Fitch: Bank Austria's Capital Increase Paves Way for CEE Spin-off
While this is positive for the bank's stand-alone credit profile, it has no direct rating implications. The ratings already reflect our expectation that UC will ensure that Bank Austria maintains a comfortable capital buffer immediately after it spins off its central and eastern European (CEE) business.
On 5 August, Bank Austria's annual general meeting approved the demerger of the bank's CEE operations. Minority shareholders with golden shares, the workers' council and a fund related to the City of Vienna gave their final consent. In our view, these decisions create a high likelihood that the regulators will follow suit shortly and that the planned transfer of the CEE operations to a new entity owned by UC will go ahead with effect from 1 October 2016.
We estimate that UC's EUR1bn cash contribution on 4 August will improve Bank Austria's (CET1) capital ratio post-transfer by roughly 250bps to about 14%. This should offer sufficient flexibility to address the downsized Bank Austria's restructuring costs in domestic retail banking in light of the bank's lower-risk profile post CEE spin-off.
The CEE-related assets reclassified as held for sale on the balance sheet of Bank Austria at end-1H16 account for roughly half of its total assets of EUR194bn and three quarters of its risk-weighted assets of EUR129bn. Once these assets are transferred, the bank will comprise three segments: retail & corporates (commercial banking), corporate and investment banking (CIB) and a small private banking business. Its Austrian-focused profile will greatly improve its asset quality: at end-1H16, its non-performing loan ratio was 4.7% in Austria compared with 10.8% in CEE.
The spin-off will lower Bank Austria's profit volatility but also weaken recurring internal capital generation as CEE has historically generated the vast majority of profits. The robust EUR877m pre-tax profit (0.92% pre-tax RoRWA) in CEE in 1H16 contrasts with the domestic business's pre-tax loss of EUR36m. However, taking into account its lower-risk profile, we believe that the domestic business remains reasonably profitable when adjusted for (i) the share of the corporate centre attributable to Austria, (ii) the share of the Austrian bank levy attributable to 2H16 but booked in 1H16, and (iii) restructuring costs relating to the planned transfer of defined-benefit obligations for active staff to the Austrian state pension system.
Profit generation post spin-off will be dominated by the corporate banking business (commercial banking and CIB), which we expect to remain reasonably profitable through the cycle as Bank Austria's leading franchise will mitigate recurring domestic margin pressure. Margin pressure, however, increases the restructuring expenses to turn around Bank Austria's high-cost, currently unprofitable Austrian retail operations in the next few years. Over the medium term, the Austrian government's plan to reduce the bank levy will provide some relief.
We believe that the CEE transfer, combined with the restructuring of domestic operations, will, on balance, have broadly neutral implications for Bank Austria's risk/return profile. However, asset quality and capital challenges in Italy could prompt us to revise the parent's ratings. This, in turn, could affect Bank Austria's ratings as we expect to equalise both entities' ratings in the medium-term to reflect our expectation that intragroup fungibility of capital is likely to increase at cross-border banking groups within the eurozone. Hence, the Negative Outlook on Bank Austria's Long-Term Issuer Default Rating reflects that on UC's IDR and is not driven by the upcoming CEE transfer.
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