Fitch Affirms OP-Pohjola at 'A+; Outlook Stable

Tue Jun 24, 2014 11:26am EDT

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(The following statement was released by the rating agency) PARIS/LONDON, June 24 (Fitch) Fitch Ratings has affirmed Finland-based OP-Pohjola Group's Long-term Issuer Default Rating (IDR) at 'A+', Short-term IDR at 'F1', and Viability Rating (VR) at 'a+'. The Outlook on the Long-term IDR is Stable. A full list of rating actions is available at the end of this rating action commentary. KEY RATING DRIVERS - IDRS, VR AND SENIOR DEBT OP-Pohjola's ratings reflect solid asset quality, supported by prudent risk management and the group's strong domestic franchise. Capitalisation has been negatively affected by the group's acquisition of the externally held shares in its central financial institution, Pohjola Bank. Fitch expects the negative impact on the group's capitalisation, although significant, to be fully offset over the next two years by measures implemented by the group. The ratings also consider the group's insurance-related investment risk. The Pohjola Bank acquisition will reduce risk-weighted capitalisation to a level no longer in line with what is seen at similarly rated peers. The transaction has not yet been completed, but Fitch estimates that it would lower the group's Fitch core capital ratio to 9.8% from 14.4%, based on end-March 2014 data. The affirmation and Stable Outlook is based on Fitch's expectation that the group will restore capital to a pre-transaction level in 2016. OP-Pohjola has presented measures to achieve this objective and is delivering according to plan. The bulk of new capital will be raised through the issue of around EUR1.3bn profit shares over 2014 and 2015, to be sold to retail customers. The new instruments offer an attractive yield compared with term deposits and the group's current cooperative capital. The acquisition will also strengthen the group's internal capital generation as the full profit of Pohjola Bank will be retained. Asset quality is a key rating strength for the group. The group's loan portfolio should remain resilient, despite muted growth projections for the Finnish economy. Mortgage loans represent around two thirds of total lending and are of high quality with a strong amortisation culture. The export-reliant corporate loan portfolio represents a larger risk, in Fitch's opinion, but we expect any additional loan impairment charges to be manageable for the group. Impaired loans amounted to a low 0.8% of gross loans at end-2013. OP-Pohjola has a prudent risk management framework and individual member banks are subject to strict central control. The group is exposed to moderate investment risk in the insurance divisions, although the portfolios have been materially de-risked in recent years, a process Fitch believes will continue. Fitch expects continued improvements in profitability in 2014. The group has traditionally lagged behind some Nordic peers in terms of return on equity as a result of its mutual status, but management is looking to address this. The current focus is on increasing cross selling between the bank and its insurance and wealth management divisions while keeping costs stable. OP-Pohjola benefits from a strong domestic franchise in banking (around one-third of the Finnish banking system's lending), non-life insurance and wealth management. The group is geographically less diversified than similarly rated peers, however, making an upgrade unlikely. OP-Pohjola is less reliant on wholesale funding than its Nordic peers, with a loan to deposit ratio of 138% at end-March 2014. Fitch expects the group to maintain capital market access and a large liquidity buffer to mitigate refinancing risk. It benefits from having to issue fairly small amounts of debt, and provides diversification opportunities for eurozone investors. RATING SENSITIVITIES - IDRS, VR AND SENIOR DEBT The ratings are highly sensitive to the group's success in restoring its capital base to a pre-transaction level within a short timeframe. Any deviation in the implementation of the capital-related measures, including in particular any setback in the sale of profit shares by member banks, could result in a downgrade. While unexpected, downward pressure on OP-Pohjola's ratings could also be caused by significant investment losses in the group's insurance operations materially affecting capitalisation. At present, given the group's weakened capital position, an upgrade is not possible. In the medium term, with capital restored, Fitch still views an upgrade as unlikely given the group's small size and greater geographical concentration compared with similarly rated peers. This is accentuated by the contingent risk of capital needs that the insurance businesses still pose to the group's capital base. KEY RATING DRIVERS - SUPPORT RATINGS AND SUPPORT RATING FLOORS OP-Pohjola's and Pohjola Bank's Support Ratings and Support Rating Floors reflect Fitch's expectation that there is an extremely high probability that support would be forthcoming from the Finnish authorities if required. This is driven by the entities' importance within the Finnish financial sector. In Fitch's view, there is a clear intention ultimately to reduce implicit state support for financial institutions in the EU, as demonstrated by a series of legislative, regulatory and policy initiatives. We expect the EU's Bank Recovery and Resolution Directive (BRRD) to be implemented into national legislation in 2H14 or in 1H15. We also expect progress towards the Single Resolution Mechanism (SRM) for eurozone banks in this timeframe. In Fitch's view, these two developments will dilute the influence Finland has in deciding how Finnish banks are resolved and increase the likelihood of senior debt losses in its banks if they fail solvability assessments. RATING SENSITIVITIES - SUPPORT RATINGS AND SUPPORT RATING FLOORS The Support Ratings and Support Rating Floors are primarily sensitive to further progress made in implementing the BRRD and the SRM. The directive requires 'bail in' of creditors by 2016 before an insolvent bank can be recapitalised with state funds. A functioning SRM and progress on making banks 'resolvable' without jeopardising the wider financial system are areas of focus for eurozone policymakers. Once these are implemented they will become an overriding rating factor, as the likelihood of the bank's senior creditors receiving full support from the sovereign, if ever required, despite its systemic importance will diminish substantially. Fitch expects that the BRRD will be enacted into EU legislation in the near term and progress made on establishing the SRM is looking close to being ready in the next one to two years. Fitch expects to then downgrade OP-Pohjola's and Pohjola Bank's Support Ratings to '5' and revise down their Support Rating Floors to 'No Floor'. The Support Ratings and Support Rating Floors are also sensitive to a change in Fitch's assumptions about the sovereign's ability (for example, triggered by a downgrade of Finland's sovereign rating) to provide support. KEY RATING DRIVERS AND SENSITIVITIES - SUSBIDIARY AND AFFILIATED COMPANY Given the cross-support mechanism between Pohjola Bank and the OP-Pohjola group, Pohjola Bank's debt ratings are aligned with OP-Pohjola's, and its ratings are sensitive to the same factors that might drive a change in OP-Pohjola's Long-term IDR. Fitch does not assign Pohjola Bank a VR. KEY RATING DRIVERS AND SENSITIVITIES - SUBORDINATED DEBT AND OTHER HYBRID SECURITIES Subordinated debt issued by Pohjola Bank is notched down from OP-Pohjola's VR, given that Fitch does not assign a VR to the subsidiary. Its rating has been affirmed and is broadly sensitive to the same considerations that might affect the group's VR. In accordance with Fitch's criteria 'Rating Bank Regulatory Capital and Similar Securities', subordinated (lower Tier 2) debt is rated one notch below OP-Pohjola's VR to reflect above- average loss severity of this type of debt. The rating actions are as follows: OP-Pohjola Group Long-term IDR: affirmed at 'A+'; Outlook Stable Short-term IDR: affirmed at 'F1' Viability Rating: affirmed at 'a+' Support Rating: affirmed at '1' Support Rating Floor: affirmed at 'A' Pohjola Bank Long-term IDR: affirmed at 'A+'; Outlook Stable Short-term IDR: affirmed at 'F1' Support Rating: affirmed at '1' Support Rating Floor: affirmed at 'A' Long-term senior debt: affirmed at 'A+' Short-term senior debt: affirmed at 'F1' Subordinated debt: affirmed at 'A' Commercial paper: affirmed at 'F1' Contact: Primary Analyst Olivia Perney Guillot Senior Director +33 144 299 174 Fitch France S.A.S 60 Rue de Monceau 75008 Paris Secondary Analyst Bjorn Norrman Director +44 20 3530 1330 Committee Chairperson Eric Dupont Senior Director +33 1 44 29 9 131 Media Relations: Elaine Bailey, London, Tel: +44 203 530 1153, Email: Elaine.Bailey@fitchratings.com. Applicable criteria, 'Global Financial Institutions Rating Criteria', dated 31 January 2014, are available at www.fitchratings.com. Applicable Criteria and Related Research: Global Financial Institutions Rating Criteria 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.

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