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Fitch Affirms UniCredit at 'BBB+' Negative Outlook
December 22, 2016 / 5:34 PM / 10 months ago

Fitch Affirms UniCredit at 'BBB+' Negative Outlook

(The following statement was released by the rating agency) MILAN/LONDON, December 22 (Fitch) Fitch Ratings has affirmed Unicredit S.p.A.'s Long-Term Issuer Default Rating (IDR) at 'BBB+' and its Viability Rating (VR) at 'bbb+'. The Outlook on the Long-Term IDR is Negative. A full list of rating actions is at the end of this rating action commentary. The affirmation follows the bank's restructuring announcement last week. In Fitch's opinion, the planned recapitalisation, sale of non-performing loans (NPLs) and cost-cutting measures, if achieved, are all positive for creditors. The Negative Outlook mirrors that on Italy's sovereign rating ('BBB+'/Negative) and reflects Fitch's view that a downgrade of Italy would probably lead to a downgrade of UniCredit's ratings. The Negative Outlook also reflects Fitch's view that a further deterioration in Italy's economic environment would make reaching the bank's targets under its strategic plan more difficult. Fitch's assumption is that the bank will successfully raise capital, reduce NPLs and work towards reaching its targets. If these are not achieved in line with the plan, the ratings will be downgraded, probably by several notches. KEY RATING DRIVERS VR, IDRs AND SENIOR DEBT UniCredit's Long-Term IDR is driven by its Viability Rating (VR). The ratings reflect the benefits from the planned EUR13bn capital increase and reduction in legacy NPL stock, but also remaining problems with asset quality and earnings for the parent bank after the restructuring. The ratings also reflect the group's broad and diversified international franchise, measures being taken on costs, and a good, diversified funding and liquidity profile. Geographical diversification, particularly in more stable and highly rated economies such as Germany and Austria has proved key to supporting the group's overall risk profile. However, Fitch considers that the parent bank's risk profile remains highly correlated with that of the Italian sovereign and with the domestic operating environment. We expect Italy's GDP to grow by 0.8% in 2016 and 0.9% in 2017, having declined in the five years to 2016 at an average annual rate of 0.6%. The restructuring will include notable progress in addressing UniCredit's legacy NPL stock. The group had approximately EUR75bn impaired exposures at end-9M16, largely generated by its Italian corporate business during the country's protracted recession. Management has identified a EUR56.4bn non-core asset portfolio to reduce through portfolio and single-name disposals and write-offs but also through improved cure and recovery strategies. The bank announced a EUR17.7bn gross doubtful loan securitisation transaction, the sale of slightly over 50% of which has already been agreed with the remaining amount to be disposed of by end-2019, whilst an additional EUR19bn of impaired exposures will be worked out more traditionally. These initiatives should lead to a reduced gross consolidated impaired exposure of approximately EUR44bn by end-2019, equivalent to a gross impaired loan ratio of 8.4% (as indicated by the bank). UniCredit projects the loan impairment coverage ratio of remaining stock will improve to above 54% by end-2019. The EUR13bn capital injection and sales of stakes in Fineco, Pekao and Pioneer will substantially boost UniCredit's capital ratios, even after raising impairment coverage levels and booking restructuring costs. Management projects a consolidated pro forma end-2017 phased-in CET1 ratio of 12%. It will repatriate EUR3bn from its German subsidiary to the parent bank in the 2017 accounts, which demonstrates that capital and funding are gradually becoming more fungible across the group, but the German and Austrian subsidiaries will retain high amounts of group capital. UniCredit's modest operating earnings should improve following the cost restructuring measures (projected annual cost savings of EUR1.7bn from 2019), and management is targeting an underlying return on tangible equity of 9% on the basis of still slow EU economic growth and lower-for-longer interest rates. Funding is stable and well diversified and benefits from the group's direct presence in and market access to various countries. The group's liquidity profile is commensurate with the ratings. The rating of the senior debt issued by UniCredit's funding vehicles, UniCredit Bank (Ireland) plc, and UniCredit International Bank Luxembourg SA is equalised with that of the parent since it is unconditionally and irrevocably guaranteed by UniCredit. SUPPORT RATING (SR) AND SUPPORT RATING FLOOR (SRF) The SR and SRF reflect Fitch's view that senior creditors cannot rely on receiving full extraordinary support from the sovereign in the event that a bank becomes non-viable. The EU's Bank Recovery and Resolution Directive (BRRD) and the Single Resolution Mechanism (SRM) for eurozone banks provide a framework for resolving banks that require senior creditors participating in losses, if necessary, instead of or ahead of a bank receiving sovereign support. SUBORDINATED DEBT AND OTHER HYBRID SECURITIES Subordinated debt and other hybrid capital issued by the bank are all notched down from its VR in accordance with Fitch's assessment of each instrument's respective non-performance and relative loss severity risk profiles. Tier 2 subordinated debt is rated one notch below the VR for loss severity to reflect below-average recovery prospects. No notching is applied for incremental non-performance risk because writedown of the notes will only occur once the point of non-viability is reached and there is no coupon flexibility prior to non-viability. Legacy Upper Tier 2 debt reflects its higher loss severity given its subordination to senior unsecured and subordinated Tier 2 obligations (two notches) and incremental non-performance risk (one notch) for its cumulative coupon deferral subject to constrains. Legacy Tier 1 notes are notched four times from the VR, two notches for loss severity for deep subordination and another two for non-performance risk as coupon deferral is constrained by look-back clauses. AT1 notes are currently rated five notches below the VR, two notches for loss severity relative to senior unsecured creditors and three notches for incremental non-performance risk, the latter notching reflecting the instruments' fully discretionary interest payment. RATING SENSITIVITIES VR, IDRs AND SENIOR DEBT UniCredit's VR, IDRs and debt ratings reflect Fitch's assumption that the EUR13bn capital raising, which according to the bank is fully pre-underwritten, will be achieved in 1Q16. The bank's ratings would be downgraded, probably by several notches, if the capital increase does not go through or if the bank fails to demonstrate notable progress in selling down and reducing the remaining stock of impaired exposures, which include around EUR19bn of impaired loans and the portion of the securitised NPLs that the bank has not yet sold to third- party investors. The ratings could also be downgraded if there is material slippage in Unicredit's cost reduction plan. Unicredit's ratings are also sensitive to the operating environment in Italy, particularly as this affects asset quality and earnings. A notable economic improvement could be beneficial for the ratings, while a deterioration could be negative. Because capital and funding are progressively becoming more fungible across the group, and the German subsidiary UniCredit Bank AG, is large in relation to the group, highly integrated into the parent and supervised by the same regulator, the ECB, it is possible that Fitch will at some point assign common VRs to UniCredit S.p.A. and its German banking subsidiary to reflect the then close integration between the two entities. After the transfer of CEE subsidiaries to the parent, UniCredit's Bank Austria AG's relative size fell and its business model has become domestically focused. If and when we conclude that capital has become essentially fungible within the group, we would equalise the Austrian subsidiary's ratings with those of its Italian parent because Bank Austria is highly integrated into the parent and supervised by the same regulator. The ratings of the senior debt issued by UniCredit's funding vehicles, UniCredit Bank (Ireland) plc, and UniCredit International Bank Luxembourg SA, are sensitive to the same considerations as the senior unsecured debt issued by the parent. SUBORDINATED DEBT AND OTHER HYBRID SECURITIES The subordinated debt and hybrid securities' ratings are primarily sensitive to changes in the VR, from which they are notched. The ratings are also sensitive to a change in the notes' notching, which could arise if Fitch changes its assessment of their non-performance relative to the risk captured in the VR or their expected loss severity. For AT1 issues, the capital raising and business plan should provide UniCredit with an ample buffer above its regulatory maximum distributable amount (MDA) threshold. However, if the capital raising fails, the bank would breach its MDA requirement and not be permitted to pay AT1 coupons, which Fitch would consider as non-performance and downgrade the debt ratings accordingly, probably to 'CCC' or below, depending on our recovery estimates. SR AND SRF An upgrade of the SR and upward revision of the SRF would be contingent on a positive change in the sovereign's propensity to support UniCredit. While not impossible, this is highly unlikely, in Fitch's view. The rating actions are as follows: UniCredit S.p.A. Long-term IDR: affirmed at 'BBB+' Outlook Negative Short-term IDR: affirmed at 'F2' VR: affirmed at 'bbb+' SR: affirmed at '5' SRF: affirmed at 'No Floor' Senior unsecured debt: affirmed at 'BBB+' Tier 2 notes: affirmed at 'BBB' Legacy Upper Tier 2 notes: affirmed at 'BB+' Preferred stock: affirmed at 'BB' AT 1 Notes: affirmed at 'BB-' UniCredit Bank (Ireland) p.l.c. (no issuer ratings assigned): Senior unsecured notes: affirmed at 'BBB+' UniCredit International Bank (Luxembourg) S.A. (no issuer ratings assigned): Senior unsecured notes: affirmed at 'BBB+' Contact: Primary Analyst Francesca Vasciminno Senior Director +39 02 87 90 87 225 Fitch Italia S.p.A. Via Privata Maria Teresa, 8 20123 Milan Secondary Analyst Fabio Ianno Director +44 20 3530 1232 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. For regulatory purposes in various jurisdictions, the supervisory analyst named above is deemed to be the primary analyst for this issuer; the principal analyst is deemed to be the secondary. 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