April 27, 2017 / 9:49 PM / 9 months ago

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

(The following statement was released by the rating agency) LONDON, April 27 (Fitch) Fitch Ratings has today affirmed UniCredit Bank Austria AG's (Bank Austria) Long-Term Issuer Default Rating (IDR) at 'BBB+' with a Negative Outlook and its Viability Rating (VR) at 'bbb+'. A full list of rating actions is at the end of this rating action commentary. Fitch's rating action follows the downgrade of Bank Austria's ultimate parent, UniCredit S.p.A.'s (UC) Long-Term IDR to 'BBB'/Stable 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 Bank Austria's IDRs, VR and senior unsecured debt ratings reflect its strong capitalisation metrics and reduced risk profile. We believe that the bank should be able to generate sufficient earnings and maintain a conservative risk profile following the transfer of its subsidiaries in central and eastern Europe (CEE) and its 41% stake in its Turkish unit to UC in 4Q16. Bank Austria's consolidated transitional common equity Tier 1 (CET1) ratio was a strong 18% at end-2016 due to the reduction in risk-weighted assets following the CEE spin-off and the EUR1 billion cash contribution from UC in August 2016. We consider that Bank Austria's capitalisation supports a VR one notch above UC's VR in the short term. UC has so far refrained from upstreaming capital from its Austrian subsidiary and intends to maintain this approach. We expect UC to remain committed to maintain high regulatory capital ratios at its Austrian subsidiary. The Negative Outlook on Bank Austria's Long-term IDR reflects our expectation that the fungibility of capital within the UC group will increase, and that capitalisation and financial flexibility could worsen due to further deterioration of UC's financial strength. Moreover, under its assumed single-point-of-entry resolution model, UC would continue to operate under its 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 as capital is increasingly managed across the UC group. We believe that this is likely under the Single Supervision Mechanism (SSM) with the European Central Bank (ECB) as regulator. DERIVATIVE COUNTERPARTY RATING (DCR) The bank's DCR is equalised with the Long-Term IDR because derivative counterparties in Austria have no definitive preferential status over other senior obligations in a resolution scenario. SUPPORT RATING Bank Austria's Support Rating indicates a 'BBB' long-term rating floor based on institutional support. It reflects Fitch's opinion that UC would have a high propensity to support its Austrian subsidiary in case of need. In our opinion, Bank Austria's size no longer constrains UC's ability to support it following the transfer of the CEE operations. RATING SENSITIVITIES IDRS, VR AND SENIOR DEBT Bank Austria's VR, IDRs and senior debt rating are sensitive to changes in UC's IDRs, to its strategic plans for its Austrian operations and to changes in the fungibility of capital within the UC group. A further downgrade of UC's ratings would lead to a downgrade of Bank Austria's ratings because we believe that a weakening of UC's financial strength would increase the risk that excess capital may be upstreamed from Bank Austria to UC. Furthermore, as capital is increasingly managed across the UC group, intragroup contagion risk means that a subsidiary would not typically be rated more than a notch above its parent within the eurozone. Bank Austria's VR, and therefore IDR, would then be likely to converge with UC's ratings, which are one notch below Bank Austria's, as indicated by Bank Austria's Negative Outlook. Bank Austria's ratings are also sensitive to deterioration of the performance of the bank's domestic retail business. A downgrade of Bank Austria's VR would result in a downgrade of its IDRs to the level of UC's IDR. The upside for Bank Austria's VR is limited because of the links with UC's ratings, and in light of the bank's own, narrowed geographic diversification and higher reliance on wholesale (corporate) banking for profit generation. DERIVATIVE COUNTERPARTY RATING (DCR) 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 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. A downgrade could occur if UC decides to upstream capital from its Austrian subsidiary or we perceive a weakening in UC's propensity to support, for example through significantly decreasing importance of Bank Austria's role in the group, none of which we expect, 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: affirmed 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 Claudia Nelson Senior Director +44 20 3530 1191 Media Relations: Peter Fitzpatrick, London, Tel: +44 20 3530 1103, Email: peter.fitzpatrick@fitchratings.com. 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