Fitch Affirms HVB at 'A+'; Outlook Stable

Mon Feb 10, 2014 11:17am EST

Related Topics

(The following statement was released by the rating agency) FRANKFURT/LONDON, February 10 (Fitch) Fitch Ratings has affirmed Unicredit Bank AG's (HVB) Long-term Issuer Default Rating (IDR) at 'A+' and Viability Rating (VR) at 'a-'. The Outlook on the Long-term IDR is Stable. A full list of rating actions is at the end of this release. KEY RATING DRIVERS - IDRs, SUPPORT RATINGS, SUPPORT RATING FLOORS AND SENIOR DEBT HVB's Long-term and Short-term IDR, SR, SRF and senior debt ratings reflect Fitch's view that its status as a large universal bank in Germany results in an extremely high probability of state support, as indicated by the Support Rating Floor (SRF) of 'A+'. HVB is fully owned by Unicredit S.p.A. (UC: BBB+/F2) which is rated three notches below HVB following the downgrade of Italy on 8 March 2013. Given its ownership structure, Fitch believes HVB would first look to UC for support, if needed. Nonetheless, Fitch expects that the German government would ultimately support HVB if UC's resources were insufficient. HVB's foreign ownership does not constrain Fitch's view of local sovereign support for the bank as it has a domestic franchise, is managed relatively independently and funds itself independently from its parent. The Stable Outlook reflects Fitch's expectation that the German government will continue to support large German banks, including HVB, as long as the tools for dealing with resolution of large international banks are not fully developed. RATING SENSITIVITIES - IDRs, SUPPORT RATINGS, SUPPORT RATING FLOORS AND SENIOR DEBT Fitch's view on support is sensitive to developments within the regulatory and legal framework, particularly emanating from the European Commission with regard to bank support, bail-ins, centralised regulatory oversight and adjustments to deposit insurance schemes, and the developing attitude of the German authorities towards using these tools. Fitch understands that there is broad political will in Germany, supported by all major parties, to move towards reducing the implicit state support of systemically important banks in the country at some point. In addition, the European Union discussion on the Bank Recovery and Resolution Directive and the Single Resolution Mechanism aspect of Banking Union are drawing to a close, with European Parliament votes scheduled for 1Q14 and representing important steps to curb systemic risks posed by the banking industry (see 'Fitch Outlines Approach for Addressing Support in Bank Ratings', 'Bank Support: Likely Rating Paths', 'The Evolving Dynamics of Support for Banks' at www.fitchratings.com and ''Sovereign Support for Banks Update on Position Outlined In 3Q13'). This follows Germany's implementation of a Restructuring Act in 2011. Although Fitch does not expect to immediately remove support incorporated into EU bank ratings, these developments highlight potential risks for HVB's IDR and senior debt ratings. HVB's SRF would be revised down and its Support Rating, IDRs and senior debt ratings downgraded if Fitch concludes that potential sovereign support has weakened relative to its previous assessment. Given HVB's VR is 'a-', any support-driven downgrade of the bank's Long-term IDR and senior debt ratings would be limited to two notches. KEY RATING DRIVERS AND SENSITIVITIES - VR HVB's VR reflects the bank's standalone credit strength, which benefits from its well-established domestic corporate and investment banking franchise and strong capitalisation, which compensates for the intrinsic earnings volatility of these activities. HVB's solid capitalisation is a key rating strength and Fitch expects the bank's capital position to remain strong under forthcoming regulatory changes, including further progress on banking union, and the forecast business development. Therefore, HVB's VR is sensitive to any weakening in core capital ratios. Fitch would downgrade HVB's VR if it believed that cross-border transfers of capital and liquidity would only be one-way, reserves were further reduced after the special dividend paid out in 2013 and HVB's investment and corporate banking profile and capitalisation level were unbalanced. Being part of UniCredit group might pose potential contagion risk for HVB's funding franchise if the European sovereign crisis intensified again, which is not Fitch's base case assumption as the agency expects a weak recovery in 2014. At the same time, HVB has limited its direct funding exposure towards group entities. Reflecting the German focus of its exposures, HVB's asset quality, specifically its loan impairment charges, continue to benefit from the resilient German economy. At the same time, HVB has a relatively higher ratio of non-performing loans (NPL/gross loans) which it has not reduced as actively as its peers have. Fitch expects this trend to continue in the coming quarters. In this context, some risk pockets remain, including from high concentrations in the bank's leveraged buyout exposure, project finance business and ship lending. Non-strategic assets are being worked out and the bank continues to reduce its exposure to riskier asset classes. A subsidiary's VR will not normally be more than three notches above the parent's IDR. As a result, further downgrades of UC, potentially driven by further downgrades of Italy, could result in a downgrade of HVB's VR. KEY RATING DRIVERS AND RATING SENSITIVITIES - SUBORDINATED DEBT AND OTHER HYBRID SECURITIES The ratings of HVB's hybrid capital instruments (issued through Funding Trusts I and II) reflect the financial standing of HVB, as reflected in its VR. They are notched down four notches from HVB's VR, reflecting two notches for loss severity and two notches for incremental non-performance risk relative to the bank's VR. While Fitch acknowledges that the German regulator could demand a deferral of coupon payment on these profit-linked instruments in line with the terms and conditions of the instruments, the agency does not anticipate such intervention in light of the bank's solid standalone financial profile. SUBSIDIARY AND AFFILIATED COMPANY RATING DRIVERS AND SENSITIVITIES UniCredit US Finance LLC is a wholly owned subsidiary of HVB. The Short-term rating of its Commercial Paper Programme is equalised with HVB's Short-term IDR and reflects the likelihood of systemic support. The Short-term rating of the commercial paper programme is sensitive to the same factors that might drive a change in HVB's IDR. The ratings actions are as follows: UniCredit Bank AG Long-term IDR affirmed at 'A+'; Outlook Stable Short-term IDR affirmed at 'F1+' Viability Rating affirmed at 'a-' Support Rating Floor affirmed at 'A+' Support Rating affirmed at '1' Senior unsecured Certificates of Deposit affirmed at 'F1+' Senior unsecured Debt Issuance Programme affirmed at 'A+' Senior unsecured Debt Issuance Programme affirmed at 'F1+' Senior unsecured BMTN Programme affirmed at 'A+' Senior unsecured EMTN Programme affirmed at 'A+' Senior unsecured EMTN Programme affirmed at 'A+' Senior unsecured EMTN Programme affirmed at 'F1+' Senior unsecured notes affirmed at 'A+' Senior unsecured GTD notes affirmed at 'A+' Subordinated notes affirmed at 'BBB+' UniCredit US Finance LLC Commercial Paper Programme affirmed at 'F1+' HVB Funding Trusts I and II Hybrid Notes affirmed at 'BB+' Contact: Primary Analyst Michael Dawson-Kropf +49 69 7680 76 113 Fitch Deutschland GmbH Taunusanlage 17 60325 Frankfurt am Main Secondary Analyst Christian van Beek Director +49 69 76 80 76 248 Committee Chairperson Erwin van Lumich Managing Director +34 93 323 8403 Media Relations: Hannah Huntly, London, Tel: +44 20 3530 1153, Email: hannah.huntly@fitchratings.com. Additional information is available at www.fitchratings.com. Applicable criteria, 'Global Financial Institutions Rating Criteria', dated 31 January 2014, and 'Rating FI Subsidiaries and Holding Companies' dated 10 August 2012 are available at www.fitchratings.com. Applicable Criteria and Related Research: Global Financial Institutions Rating Criteria here Rating FI Subsidiaries and Holding Companies here Additional Disclosure Solicitation Status here ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.

FILED UNDER:
Comments (0)
This discussion is now closed. We welcome comments on our articles for a limited period after their publication.