is available on www.fitchratings.com Applicable Criteria Global Bank Rating Criteria (pub. 25 Nov 2016) here Additional Disclosures Dodd-Frank Rating Information Disclosure Form here _id=1020010 Solicitation Status here Endorsement Policy here ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEB SITE AT WWW.FITCHRATINGS.COM. PUBLISHED RATINGS, CRITERIA, AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE, AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE CODE OF CONDUCT SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE. Copyright © 2016 by Fitch Ratings, Inc., Fitch Ratings Ltd. and its subsidiaries. 33 Whitehall Street, NY, NY 10004. Telephone: 1-800-753-4824, (212) 908-0500. Fax: (212) 480-4435. Reproduction or retransmission in whole or in part is prohibited except by permission. All rights reserved. In issuing and maintaining its ratings and in making other reports (including forecast information), Fitch relies on factual information it receives from issuers and underwriters and from other sources Fitch believes to be credible. Fitch conducts a reasonable investigation of the factual information relied upon by it in accordance with its ratings methodology, and obtains reasonable verification of that information from independent sources, to the extent such sources are available for a given security or in a given jurisdiction. The manner of Fitch’s factual investigation and the scope of the third-party verification it obtains will vary depending on the nature of the rated security and its issuer, the requirements and practices in the jurisdiction in which the rated security is offered and sold and/or the issuer is located, the availability and nature of relevant public information, access to the management of the issuer and its advisers, the availability of pre-existing third-party verifications such as audit reports, agreed-upon procedures letters, appraisals, actuarial reports, engineering reports, legal opinions and other reports provided by third parties, the availability of independent and competent third- party verification sources with respect to the particular security or in the particular jurisdiction of the issuer, and a variety of other factors. Users of Fitch’s ratings and reports should understand that neither an enhanced factual investigation nor any third-party verification can ensure that all of the information Fitch relies on in connection with a rating or a report will be accurate and complete. Ultimately, the issuer and its advisers are responsible for the accuracy of the information they provide to Fitch and to the market in offering documents and other reports. In issuing its ratings and its reports, Fitch must rely on the work of experts, including independent auditors with respect to financial statements and attorneys with respect to legal and tax matters. Further, ratings and forecasts of financial and other information are inherently forward-looking and embody assumptions and predictions about future events that by their nature cannot be verified as facts. 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