TEXT-Fitch affirms Bank Pekao SA, Pekao Bank Hipoteczny
Jan 30 - Fitch Ratings has affirmed Poland-based Bank Pekao SA's (Pekao) Long-term Issuer Default Rating (IDR) at 'A-' with a Stable Outlook. Simultaneously, Fitch has affirmed the ratings of Pekao's subsidiary, Pekao Bank Hipoteczny (Pekao BH). A full list of rating actions is at the end of this release. RATING ACTION RATIONALE: Pekao Pekao's Long- and Short-term IDRs are based on its intrinsic strength, reflected in its Viability Rating (VR) of 'a-'. The IDRs and VR reflect the bank's stable and diversified funding base, ample capitalisation and strong franchise as well as consistency in conservative credit and market risk management. These factors have made Pekao more resilient to the deterioration in the operating environment during the crisis compared with peers, and in Fitch's view give the bank sufficient flexibility to accommodate any negative impact from the slowing Polish economy. The affirmation of Pekao's '2' Support Rating reflects Fitch's view that even after the successful closing of the announced offer to sell the 9.1% stake in Pekao , UniCredit S.p.A. (UC; 'A-'/Negative) will remain a majority shareholder and will continue to have a high propensity to provide support to Pekao, given the strategic importance of Polish banking operations to UC. However, at the current rating levels, Pekao's IDRs do not benefit from support available from UC. The Stable Outlook on Pekao's Long-term IDR reflects Fitch's view on the outlook for Pekao's standalone risk profile as well as the Stable Outlook on Poland's sovereign ratings (foreign currency Long-term IDR 'A-'/Stable). RATING ACTION DRIVERS - Pekao -, IDRs, VR Pekao is a universal bank with the second-largest market share in Poland by total assets, serving more than four million customers. Pekao's deposit franchise is a key rating strength. Customer deposits (including liabilities related to certificates of deposit issued) accounted for 89% of the bank's non-equity funding at end-Q312. The structure of the deposit base is quite stable with corporate deposits accounting for around 53% of the deposit base excluding repo transactions. The share of foreign-currency deposits was stable at around 15%. The share of retail loans in Pekao's loan book increased over 9M12 to around 40% of the total, but the bank is still predominantly a corporate lender. Industry concentrations in the corporate loan book are not excessive and did not change materially over 9M12. Individual concentrations measured by the 20 largest on and off balance sheet exposures increased over 9M12, but they were still moderate relative to Fitch Core Capital (FCC) at end-Q312. At end-Q312, the asset quality of Pekao's Polish operations was better than the sector average (impaired loans ratio of 7.1% vs. 8.8%), but deteriorated faster than for the sector over 9M12 reflecting pressures in the corporate book. Including the Ukrainian operations, the consolidated impaired loans ratio stood at 7.4% at end-Q312. The coverage of impaired exposures (including incurred but not reported credit losses) fell over 9M12 to 68% (still above the market average) from 73% at end-2011, reflecting recoveries of existing impaired exposures and collateral values for cases newly recognized as impaired. Pre-impairment operating profitability remained intact and improved marginally faster than for the sector as a whole in 9M12 (6% up for Pekao and around 4% for the sector). Annualised impairment charges remain within a narrow band of between 60-80bps of average gross loans quarterly. The bank maintains very strong capital levels with a FCC / risk weighted assets (RWA) ratio of 21% at end-Q312. Internal capital generation remained strong, while RWA growth was muted over 9M12. We expect profitability to be solid in 2013, while RWA growth could be even slower than in 9M12 reflecting the expected slowdown in GDP growth. The risk in the CHF-denominated mortgage portfolio is contained. The exposure amounted to PLN5.4bn or around 25% of FCC. The product is a legacy originated by BPH before the merger with Pekao and was discontinued in summer 2006. This reduces pressures on loan to value ratios (LTVs). Mortgage loans in local currency remain (alongside cash loans) Pekao's key lending products for retail customers. RATING SENSITIVITIES - Pekao -, IDRs, VR Within Fitch's base case scenario, Pekao's ratings will not be impacted by limited further possible downgrade of UC's Long-term IDR, given the agency's view of only moderate contagion risk for Pekao from negative developments at UC. This reflects Pekao's low dependence on group and wholesale funding, its robust domestic franchise and a strong local regulator, which in Fitch's view would be very unlikely to permit excessive transfers of capital and liquidity from Polish banks to their foreign parents. Pekao's ratings would only be likely to come under negative pressure in case of a multi-notch downgrade of UC, which Fitch does not anticipate at present. An upgrade of Pekao's VR and IDRs is unlikely in the short to medium term, given the weakening operating environment and pressure on UC's credit profile. Pekao's VR is currently not constrained by the sovereign rating, so positive rating action on Poland's sovereign ratings would not result in upgrades of Pekao's ratings. Pekao could be downgraded in case of further escalation of the eurozone crisis, which could result in increased loan impairment charges due to a less supportive operating environment locally. Any negative action on Poland's sovereign ratings could also put downward pressure on Pekao's ratings. RATING SENSITIVITIES - Pekao -, SUPPORT RATING In Fitch's view UC's propensity to support Pekao will remain strong. Pekao's Support Rating could be downgraded, however, in case of a downgrade of UC's Long-term IDR to 'BBB-' or below, although Fitch views such a scenario as unlikely at present. Any downgrade of the Support Rating would likely be limited to one notch given the systemic importance of the bank for the Polish banking sector and the potential for support, if needed, from the Polish authorities. An upgrade of Pekao's Support Rating would require UC's Long-term IDR to be upgraded to 'A' or above. RATING ACTION RATIONALE, DRIVERS AND SENSITIVITIES: Pekao BH The affirmation of Pekao BH's ratings reflects Fitch's view that it is a core subsidiary for Pekao, as a result of which Pekao BH's IDRs are equalised with those of its parent and share the same Stable Outlook. Pekao BH's IDRs will likely move in tandem with those of Pekao. Pekao BH is a specialised mortgage lender involved in financing residential and commercial real estate through lending to private individuals and corporate customers. At end-Q312, Pekao BH's gross loans accounted for 1.7% of Pekao's consolidated gross loan book. The rating actions are: Bank Pekao Long-term foreign currency IDR: affirmed at 'A-', Outlook Stable Short-term foreign currency IDR: affirmed at 'F2' Viability Rating: affirmed at 'a-' Support Rating: affirmed at '2' Pekao BH Long-term foreign currency IDR: affirmed at 'A-', Outlook Stable Short-term foreign currency IDR: affirmed at 'F2' Support Rating: affirmed at '1' National Long-term rating: affirmed at 'AA(pol)', Outlook Stable National Short-term rating: affirmed at 'F1+(pol)' Additional information is available at 'www.fitchratings.com'. The ratings above were solicited by, or on behalf of, the issuer, and therefore, Fitch has been compensated for the provision of the ratings. Applicable criteria, 'Global Financial Institutions Rating Criteria', dated 15 August 2012, 'Rating FI Subsidiaries and Holding Companies', dated 10 August 2012, Evaluating Corporate Governance, dated 12 December 2012, 'Rating Financial Institutions Above the Sovereign', dated 11 December 2012 are available at www.fitchratings.com. Applicable Criteria and Related Research: Global Financial Institutions Rating Criteria Rating FI Subsidiaries and Holding Companies Evaluating Corporate Governance Rating Financial Institutions Above the Sovereign
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