March 3, 2017 / 3:57 PM / in 9 months

Fitch Upgrades Austria's Volksbanken-Verbund to 'BBB-'; Outlook Positive

(The following statement was released by the rating agency) FRANKFURT/LONDON, March 03 (Fitch) Fitch Ratings has upgraded Volksbanken-Verbund's (VB-Verbund) Viability Rating (VR) to 'bbb-' from 'bb+', Long-Term Issuer Default Rating (IDR) to 'BBB-' from 'BB+' and Short-Term IDR to 'F3' from 'B'. Fitch has also upgraded the IDRs of VB-Verbund's member banks to 'BBB-'/'F3' from 'BB+'/'B'. The Outlook on the Long-Term IDRs is Positive. A full list of rating actions is available at the end of this rating action commentary. KEY RATING DRIVERS - IDRs AND VR The upgrade of VB-Verbund's VR and IDRs reflects the successful execution of the group's risk reduction and restructuring programme, which is now largely completed. The process has been well-controlled and -executed, in our view, and the major restructuring progress achieved has greatly reduced execution risk. The overhauled group structure and increased centralisation of risk controls and monitoring at the group's central institution, Volksbank Wien AG (VBW), has also reduced complexity and strengthened the member banks' cohesion. Fitch assigns IDRs but no VR to each of VB-Verbund's individual member banks in line with its criteria for rating banking structures backed by mutual support schemes. VB-Verbund is not a legal entity but a medium-sized network of cooperative banks, whose cohesion is primarily ensured by a recently overhauled and strengthened mutual support scheme. The restructuring has considerably improved the group's asset quality and stabilised the group's performance, albeit initially at modest levels, following heavy impairment and restructuring costs in recent years. Increased centralisation and the mergers of the group's member banks into eight regional and two specialised banks according to an ambitious schedule have also strengthened the group's cohesion and risk controls. The mergers are largely completed, and the few outstanding mergers should be completed by August 2017. The Positive Outlook reflects the likely long-term benefits from the group's more robust risk infrastructure and more coherent management practices on the company profile and the risk profile of each member bank. The individual banks' asset quality remains heterogeneous, but their convergence shows that the weaker elements are already benefiting from the more sophisticated risk management practices implemented and monitored by VBW. We expect that VB-Verbund's revenue generation and cost efficiency will further improve sustainably in the medium term. After restructuring costs weighed on profitability in 2016, we expect the group to report a modest profit in 2017. However, performance should remain only moderate in the longer term, given the robust but saturated Austrian operating environment. VB-Verbund operates almost exclusively in the resilient Austrian market and its loan book consists predominantly of lower-risk retail and small SME clients. Its asset quality remains moderately weaker than that of large, highly rated European cooperative banks. We estimate impaired loans to have accounted for around 4.5% of gross loans at end-2016 and we expect that asset quality will gradually improve further and converge toward retail-focused peers' in highly-rated European countries, albeit more gradually than in the past two years. VB-Verbund's capitalisation is acceptable in light of the group's considerably improved risk profile, but will benefit from the cost savings from the primary banks' mergers. The savings should strengthen the internal capital generation of VB-Verbund before it repays the remainder of the EUR300 million state capital received in 2009 to support its former troubled central institution, which VB-Verbund divested in 2015. KEY RATING DRIVERS - SUPPORT RATINGS AND SUPPORT RATING FLOORS (SRF) VB-Verbund's Support Rating and SRF reflect Fitch's view that senior creditors can no longer rely on full extraordinary state support. This is driven by the EU's Bank Recovery and Resolution Directive (BRRD), which has been fully transposed, with its bail-in tool, into Austrian law, effective from 1 January 2015. RATING SENSITIVITIES - IDRs AND VR VB-Verbund's Positive Outlook indicates further upside for the Long-Term IDR and VR when internal capital generation recovers to adequate levels. However, the VR is unlikely to rise above the 'bbb' range in light of VB-Verbund's small market share in the generally low-margin, high-cost Austrian retail banking market. A downgrade of the VR and IDRs could result from a failure to achieve the necessary cost savings from the restructuring, which could challenge the group's inability to repay the state capital as scheduled, or from a severe downturn in Austria's economy. However, we view none of these scenarios as likely. RATING SENSITIVITIES - SUPPORT RATINGS AND SRF An upgrade of VB-Verbund's Support Ratings and an upward revision of the SRF would be contingent on a positive change in the sovereign's propensity to support the bank. This is highly unlikely in light of the prevailing regulatory environment, in our view. The rating actions are as follows: VB-Verbund Long-Term IDR: upgraded to 'BBB-' from 'BB+'; Outlook Positive Short-Term IDR: upgraded to 'F3' from 'B' Viability Rating: upgraded to 'bbb-' from 'bb+' Support Rating: affirmed at '5' Support Rating Floor: affirmed at 'No Floor' In line with VB-Verbund's IDRs, the IDRs of VB-Verbund's members listed below have been upgraded to 'BBB-'/Positive/'F3' and are sensitive to the same drivers as VB-Verbund's IDRs: Bank fuer Aerzte und Freie Berufe AG Oesterreichische Apothekerbank eG Volksbank Wien AG Volksbank Vorarlberg e. Gen. Volksbank Tirol AG Volksbank Kaernten eG Volksbank Steiermark AG Volksbank Salzburg eG Volksbank Bad Goisern eingetragene Genossenschaft Volksbank Steirisches Salzkammergut, reg.Gen.m.b.H. Volksbank Oberoesterreich AG Volksbank Bad Hall e.Gen. Volksbank Niederoesterreich AG Waldviertler Volksbank Horn reg.Gen.m.b.H. Following SPARDA-BANK AUSTRIA eGen's decision to remain a member of VB-Verbund, Fitch has also upgraded the bank's IDRs to 'BBB-'/Positive/'F3' and removed them from Rating Watch Evolving (RWE), where they had been placed in 2016 following the bank's stated intention to leave the group. The IDRs of VB-Verbund's following members have been upgraded to 'BBB-'/Positive/'F3' and withdrawn as a result of their merger into other rated members of the group: Volksbank Enns - St. Valentin eG Volksbank Kufstein-Kitzbuhel Holding eG VOLKSBANK LANDECK Holding eG Volksbank Niederoesterreich Sued eG Volksbank Oberes Waldviertel reg.Gen.m.b.H. Volksbank Oberndorf reg.Gen.m.b.H. Volksbank Obersteiermark eGen Volksbank Oetscherland eG Volksbank Suedburgenland eG Volksbank Sued-Oststeiermark e.Gen. Volksbank Weinviertel e.Gen. The IDRs of start:bausparkasse AG and IMMO-BANK AG have been withdrawn as a result of both banks' sale and exit from VB-Verbund in December 2016. As a result, Fitch will no longer provide ratings or analytical coverage of these issuers as we no longer receive sufficient information to maintain the ratings following the issuers' exit from VB-Verbund. Contact: Primary Analyst Patrick Rioual Senior Director +49 69 768 076 123 Fitch Deutschland GmbH Neue Mainzer Strasse 46-50 60311 Frankfurt am Main Secondary Analyst Christian Schindler Associate Director +44 203 530 1323 Committee Chairperson Christian Scarafia Senior Director +44 203 530 1012 Media Relations: Elaine Bailey, London, Tel: +44 203 530 1153, Email: Additional information is available on Applicable Criteria Global Bank Rating Criteria (pub. 25 Nov 2016) here Additional Disclosures Dodd-Frank Rating Information Disclosure Form here _id=1020008 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. 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