RPT-Fitch Affirms Bank Pekao SA and Pekao Bank Hipoteczny

Fri Jan 24, 2014 9:34am EST

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Jan 24 (Reuters) - (The following statement was released by the rating agency)

Fitch Ratings has affirmed Poland-based Bank Pekao SAa€™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 (PBH). A full list of rating actions is provided at the end of this comment.

KEY RATING DRIVERS - IDRs and VR of Pekao

Pekao's IDRs are based on its intrinsic strength, as 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 its consistently conservative credit and market risk management. In Fitch's view the bank has sufficient flexibility to accommodate potential shocks. Fitch expects the operating environment to improve in 2014, which should be supportive of the banka€™s performance over the medium-term.

Pekao is a universal bank with the second-largest market share in Poland by total assets, serving more than four million customers. Customer deposits (including liabilities related to certificates of deposit issued) accounted for 87% of the banka€™s non-equity funding at end-3Q13. The structure of the deposit base is fairly stable with corporate deposits accounting for around 55% of the deposit base excluding repo transactions. The share of foreign-currency deposits was stable at around 15% at end-3Q13.

The bank is still predominantly a corporate lender with loans to private customers accounting for around 40% of the loan book. Industry concentrations in the corporate loan book are not excessive and did not change materially over 9M13. Individual concentrations, measured by the 20 largest on- and off-balance sheet exposures, increased slightly over 9M13, but remained moderate relative to Fitch Core Capital (FCC) at end-3Q13. The risk arising from its CHF-denominated mortgage portfolio is contained. The exposure amounted to PLN5bn or around 22% of FCC at end-3Q13.

Reported impaired loans were higher at 7.3% in 3Q13 (2Q12: 7.1%) but below the peak of 7.5% in Q113. The lower level was partly due to the sale of the Ukrainian bank unit to UCI given its significantly weaker asset quality relative to Pekaoa€™s domestic operations. Coverage (including incurred but not reported provisions) of impaired loans improved to 67.4% (above market average of 61.9%) at end-9M13 from 64.8% at end-2012. Uncovered impaired loans were low at 11.4% of FCC at end-3Q13.

Pre-impairment profitability was sound in 9M13 and Fitch expects it to be solid in 2014. Annualised quarterly impairment charges remain within a narrow band of between 60bps and 80bps of average gross loans.

The bank maintains solid capital levels with a FCC/risk-weighted assets (RWA) ratio of 21.6% at end-3Q13. Internal capital generation remained strong, while RWA growth was muted over 9M13.

KEY RATING DRIVERS - Support Rating of Pekao

Pekao's '2' Support Rating reflects Fitch's view that the bank's majority shareholder, UniCredit S.p.A. (UC; BBB+/Negative), will continue to have a high propensity to provide support to Pekao, given the strategic importance of Polish banking operations to UC. However, Pekaoa€™s IDRs are currently driven by the VR and therefore do not benefit from support available from UC.

The Stable Outlook on Pekao's Long-term IDR reflects the outlook for Pekao's standalone risk profile as well as the Stable Outlook on Poland's sovereign.

RATING SENSITIVITIES - IDRs and VR of Pekao

Under Fitch's base case scenario, Pekao's ratings will not be impacted by a further downgrade of UC's Long-term IDR, given the agency's view of only moderate contagion risk from negative developments at UC. This reflects Pekao's low dependence on group and wholesale funding, its robust domestic franchise and a strong domestic regulator. In Fitch's view the regulator is unlikely to permit excessive transfers of capital and liquidity from Polish banks to their foreign parents. Pekao's ratings would only likely come under negative pressure from a multi-notch downgrade of UC, which Fitch does not expect at present.

An upgrade of Pekao's VR and IDRs is unlikely in the short- to-medium term, given the current high level of VR and pressures on UC's credit profile. Pekaoa€™s VR is currently not constrained by the sovereign rating, so positive rating action on Polanda€™s sovereign ratings would not result in upgrades of Pekaoa€™s ratings.

Pekao may be downgraded if there is an escalation of the eurozone crisis, which could result in increased loan impairment charges due to a less supportive operating environment domestically. Any negative action on Poland's sovereign ratings could also put downward pressure on Pekaoa€™s ratings.

RATING SENSITIVITIES - SUPPORT RATING of Pekao

In Fitch's view UC's propensity to support Pekao will remain strong. Pekaoa€™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.

An upgrade of Pekaoa€™s Support Rating would result from UCa€™s Long-term IDR being upgraded to 'A' or above.

KEY RATING DRIVERS AND SENSITIVITIES - PBH

PBH's ratings are equalised with those of its parent and share the same Stable Outlook, reflecting Fitcha€™s view that it is a core subsidiary for Pekao. PBHa€™s IDRs will likely move in tandem with those of Pekao.

PBH is a specialised mortgage lender involved in financing residential and commercial real estate through lending to private individuals and corporate customers. At end-3Q13, PBH's gross loans accounted for 1.6% of Pekao's consolidated gross loan book.

The rating actions are as follows:

Pekao

Long-term IDR: affirmed at a€˜A-a€™, Outlook Stable

Short-term IDR: affirmed at a€˜F2a€™

Viability Rating: affirmed at 'a-'

Support Rating: affirmed at a€˜2a€™

PBH

Long-term IDR: affirmed at 'A-', Outlook Stable

Short-term 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)'

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