December 15, 2017 / 4:45 PM / 10 months ago

Fitch Affirms UniCredit at 'BBB'; Stable Outlook

(The following statement was released by the rating agency) LONDON/MILAN, December 15 (Fitch) Fitch Ratings has affirmed UniCredit S.p.A.'s Long-Term Issuer Default Rating (IDR) at 'BBB' and its Viability Rating (VR) at 'bbb'. 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, DERIVATIVE COUNTERPARTY RATING (DCR) AND SENIOR DEBT UniCredit's ratings reflect Fitch's expectation that the bank will continue to reduce its legacy NPLs in line with its updated strategic plan and maintain capitalisation with satisfactory buffers over regulatory minimums and generally in line with its peers. Fitch believes that the bank has made good progress in implementing its strategic plan, which it recently updated, and that it is in a good position to meet its planned targets. In Fitch's view, UniCredit's asset quality will remain weaker than most of its European peers' even after the reduction envisaged by 2019, and capital, which benefits from the capital strengthening in 2017, remains burdened by an above-average level of unreserved impaired loans when compared to banks in other European countries. Our assessment of UniCredit also considers that the parent bank's asset quality and returns remain weaker than at other parts of the group, and we believe that the group's risk profile remains correlated with the operating environment in its Italian home market. The ratings also reflect the group's broad and diversified international franchise, measures that the bank has taken to reduce operating expenses, and a good and diversified funding and liquidity profile. The EUR13 billion capital increase completed in March 2017, the disposal of asset management company Pioneer and subsidiary Bank Pekao, in addition to initiatives already completed in late 2016, all contributed to the 13.8% fully loaded CET1 ratio reported by the group at end-September 2017. The bank expects some capital erosion from the first time adoption of IFRS 9, business growth and the anticipation of certain regulatory changes (eg EBA guidelines) but plans to operate with capital levels that are satisfactorily above regulatory minimums. UniCredit plans to operate with a minimum CET1 ratio of 12.5% and a CET1 capital buffer above the regulatory minimum including buffers of 250bp by end-2019 and to maintain these capital levels thereafter. The combined effect of the capital strengthening and NPL reductions has led to net impaired loans accounting for just above 43% of Fitch Core Capital (FCC) at end-9M17, which is still high when compared with global peers, but which has improved significantly from about 70% at end-2016 and is stronger than at most Italian peers. Fitch expects a further reduction in capital encumbrance by impaired loans as the bank continues to reduce NPLs as planned. During 2017, UniCredit completed the disposal of a 50%+ vertical tranche of a EUR17.7 billion Italian doubtful loan securitisation transaction to two institutional investors, and has announced the disposal of an additional 30% tranche to be completed by end-1Q18. In addition it has sold smaller portfolios of doubtful loans for a total of over EUR2 billion in 2017 to date. As a result of these transactions, the bank reported a 10.4% impaired loan ratio at end-9M17 down from 16% at end-2016. The bank increased its targeted reduction of impaired loans by EUR4 billion and now expects to reduce gross loans in its non-core unit by EUR15 billion by end-2019 which should lead to a consolidated gross non-performing exposure (NPE) ratio of 7.8%, as calculated by the bank, by end-2019, lower than the 8.4% announced in late 2016. UniCredit recently announced that the residual EUR17.2 billion non-core assets remaining at end-2019 will be run down entirely by end-2025. Fitch expects the bank to achieve the planned NPE reduction, which will improve asset quality. However, UniCredit's targeted end-2019 NPE ratio will still remain materially higher than the end-September 2017 EU average of 4.4%. UniCredit's operating profit started to improve in 2017, in line with our expectations, following the balance-sheet clean-up undertaken in late 2016 and early 2017. Operating profit in 9M17 included the benefits of lower loan impairment charges, and the gradual effect of cost restructuring measures, a large part of which were completed ahead of initial plans. We expect profitability to improve further, despite the continued pressure on asset margins as the bank has been successful in increasing commission income. Geographical diversification, particularly in more stable and highly rated economies such as Germany and Austria, has proved key to supporting the group's overall risk profile. However, Fitch considers that the parent bank's risk profile is still correlated with that of the Italian sovereign and with the operating environment in Italy. Fitch believes that the bank has made good progress in reducing its risk appetite, and a successful record in originating low-risk business will be important for the bank to maintain good asset quality in its core banking operations outside the non-core unit. UniCredit's 'F2' Short-Term IDR, the higher of the two possibilities for a 'BBB' Long-Term IDR under our criteria, reflects its well-diversified funding and its good liquidity, which in our opinion benefit from the group's direct presence in, and market access to investors in strong European countries, but also its ability to access non-European markets. The rating of senior debt issued by UniCredit's funding vehicles, UniCredit Bank (Ireland) plc, and UniCredit International Bank Luxembourg SA is equalised with that of the parent because it is unconditionally and irrevocably guaranteed by UniCredit, and Fitch expects the parent to honour this guarantee. UniCredit's DCR is at the same level as its Long-Term IDRs because in Italy derivative counterparties have no preferential legal status over other senior obligations in a resolution scenario. SUPPORT RATINGS AND SUPPORT RATING FLOORS The Support Rating and Support Rating Floor reflect Fitch's view that senior creditors cannot rely on receiving full extraordinary support from the sovereign if a bank becomes non-viable. The EU's Bank Recovery and Resolution Directive and the Single Resolution Mechanism for eurozone banks provide a framework for resolving banks that requires senior creditors to participate in losses, if necessary, instead of/or ahead of a bank receiving sovereign support. SUBORDINATED DEBT AND OTHER HYBRID SECURITIES Subordinated debt and other hybrid capital securities issued by the banks are notched down from their respective VRs in accordance with Fitch's assessment of each instrument's respective non-performance and relative loss-severity risk profiles. Tier 2 subordinated debt is rated one notch below the VRs for loss severity to reflect below-average recovery prospects. No notching is applied for incremental non-performance risk because writedown of the notes will only occur once the point of non-viability is reached and there is no coupon flexibility before non-viability. The legacy Upper Tier 2 debt rating reflects its higher loss severity given its subordination to senior unsecured and subordinated Tier 2 obligations (two notches) and incremental non-performance risk (one notch) for its cumulative coupon deferral subject to constraints. Legacy Tier 1 notes are notched down four times from the VR, two notches for loss severity for deep subordination and another two for non-performance risk as coupon deferral is constrained by look-back clauses. Additional Tier 1 notes are rated five notches below the VRs, two notches for loss severity relative to senior unsecured creditors and three notches for incremental non-performance risk, the latter notching reflecting the instruments' fully discretionary interest payment. RATING SENSITIVITIES VR, IDRS, SENIOR DEBT AND DCR UniCredit's ratings remain sensitive to the operating environment in Italy, particularly as this affects asset quality and earnings. A notable improvement in the domestic economy could be beneficial for the ratings if accompanied by further substantial reduction of impaired loans. An upgrade of UniCredit's ratings would require a material further improvement in asset quality and a successful record of consistent internal capital generation from the group's operating profit while maintaining its reduced risk appetite. The ratings could be downgraded if progress in reducing the remaining stock of impaired exposures slows down and if the bank does not meet its targets. The ratings could also be downgraded if there is material slippage in its cost reduction plan, although we currently do not expect this given the bank's good progress on managing expenses. It is possible that Fitch will assign common VRs to UniCredit and its German subsidiary, UniCredit Bank AG (HVB), to reflect the increasingly close integration between the two legal entities. Capital and funding are progressively becoming more fungible across the group, as shown by the repatriation of EUR3 billion capital from the German subsidiary to the parent during 2017. The German subsidiary is also large in relation to the group, highly integrated into the parent and supervised by the same regulator, the ECB. Further clarity on the group's resolution plan could indicate that capital has become more fungible, particularly if accompanied by the preplacement of internal loss-absorbing capital from UniCredit into HVB. The ratings of the senior debt issued by UniCredit's funding vehicles, UniCredit Bank (Ireland) plc, and UniCredit International Bank Luxembourg SA, are sensitive to the same considerations as the senior unsecured debt issued by the parent. SUPPORT RATING AND SUPPORT RATING FLOOR An upgrade of the SR and any upward revision of the SRF would be contingent on a positive change in the sovereign's propensity to support Italian banks. While not impossible, this is highly unlikely, in Fitch's view. SUBORDINATED DEBT AND OTHER HYBRID SECURITIES The subordinated debt and hybrid securities' ratings are primarily sensitive to changes in the VR, from which they are notched. The ratings are also sensitive to a change in the notes' notching, which could arise if Fitch changes its assessment of their non-performance relative to the risk captured in the VRs or their expected loss severity. For Additional Tier 1 issues this could reflect a change in capital management or flexibility, or an unexpected shift in regulatory buffers and requirements, for example. The rating actions are as follows: UniCredit S.p.A. Long-Term IDR: affirmed at 'BBB' Outlook Stable Short-Term IDR: affirmed at 'F2' VR: affirmed at 'bbb' DCR: affirmed at 'BBB(dcr)' SR: affirmed at '5' SRF: affirmed at 'No Floor' Senior unsecured debt: affirmed at 'BBB', 'F2' Tier 2 notes: affirmed at 'BBB-' Legacy Upper Tier 2 notes: affirmed at 'BB' Preferred stock: affirmed at 'BB-' AT 1 Notes: affirmed at 'B+' UniCredit Bank (Ireland) p.l.c. (no issuer ratings assigned): Senior unsecured notes: affirmed at 'BBB' UniCredit International Bank (Luxembourg) S.A. (no issuer ratings assigned): Senior unsecured notes: affirmed at 'BBB' Contact: Contact: Primary Analyst Francesca Vasciminno Senior Director +39 02 879087 225 Fitch Italia S.p.A. Via Privata Maria Teresa, 8 20123 Milan Secondary Analyst Gianluca Romeo Director +39 02 8790 87 201 Committee Chairperson Christian Scarafia Senior Director +44 20 3530 1012 Media Relations: Peter Fitzpatrick, London, Tel: +44 20 3530 1103, Email: peter.fitzpatrick@fitchratings.com. 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