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Fitch Affirms Bank Ochrony Srodowiska at 'BBB'; Outlook Negative
April 23, 2014 / 4:42 PM / in 4 years

Fitch Affirms Bank Ochrony Srodowiska at 'BBB'; Outlook Negative

(The following statement was released by the rating agency) WARSAW/LONDON/MOSCOW, April 23 (Fitch) Fitch Ratings has affirmed Bank Ochrony Srodowiska's (BOS) Long-Term Issuer Default Rating (IDR) at 'BBB' with a Negative Outlook, its Support Rating (SR) at '2' and Support Rating Floor (SRF) at 'BBB'. The bank's Viability Rating was affirmed at 'bb'. A full list of rating actions is available at the end of this rating action commentary. KEY RATING DRIVERS - IDRS, SR, SRF BOS's Long-term Issuer Default Rating (IDR), SRF and SR reflects Fitch's view of the high probability of support from the Polish sovereign (A-/Stable) in case of need. This view reflects the state's indirect majority shareholding in the bank, BOS's important role in financing the country's environment protection projects and potential reputational damage for the state should the bank default. At the same time, the IDRs also take into consideration BOS's limited systemic importance, the absence of any direct state participation in the bank's capital, and its rather narrow policy role. The Polish sovereign controls BOS through the state-owned National Fund for Environment Protection and Water Management (the Fund), which had a 56.6% stake in the bank at end-2013. The Fund considers BOS a strategic investment and Fitch notes that it cannot reduce its shareholding in the bank without government approval. RATING SENSITIVITIES - IDRS, SR, SRF The Negative Outlook on BOS's Long-term IDR reflects the likelihood of BOS's SR and SRF being respectively downgraded and revised downwards within the next one to two years. This is based on further progress being made in implementing the legislative and practical aspects of enabling effective bank resolution frameworks, which is likely to reduce implicit sovereign support for banks in the EU. This is likely to occur through national implementation of the provisions of the Bank Recovery and Resolution Directive (see Fitch Revises Outlooks on 18 EU State-sponsored Banks to Negative on Weakening Support, dated 26 March 2014 and Rating Paths for EU State-Sponsored Banks, dated 14 April 2014, all available at Fitch expects BOS's SRF to be revised down to a high 'BB' level within the next one to two years. The degree of the downward revision of the SRF will most likely determine the extent of the downgrade of BOS's Long-term IDR, given the limited upside potential of the bank's Viability Rating (bb). BOS will benefit from some form of continued state sponsorship considerations that Fitch is likely to continue to factor into its SR and SRF. A downgrade of the Polish sovereign could lead to a similar action on BOS's ratings, although this is unlikely at present given the Stable Outlook on the sovereign. BOS's IDRs could be downgraded if the Fund's stake falls below 50% - which Fitch considers unlikely - or if timely support is not made available to BOS if required. KEY RATING DRIVERS AND SENSITIVITIES - VR BOS's VR of 'bb' is constrained by its weak franchise and considerable single name concentrations in its loan book. The bank's small size and market shares (1.3% of the banking sector's total assets at end-2013) weigh on its margins and translate into low operational efficiency. BOS's profitability is the lowest among rated Polish peers, reflecting the bank's small size, a significant proportion of low-yield loans and fairly high funding costs. In 2013, the brokerage house subsidiary, DOM Maklerski BOS S.A., contributed a material 16.7% to the bank's consolidated net profit. BOS's VR also reflects a moderate share of retail savings in the bank's total deposit base, material reliance on corporate deposits and wholesale debt markets and only adequate capitalisation. Large single name concentrations are mainly within the bank's "green" loan portfolio (23% of total gross loans at end-2013). They are predominantly project finance exposures in renewable energy, in particular wind farm projects. Credit risks related to this form of financing are amplified by regulatory risks as wind farms rely on state subsidies. At end-2013, total loans to wind farm developers accounted for around a quarter of the "green" portfolio or 6% of total gross loans. The bank's overall loan book quality compares well with that of its Polish peers, reflecting a high share of low-risk exposures to the public finance sector (24% of total gross loans at end-2013). At end-2013, its total reported impaired loans ratio (6.7%) was below the sector average (7.3%). The bank takes a conservative approach to impaired loan reporting. It reports all exposures showing evidence of impairment as impaired, whereas the industry standard is to account only for loans with actual impairment identified. Using the industry standard approach, BOS's impaired loans ratio would have been 5.5%. A substantial portion of impaired loans in the corporate book are legacy exposures to the construction/real estate sector but the bank expects to continue to make additional impairment charges against them in 2014 as the loans are being restructured . The bank's retail portfolio quality is likely to continue to weaken, but only gradually, due to the seasoning of housing loans and, to a lesser extent, a higher proportion of unsecured consumer loans. Majority of the bank's funding comes from customer deposits (68%). However, the majority of them (57%) are corporate deposits that tend to be concentrated. Another 16 % of funding comes from domestic and foreign wholesale markets. The largest deposits are not stable, as evidenced by the bank's expectation of around PLN0.5bn deposit withdrawal (or 2.7% of end-2013 total funding) by public finance entities by mid-2014 due to changes in Polish legislation. The bank has informed Fitch that this outflow has been largely mitigated in 1Q14 by new customer deposits. The bond repayment schedule was manageable at end-2013, although BOS faces a substantial maturing eurobond (PLN1bn equivalent, or 6% of total funding) in May 2016. In Fitch's view the bank's efforts to increase the share of retail deposits and refinancing of the eurobonds amid expected weakening of state support may increase the overall cost of funding. BOS's total liquidity buffer partly reflects a need to cover volatile deposits placed by the Polish Power Exchange (PPE). Fitch believes that the likely outflow of these fairly cheap liquidity resources in 2014 will not materially weaken the bank's liquidity position, but will put additional pressure on its margins. BOS's pool of highly liquid assets, adjusted for the deposits from PPE, increased to PLN2.6bn at end-1Q14 from PLN1.8bn at end-2013, driven by active acquisition of customer deposits. It covered around 16% of total liabilities (adjusted). Fitch considers BOS's capitalisation only adequate in view of its substantial unreserved NPLs (equal to 40% of Fitch core capital (FCC) at end-2013) and loan book growth (2013: up 8.2% yoy), while internal capital generation is modest. At end-2013, the FCC ratio weakened to 10.4% (2012: 12.4%), reflecting accelerated loan growth. KEY RATING SENSITIVITIES - VR A further substantial increase of BOS's exposure to pro-ecological project financing, through rising single-name concentrations, could lead to a downgrade of the bank's VR. Also a continued period of loan growth exceeding the bank's internal capital generation and/or any potential significant pressures on the bank's funding costs or liquidity would likely result in a downgrade of the VR. Upside potential for the VR is limited due to BOS's weak franchise and considerable credit risk concentrations. BOS is a small universal bank in Poland with a strong environmental focus. At end-2013, it represented 1.2% and 0.88% of the banking sector total loans and retail deposits, respectively. The bank has built a strong footprint in financing environmentally friendly projects in Poland. BOS has been listed on the Warsaw Stock Exchange since 1997. The rating actions are as follows: Bank Ochrony Srodowiska: Long-Term Foreign Currency IDR: affirmed at 'BBB'; Outlook Negative Short-Term Foreign Currency IDR: affirmed at 'F3' Viability Rating: affirmed at 'bb' Support Rating: affirmed at '2' Support Rating Floor: affirmed at 'BBB' BOS Finance AB Long-term senior unsecured debt: affirmed at 'BBB' Contact: Primary Analyst Michal Bryks, ACCA Director +48 42 338 6293 Fitch Polska S.A. Krolewska 16, 00-103 Warsaw Secondary Analyst Agata Gryglewicz Associate Director +48 22 330 6970 Committee Chairperson James Watson Managing Director +7 495 956 6657 Media Relations: Hannah Huntly, London, Tel: +44 20 3530 1153, Email:; Malgorzata Socharska, Warsaw, Tel: +48 22 338 62 81, Email: Additional information is available on Applicable criteria, Global Financial Institutions Rating Criteria, dated 31 January 2014 are available at are available at Applicable Criteria and Related Research: Global Financial Institutions Rating Criteria here Rating Paths for EU State-Sponsored Banks 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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