TEXT-S&P affirms UniCredit Bank AG ratings

-- We have lowered our long- and short-term ratings on Italy-Based UniCredit SpA to 'BBB+/A-2' from 'A/A-1' and removed them from CreditWatch negative, where they were placed on Dec. 7, 2011. The stand-alone credit profile for UniCredit is unchanged at 'a-'.

-- We are affirming our 'A/A-1' long- and short-term counterparty credit ratings on Germany-based UniCredit Bank AG and removing them from CreditWatch negative, where they were placed on Dec. 7, 2011.

-- The affirmation reflects our opinion that UniCredit Bank AG is less affected than parent UniCredit SpA by the downgrade on Italy on Jan. 13, 2012, given its business focus in Germany (AAA/Stable/A-1+) and high systemic importance within the supportive German banking sector.

-- The negative outlook reflects the possibility that we could lower the ratings on UniCredit Bank AG if we were to further lower the ratings on the parent.

Feb 10 - Standard & Poor's Ratings Services today affirmed its 'A/A-1' long- and short-term counterparty credit ratings on UniCredit Bank AG (UniCredit Bank) and removed them from CreditWatch negative, where they were placed on Dec. 7, 2011. The outlook is negative. At the same time, and in accordance with our hybrid criteria, we affirmed our issue ratings on UniCredit subordinated notes at 'BBB+', and its Tier 1 hybrid notes at 'BBB'. The ratings affirmation reflects our opinion that UniCredit Bank is less affected than the parent by the downgrade of Italy (unsolicited ratings BBB+/Negative/A-2) on Jan. 13, 2012, given its business focus in Germany and high systemic importance within the supportive German banking sector. The ratings on UniCredit Bank reflect its 'a-' anchor, "adequate" business position, "strong" capital and earnings, "moderate" risk position, "average" funding, and "adequate" liquidity, as our criteria define these terms.

The stand-alone credit profile (SACP) is 'a-'. Our view of UniCredit Bank's "high" systemic importance for the German banking sector results in a two-notch uplift from the SACP, reflecting our view of a moderately high likelihood of systemic support. The ratings on UniCredit Bank are one notch lower than the indicative issuer credit rating, reflecting the bank's strong link with the parent UniCredit SpA. UniCredit Bank is a core subsidiary of UniCredit SpA and is the group's "center of competence" for its corporate and capital markets business. Additionally, UniCredit Bank provides some funding support to the parent. Our bank criteria use our Banking Industry Country Risk Assessment (BICRA) economic risk and industry risk scores to determine a bank's anchor, the starting point in assigning an issuer credit rating. Our anchor for a commercial bank operating in Germany is 'a-', based on an economic risk score of '1' and an industry risk score of '3'. Our economic risk assessment reflects our view of Germany's highly diversified and competitive economy and lack of major economic imbalances.

An export-led nation, Germany remains vulnerable to swings in global economies, trade flows, and capital market trends, however. Industry risk benefits from Germany's extensive funding market and banks' domestic funding surpluses from low domestic credit growth and high saving rates. However, the banking sector's competitive dynamics result in relatively low profitability, which is fueled by significant disparities in banks' commercial targets and the business and risk profiles of market players. We assess UniCredit Bank's business position as "adequate". It is predominantly a corporate bank focusing on German and international markets, with about 3% market share in customer loans in Germany. Franchise strength is good, mainly in Bavaria and some parts of Northern Germany. There is some volatility in business flows that is inherent to its investment banking activity. UniCredit Bank has a well-regarded management team that successfully refocused its business and cut costs during the 2008-2009 financial crisis. We assess capital and earnings as "strong", based on our expectation that the RAC ratio (10.5% at end-June 2011) will remain in the 10%-11% range in the next 18-24 months. We also note the bank's commitment to continue reducing its exposure to noncore activities within the corporate and investment banking business. Quality of earnings is moderate, given the presence of a significant share of revenues coming from investment banking.

UniCredit Bank's earnings buffer is adequate at about 60 basis points, reflecting profitable corporate and investment banking activities. We view its risk position as "moderate", reflecting some concentration in its corporate credit portfolio, some complexity in its credit market related business, and some tail risk in credit losses that are not fully captured in our RAC framework given the very low economic risk we assign to Germany. At the same time, UniCredit Bank's credit losses have been lower than peer average for the past few years, also reflecting significant restructuring of real estate assets. UniCredit Bank's funding is "average", in the context of our "strong" assessment for funding on the German banking sector. Reliance on wholesale funding is higher than the average for German banks, but in line with other large domestic players. Customer deposits represent about 45% of the funding base, and the loan-to-deposit ratio improved to 141% at end-September 2011, from 163% in 2008 and 155% in 2009. UniCredit Bank benefits from Germany's current favorable market conditions, which results in a lower cost of funding compared to the parent, to which it provides some funding support. Liquidity is adequate, in our view. Short-term wholesale funding is about 55% of total wholesale funding. However, liquidity management is prudent. UniCredit Bank has significant deposits at the European Central Bank, which provides the bank some flexibility to manage its recourse to wholesale markets.

The negative outlook of UniCredit Bank reflects that on the parent, which in turns reflects the possibility that we could lower the ratings if we were to lower our ratings on the Republic of Italy, or if the Italian economy and banking industry weakened further. We would also consider lowering the ratings on UniCredit SpA if the group asset quality in 2012 materially worsened more than we currently anticipate under our baseline scenario. If we lowered the ratings on UniCredit SpA, we would reassess the SACP of UniCredit Bank to determine if the deterioration of the group creditworthiness negatively affected the capital and funding position of its subsidiary. A revision of the outlook to stable would depend on a similar action taken on the parent bank, which would hinge on our perception of a pronounced improvement in Italy's economic and industry risk, together with signs of UniCredit SpA's earnings and asset quality strengthening.