April 27, 2017 / 9:19 PM / 4 months ago

Fitch Downgrades UniCredit Bank AG's IDR to 'BBB+'; Outlook Negative

(The following statement was released by the rating agency) LONDON/FRANKFURT, April 27 (Fitch) Fitch Ratings has downgraded Unicredit Bank AG's (HVB) Long-Term Issuer Default Rating (IDR) to 'BBB+' from 'A-' and its Viability Rating (VR) to 'bbb+' from 'a-'. The Outlook on the Long-Term IDR is Negative. A full list of rating actions is at the end of this commentary. Fitch's rating action follows the downgrade of HVB's ultimate parent, UniCredit S.P.A. (UC), to 'BBB' from 'BBB+' (Outlook revised to Stable from Negative). UC's downgrade follows the downgrade of Italy's Sovereign Long-Term Foreign Currency IDR to 'BBB' from 'BBB+' (see: "Fitch Downgrades Italy's LTFC IDR to 'BBB'; Outlook Stable", dated 21 April 2017 and available on www.fitchratings.com). KEY RATING DRIVERS IDRS, VR AND SENIOR DEBT HVB's IDRs and senior debt ratings reflect the bank's standalone credit strength, as expressed by its VR. The bank's strong capitalisation has a high influence on its VR. Its capital ratios remain well above those of its peers even after a EUR3 billion one-off dividend payment to UC to be completed in May 2017. We expect HVB's capitalisation to remain sound despite its stated intention to distribute the vast majority of its profits to UC in the next few years, which should result in minimal internal capital generation at HVB. HVB has considerably reduced its funding exposure to UC group entities and we understand that it has no plans for further extraordinary dividend payments exceeding HVB's annual profit. The VR also reflects HVB's primarily wholesale business model based on a well-established domestic corporate and investment banking franchise, its solid asset quality, which benefits from the resilient German economy, and its moderate profitability with some volatility. HVB's VR reflects our assumption that UC's strategic plan announced in December 2016 (see "Fitch Affirms UniCredit at 'BBB+' Negative Outlook" dated 22 December 2016 and available on www.fitchratings.com) will not have a material impact on HVB's standalone strength. The measures, which include the agreed payment of a EUR3 billion special dividend from HVB to UC, confirm our expectation that capital is increasingly managed across the UC group. However, we expect HVB's capitalisation to continue to support a VR one notch above UC's VR in the short term. In Fitch's view, intragroup contagion risk means that a subsidiary would not typically be rated more than a notch above its parent within the eurozone. HVB's fully loaded common equity Tier 1 ratio (CET1) dropped to 20.4% at end-2016 from 25.1% at end-2015 due to the planned special dividend payment (which is already accounted for in the year-end regulatory ratios) as well as a 4.5% increase in risk-weighted assets (RWA). However, HVB remains strongly capitalised and we expect it to comfortably exceed current and future regulatory requirements. In addition, UC and HVB have agreed with their respective national regulators that HVB's own funds ratio will not fall below 13%. The Negative Outlook on HVB's Long-Term IDR reflects the potential pressure on HVB's capitalisation and financial flexibility that could arise from a further deterioration in UC's financial strength. Such a deterioration could, in our opinion, result in a need to upstream further capital from HVB to UC. Moreover, under its assumed single-point-of-entry resolution model, UC would continue to operate under its current parent bank structure. We believe that the higher fungibility of capital and liquidity within the UC group that would result from this approach makes material capital upstreaming more likely. This could constrain HVB's financial flexibility. DERIVATIVE COUNTERPARTY RATING (DCR) AND DEPOSIT RATINGS HVB's DCR and Deposit Ratings are aligned with its IDRs. The bank's qualifying junior and vanilla senior debt buffers are large, but we believe that their sustainability is not yet clear. This is because there are still some uncertainties on the timing of UC's plans to allocate total loss absorbing capacity (TLAC) within the group, which could change HVB's liabilities structure over the medium term. SUPPORT RATING HVB's Support Rating (SR) indicates a 'BB-' long-term rating floor based on institutional support. It reflects Fitch's opinion that despite UC's strong propensity to support HVB, its constrained ability to do so results in a moderate likelihood of extraordinary support. This is because of the large solvency support that HVB would be likely to require relative to the capital available in the rest of the group, given that a large share of UC's consolidated equity is in HVB. Our view that UC's propensity to support is strong is primarily based on HVB's role as the group's investment banking hub and sizeable corporate banking operations in Europe's largest economy. SUBORDINATED DEBT AND HYBRID SECURITIES HVB's hybrid capital notes issued through HVB Funding Trusts I and II are rated four notches below the bank's VR: two notches for loss severity; and two notches for incremental non-performance risk. While the regulator could order a coupon deferral in line with the terms and conditions of these profit-linked instruments, we view such intervention as unlikely in light of HVB's solid standalone financial profile. RATING SENSITIVITIES IDRS, VR AND SENIOR DEBT HVB's IDRs and VR are primarily sensitive to a change in UC's IDRs. A further downgrade of UC's ratings would lead to a downgrade of HVB's ratings because we believe that a weakening of UC's financial strength would increase the risk of upstreaming further capital from HVB. HVB's VR and IDR are also sensitive to rising integration and fungibility of capital and funding within the UC group, which we view as likely under the European Single Supervision and Single Resolution Mechanisms. Under Fitch's criteria, a highly integrated bank that accounts for a large share of its parent's consolidated assets and overall credit profile can be assigned a common VR with its parent. Therefore, we would probably assign common VRs to UC and HVB if we conclude that lower restrictions on capital movements within the UC group make it impossible to separate the credit profiles of its largest subsidiaries. HVB's VR, and therefore IDR, would then converge towards UC's ratings, which are currently a notch below HVB's. Apart from UC's influence, HVB's VR and IDRs are also sensitive to a decline in HVB's recurring operating profitability. RATING SENSITIVITIES - DCR AND DEPOSIT RATINGS HVB's DCR and Deposit Ratings are primarily sensitive to changes in its IDRs. The DCR and Deposit Ratings could be notched above HVB's IDRs if we conclude that the bank's qualifying junior and vanilla senior debt buffers are sufficient on a sustained basis to restore viability and prevent a default on derivative obligations and deposits after a failure. We believe that further clarity on the sustainability of these buffers should become available when UC starts to downstream internal TLAC into HVB. The DCR and Deposit Ratings are also sensitive to future changes to the resolution regime, which may alter the hierarchy of the various instruments in resolution, although this is not our current expectation in Germany. SUPPORT RATING The SR is sensitive to significant changes to UC's ability to support HVB, which could be indicated by a change to UC's ratings. It is also sensitive to any negative changes to Fitch's view of UC's propensity to provide support, which we currently do not expect. We would withdraw HVB's SR if we decide to assign a common VR to UC and HVB. SUBORDINATED DEBT AND HYBRID SECURITIES HVB's subordinated debt and hybrid securities' ratings are sensitive to changes in the bank's VR or to a change in the securities' notching, which could arise if we change our assessment of the notes' loss severity or relative non-performance risk. UniCredit Bank AG Long-Term IDR downgraded to 'BBB+' from 'A-'; Negative Outlook Short-Term IDR affirmed at 'F2' Viability Rating downgraded to 'bbb+' from 'a-' Derivative Counterparty Rating downgraded to 'BBB+(dcr) from 'A-(dcr)' Deposit Ratings downgraded to 'BBB+/F2' from 'A-'/'F2' Support Rating affirmed at '3' Senior unsecured certificates of deposit affirmed at 'F2' Senior unsecured debt issuance programme downgraded to 'BBB+/F2' from 'A-'/'F2' Senior unsecured MTN programme downgraded to 'BBB+' from 'A-' Senior unsecured EMTN programme downgraded to 'BBB+/F2' from 'A-'/'F2' Senior unsecured notes downgraded to 'BBB+' from 'A-' Tier 2 subordinated notes downgraded to 'BBB' from 'BBB+' HVB Funding Trusts I and II hybrid capital notes downgraded to 'BB' form 'BB+' Contact: Primary Analyst Patrick Rioual Senior Director +49 69 76 80 76 123 Fitch Deutschland GmbH Neue Mainzer Strasse 46-50 60311 Frankfurt am Main Secondary Analyst Sebastian Schrimpf, CFA Associate Director +49 69 76 80 76 136 Committee Chairperson Claudia Nelson Senior Director +44 20 3530 1191 Media Relations: Elaine Bailey, London, Tel: +44 203 530 1153, Email: elaine.bailey@fitchratings.com. 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