January 30, 2013 / 5:36 PM / 5 years ago

TEXT-Fitch affirms Bank Pekao SA, Pekao Bank Hipoteczny

Jan 30 - Fitch Ratings has affirmed Poland-based Bank Pekao SA's (Pekao)
Long-term Issuer Default Rating (IDR) at 'A-' with a Stable Outlook.
Simultaneously, Fitch has affirmed the ratings of Pekao's subsidiary, Pekao Bank
Hipoteczny (Pekao BH). A full list of rating actions is at the end of this
release.

RATING ACTION RATIONALE: Pekao
Pekao's Long- and Short-term IDRs are based on its intrinsic strength, reflected
in its Viability Rating (VR) of 'a-'. The IDRs and VR reflect the bank's stable
and diversified funding base, ample capitalisation and strong franchise as well
as consistency in conservative credit and market risk management. These factors
have made Pekao more resilient to the deterioration in the operating environment
during the crisis compared with peers, and in Fitch's view give the bank
sufficient flexibility to accommodate any negative impact from the slowing
Polish economy.

The affirmation of Pekao's '2' Support Rating reflects Fitch's view that even
after the successful closing of the announced offer to sell the 9.1% stake in
Pekao , UniCredit S.p.A. (UC; 'A-'/Negative) will remain a majority shareholder
and will continue to have a high propensity to provide support to Pekao, given
the strategic importance of Polish banking operations to UC. However, at the
current rating levels, Pekao's IDRs do not benefit from support available from
UC.
The Stable Outlook on Pekao's Long-term IDR reflects Fitch's view on the outlook
for Pekao's standalone risk profile as well as the Stable Outlook on Poland's
sovereign ratings (foreign currency Long-term IDR 'A-'/Stable).

RATING ACTION DRIVERS - Pekao -, IDRs, VR
Pekao is a universal bank with the second-largest market share in Poland by
total assets, serving more than four million customers. Pekao's deposit
franchise is a key rating strength. Customer deposits (including liabilities
related to certificates of deposit issued) accounted for 89% of the bank's
non-equity funding at end-Q312. The structure of the deposit base is quite
stable with corporate deposits accounting for around 53% of the deposit base
excluding repo transactions. The share of foreign-currency deposits was stable
at around 15%.

The share of retail loans in Pekao's loan book increased over 9M12 to around 40%
of the total, but the bank is still predominantly a corporate lender. Industry
concentrations in the corporate loan book are not excessive and did not change
materially over 9M12. Individual concentrations measured by the 20 largest on
and off balance sheet exposures increased over 9M12, but they were still
moderate relative to Fitch Core Capital (FCC) at end-Q312.

At end-Q312, the asset quality of Pekao's Polish operations was better than the
sector average (impaired loans ratio of 7.1% vs. 8.8%), but deteriorated faster
than for the sector over 9M12 reflecting pressures in the corporate book.
Including the Ukrainian operations, the consolidated impaired loans ratio stood
at 7.4% at end-Q312. The coverage of impaired exposures (including incurred but
not reported credit losses) fell over 9M12 to 68% (still above the market
average) from 73% at end-2011, reflecting recoveries of existing impaired
exposures and collateral values for cases newly recognized as impaired.

Pre-impairment operating profitability remained intact and improved marginally
faster than for the sector as a whole in 9M12 (6% up for Pekao and around 4% for
the sector). Annualised impairment charges remain within a narrow band of
between 60-80bps of average gross loans quarterly.

The bank maintains very strong capital levels with a FCC / risk weighted assets
(RWA) ratio of 21% at end-Q312. Internal capital generation remained strong,
while RWA growth was muted over 9M12. We expect profitability to be solid in
2013, while RWA growth could be even slower than in 9M12 reflecting the expected
slowdown in GDP growth.

The risk in the CHF-denominated mortgage portfolio is contained. The exposure
amounted to PLN5.4bn or around 25% of FCC. The product is a legacy originated by
BPH before the merger with Pekao and was discontinued in summer 2006. This
reduces pressures on loan to value ratios (LTVs). Mortgage loans in local
currency remain (alongside cash loans) Pekao's key lending products for retail
customers.

RATING SENSITIVITIES - Pekao -, IDRs, VR
Within Fitch's base case scenario, Pekao's ratings will not be impacted by
limited further possible downgrade of UC's Long-term IDR, given the agency's
view of only moderate contagion risk for Pekao from negative developments at UC.
This reflects Pekao's low dependence on group and wholesale funding, its robust
domestic franchise and a strong local regulator, which in Fitch's view would be
very unlikely to permit excessive transfers of capital and liquidity from Polish
banks to their foreign parents. Pekao's ratings would only be likely to come
under negative pressure in case of a multi-notch downgrade of UC, which Fitch
does not anticipate at present.

An upgrade of Pekao's VR and IDRs is unlikely in the short to medium term, given
the weakening operating environment and pressure on UC's credit profile. Pekao's
VR is currently not constrained by the sovereign rating, so positive rating
action on Poland's sovereign ratings would not result in upgrades of Pekao's
ratings.

Pekao could be downgraded in case of further escalation of the eurozone crisis,
which could result in increased loan impairment charges due to a less supportive
operating environment locally. Any negative action on Poland's sovereign ratings
could also put downward pressure on Pekao's ratings.

RATING SENSITIVITIES - Pekao -, SUPPORT RATING
In Fitch's view UC's propensity to support Pekao will remain strong. Pekao's
Support Rating could be downgraded, however, in case of a downgrade of UC's
Long-term IDR to 'BBB-' or below, although Fitch views such a scenario as
unlikely at present. Any downgrade of the Support Rating would likely be limited
to one notch given the systemic importance of the bank for the Polish banking
sector and the potential for support, if needed, from the Polish authorities.

An upgrade of Pekao's Support Rating would require UC's Long-term IDR to be
upgraded to 'A' or above.

RATING ACTION RATIONALE, DRIVERS AND SENSITIVITIES: Pekao BH
The affirmation of Pekao BH's ratings reflects Fitch's view that it is a core
subsidiary for Pekao, as a result of which Pekao BH's IDRs are equalised with
those of its parent and share the same Stable Outlook. Pekao BH's IDRs will
likely move in tandem with those of Pekao.


Pekao BH is a specialised mortgage lender involved in financing residential and
commercial real estate through lending to private individuals and corporate
customers. At end-Q312, Pekao BH's gross loans accounted for 1.7% of Pekao's
consolidated gross loan book.

The rating actions are:

Bank Pekao
Long-term foreign currency IDR: affirmed at 'A-', Outlook Stable
Short-term foreign currency IDR: affirmed at 'F2'
Viability Rating: affirmed at 'a-'
Support Rating: affirmed at '2'

Pekao BH
Long-term foreign currency IDR: affirmed at 'A-', Outlook Stable
Short-term foreign currency IDR: affirmed at 'F2'
Support Rating: affirmed at '1'
National Long-term rating: affirmed at 'AA(pol)', Outlook Stable
National Short-term rating: affirmed at 'F1+(pol)'


Additional information is available at 'www.fitchratings.com'.

The ratings above were solicited by, or on behalf of, the issuer, and therefore,
Fitch has been compensated for the provision of the ratings.

Applicable criteria, 'Global Financial Institutions Rating Criteria', dated 15
August 2012, 'Rating FI Subsidiaries and Holding Companies', dated 10 August
2012, Evaluating Corporate Governance, dated 12 December 2012, 'Rating Financial
Institutions Above the Sovereign', dated 11 December 2012 are available at
www.fitchratings.com.

Applicable Criteria and Related Research:
Global Financial Institutions Rating Criteria
Rating FI Subsidiaries and Holding Companies
Evaluating Corporate Governance
Rating Financial Institutions Above the Sovereign

Our Standards:The Thomson Reuters Trust Principles.
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