February 6, 2014 / 2:36 PM / 4 years ago

Fitch Affirms OP-Pohjola at 'A+' on Announcement of Pohjola Bank Acquisition

(The following statement was released by the rating agency) PARIS/LONDON, February 06 (Fitch) Fitch Ratings has affirmed OP-Pohjola Group's Long-term Issuer Default Rating (IDR) at 'A+', Short-term IDR at 'F1', and Viability Rating (VR) at 'a+' on the announcement that OP-Pohjola Group Central Cooperative will make a public tender offer for all the shares in Pohjola Bank it does not own for around EUR3.4bn. The Outlook on the Long-term IDR is Stable. A full list of rating actions is at the end of this rating action commentary. KEY RATING DRIVERS - VR, IDRS AND SENIOR DEBT The affirmation of OP-Pohjola's IDRs and VR reflects Fitch's view that the transaction is strategically positive for the group, enabling it to strengthen internal capital generation and allowing for further structural rationalisation. Fitch expects that although the negative impact on the group's capitalisation will be significant, it will be fully offset over the next two years by measures implemented by the group. OP-Pohjola Group Central Cooperative is the central institution of the OP-Pohjola group, owned by the cooperative member banks. It currently owns 37% of Pohjola Bank, the central financial institution of the group, and 61% of the voting rights. Other member institutions own 26% of Pohjola Bank with 37% held by external investors. By acquiring the shares in Pohjola Bank it does not own from member institutions and external shareholders, OP-Pohjola Group Central Cooperative will become the sole owner of Pohjola Bank. Once the transaction is completed, expected in 2Q14, Pohjola Bank's net income will be fully retained, strengthening the group's internal capital generation. In addition, this will simplify the group's management by business division and allow for some cost and revenue synergies, albeit not significant. In Fitch's view, this will reinforce the group's pre-impairment profitability levels, which although healthy, have been lagging those of some Nordic peers, and its ability to absorb unexpected shocks. The transaction has no impact on the group's risk profile as Pohjola Bank was already fully consolidated. Fitch expects asset quality to remain strong. The main negative impact of the transaction will be the weakening of capitalisation. Based on end-2013 data, Fitch estimates that the group's Fitch core capital ratio will fall to around 9.5% from 16.6% on a pro-forma basis, a level which would not be commensurate with the rating in the long term. The affirmation and Stable Outlook is based on Fitch's expectation that the group will restore its Fitch core capital ratio to at least a pre-transaction level by early 2016. OP-Pohjola has presented appropriate measures to achieve this, and Fitch takes comfort from management's strong track record and ability to deliver on its objectives. The bulk of new Tier 1 capital will be raised by the cooperative member banks through the issuance of around EUR1.3bn profit shares over 2014 and 2015. These will be sold to retail customers. Fitch expects them to be attractive as they offer a higher yield than term deposits and current co-operative capital that the group is re-issuing on a continuous basis. The remainder of Tier 1 capital will be generated through retained earnings. Based on the structure of the transaction, OP-Pohjola will have to fund around EUR2bn externally. Fitch expects the group to be able to do this with relative ease. OP-Pohjola is less wholesale funding reliant than most Nordic peers, with about 70% of the group's loan book funded by customer deposits. While it is sensitive to a prolonged dislocation in wholesale funding markets, it benefits from the need to issue only a relatively small amount of debt, providing diversification to eurozone investors. Adding EUR2bn to its 2014 funding plans (largely through covered bond issuance) will allow the group to be slightly more present in the funding markets, and Fitch expects good market appetite. Funding risk is further mitigated by a large liquidity buffer and minimal maturity gaps. OP-Pohjola Group's ratings are also underpinned by sustained prudent risk management, good asset quality and its strong Finnish franchise. They also factor in insurance-related investment risk, particularly in light of the group's relatively small amount of capital, and limited geographical diversification. The ratings of Pohjola Bank are aligned with those of OP-Pohjola, as a result of the group's support mechanism. RATING SENSITIVITIES - VR, IDRS AND SENIOR DEBT The ratings are highly sensitive to the group's success in restoring its capital base to a pre-transactional level within a short timeframe. Any deviation in the implementation of the capital-related measures, including in particular any set-back in the sale of profit shares by member banks, could result in a downgrade. While unexpected, downward pressure on OP-Pohjola's ratings could 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 relatively 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 pose to the group's capital base, although the group has actively reduced this risk. KEY RATING DRIVERS - SUPPORT RATING AND SUPPORT RATING FLOOR OP-Pohjola's Support Rating and Support Rating Floor 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 OP-Pohjola's importance within the Finnish financial sector. RATING SENSITVITIES - SUPPORT RATING AND SUPPORT RATING FLOOR The Support Rating and Support Rating Floor are potentially sensitive to any change in Fitch's assumptions about the ability (as reflected in its ratings) or willingness of the Finnish state to provide timely support to the bank, if required. They are also sensitive to a change in Fitch's assumptions around the availability of sovereign support for banks more generally. 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. Fitch has released three research reports on its approach in incorporating support in its bank ratings in light of evolving support dynamics for banks worldwide (see "Fitch Outlines Approach for Addressing Support in Bank Ratings" and "Bank Support: Likely Rating Paths", both released in September 2013 and "Sovereign Support for Banks" released in December 2013, at www.fitchratings.com). The Support Rating would be downgraded and the Support Rating Floor revised down if Fitch concludes that potential sovereign support has weakened relative to its previous assessment. KEY RATING DRIVERS AND SENSITIVITIES - SUBSIDIARY 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 are notched down once from OP-Pohjola's VR, as Fitch does not assign a VR to the subsidiary. In accordance with Fitch's criteria ' Assessing and Rating Bank Subordinated and Hybrid Securities', subordinated (lower Tier 2) debt is rated one notch below OP-Pohjola's VR to reflect below average loss severity of this type of debt when compared to average recoveries. The ratings of the subordinated debt are broadly sensitive to the same considerations that might affect the group's VR. The rating actions are as follows: OP-Pohjola 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 1 44 29 91 74 Fitch France S.A.S. 60 Rue de Monceau 75008 Paris Secondary Analyst Bjorn Norrman Director +44 20 3530 1330 Committee Chairperson Cristina Torrella Senior Director +34 93 323 8405 Media Relations: Hannah Huntly, London, Tel: +44 20 3530 1153, Email: hannah.huntly@fitchratings.com. Additional information is available on www.fitchratings.com Applicable criteria, "Assessing and Rating Bank Subordinated and Hybrid Securities", dated 31 January 2014, and "Global Financial Institutions Rating Criteria," dated 31 January 2014, are available at www.fitchratings.com. Applicable Criteria and Related Research: Assessing and Rating Bank Subordinated and Hybrid Securities Criteria here 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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