RPT-Fitch affirms Bank Zachodni WBK S.A. at 'BBB'; outlook stable
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Dec 4 (Reuters) - (The following statement was released by the rating agency)
Fitch Ratings has affirmed Bank Zachodni WBK S.A.'s (BZ WBK), Long-term Issuer Default Rating (IDR) at 'BBB' with a Stable Outlook. The agency has also assigned a National Long-term rating of 'A+(pol)EXP' to the bank's planned issue of PLN500m senior unsecured bonds. A full list of rating actions is at the end of this commentary.
KEY RATING DRIVERS: IDRS, VR AND NATIONAL RATING
BZ WBK's IDRs are driven by the bank's intrinsic strength and are underpinned by support available from its majority owner, Banco Santander (Santander, BBB+/Stable).
The bank's Viability Rating (VR) reflects its strong franchise, stable performance, adequate liquidity and capitalisation and stable funding structure based on customer deposits. However, it also reflects the significant exposure to commercial real estate (CRE) and residential mortgages denominated in foreign currencies (FC), the latter mostly inherited from Kredyt Bank (KB), following the merger in 1Q13. In Fitch's opinion, risks arising from CRE and FC mortgage exposures are adequately cushioned by BZ WBK's capital position and healthy pre-impairment profitability. Fitch believes that the planned acquisition of a 60% stake in Santander Consumer Bank (SCB) will only result in minor changes in BZ WBK's credit profile.
BZ WBK is the third-largest bank in Poland, with a country-wide distribution network. It has a strong foothold in all major banking segments, with quite strong complementary business lines (leasing, insurance, brokerage). The funding franchise is one of BZ WBK's rating strengths, with 84% of total funding at end-3Q13 sourced from granular customer deposits (excluding repos), 73% of which were retail.
Fitch views BZ WBK's capitalisation as adequate, with a Fitch core capital ratio of 13.9% at end-3Q13. Coverage of impaired loans was reasonable at 63%, and uncovered impaired loans were equal to a moderate 18% of Fitch core capital. Consolidation of SCB, expected in 1Q14, should have a small positive impact on capitalisation, as it will be financed by new share issuance by BZ WBK, and SCB has a marginally better capital ratio. However, by end-2014, management forecasts a more significant improvement in capitalisation, guiding that the core Tier 1 ratio could rise to 13.7% from 11.9% at end-3Q13. Fitch views this as realistic, given the banks' current profitability and BZ WBK's dividend policy, providing growth is moderate.
The liquidity position is adequate. BZ WBK maintained a liquidity buffer equal to around 13% of customer deposits, and the (gross) loans to deposit ratio was around 96% at end-3Q13. Consolidation of SCB will have only a moderate negative impact on the group's funding profile. Based on available data, Fitch estimates that on a pro-forma basis the loan/deposit ratio would increase to around 104%, and customer deposits would constitute around 80% of total funding following the consolidation. The liquidity profile may deteriorate somewhat, but this risk is to some extent mitigated by the fact that SCB will remain a separate entity and will be required to meet all local liquidity requirements on a standalone basis. The share of impaired exposures after the merger with KB was above the market average at 7.9% (sector: 7.4%) at end-3Q13, with NPLs (loans overdue by 90 days or more) running at 7.7% (sector: 6.7%) at end-1H13. The acquisition of SCB is likely to have a moderate negative impact on the reported quality of the consolidated loan book. On a pro-forma basis, impaired loans of the consolidated entity would have been 8.5% at end-3Q13 compared with 7.9% for BZ WBK. However, reserve coverage of impaired loans would increase to 75% from 63% given that coverage of impaired loans at SCB was close to 120% at end-3Q13.
The loan book is quite granular, with low borrower concentrations. However, some industry concentrations exist. The largest is a joint exposure to the property and construction sectors, which accounted for 16% of the gross loan book, or 106% of FCC, at end-1H13. The relative weight of the property portfolio was substantially reduced by the merger with KB (to around 14% at end-1H13 from 22% pre-merger), and consolidation of SCB would further dilute the share of this component of the consolidated loan book to around 12%.
The FC-denominated mortgage portfolio was largely inherited from KB, and was a manageable 19% of total loans at end-3Q13. Its share will remain stable after the consolidation of SCB.
The planned PLN500m of senior unsecured bonds will be issued in local currency, have a semi-annual floating coupon and three-year maturity. The bonds will constitute direct, unconditional and unsecured obligations of the issuer and rank pari passu with other unsecured and unsubordinated obligations, except for those obligations mandatorily preferred by law.
KEY RATING DRIVERS: SUPPORT RATING
The affirmation of BZW BK's '2' Support Rating reflects Fitch's view that the bank's majority shareholder, Santander, will have a high propensity to provide support to BZ WBK in case of need, given the strategic importance of BZ WBK to Santander. However, at the current rating levels, Fitch's view of potential support available from Santander does not provide any uplift for BZ WBK's IDRs. The Stable Outlook on BZ WBK's Long-term IDR is based on the bank's intrinsic strength, reflected by the VR.
RATING SENSTIVITIES - IDRS, VR AND NATIONAL RATING
An upgrade of BZ WBK's IDRs would require either an upgrade of Santander's Long-term IDR or an upgrade of BZ WBK's VR. Fitch views both of these as unlikely in the short to medium term, given the moderate negative impact of the acquisition of SCB on the consolidated loan to deposit ratio and reported NPL ratio, the on-going integration of KB, the only gradual and still quite fragile improvement in the operating environment and the Stable Outlook on Santander's Long-term IDR.
BZ WBK could be downgraded if both (i) Santander was downgraded; and (ii) BZ WBK's VR was downgraded. Neither of these scenarios is currently anticipated by Fitch, although a renewed escalation of the eurozone crisis, which could result in increased impairment charges due to a less supportive operating environment locally, could put downward pressure on BZ WBK's VR.
RATING SENSITIVITIES -SUPPORT RATING
In Fitch's view, Santander's propensity to support BZ WBK will remain strong. BZ WBK's Support Rating would only be likely to change in case of a two-notch upgrade or downgrade of Santander's Long-term IDR, which Fitch currently views as unlikely.
The rating actions are:
Long-term foreign currency IDR: affirmed at 'BBB', Outlook Stable
Short-term foreign currency IDR: affirmed at 'F3'
Viability Rating: affirmed at 'bbb'
Support Rating: affirmed at '2'
National Long-term rating: assigned at 'A+(pol)', Outlook Stable
Senior unsecured debt National Long term rating: assigned at 'A+(pol)'
PLN500m senior unsecured bonds, National Long-term rating: assigned at 'A+(pol)EXP'