OREANDA-NEWS. Fitch Ratings has affirmed the Long-term Issuer Default Ratings (IDRs) of mBank at 'A', Bank Millennium at 'BBB-', and Alior Bank SA and Getin Noble Bank SA at 'BB'. The agency has also affirmed the Long-term IDRs of two of mBank's subsidiaries, mBank Hipoteczny and mLeasing, at 'A'. The Outlooks on Alior, Getin and Millennium are Stable, and Negative on mBank and its subsidiaries. A full list of rating actions is at the end of this commentary.

KEY RATING DRIVERS: MBANK AND SUBSIDIARIES' IDRS, SUPPORT RATING AND SENIOR DEBT
The IDRs, senior debt rating and Support Rating (SR) of mBank, and the ratings of mBank Hipoteczny and mLeasing, reflect Fitch's opinion that there is an extremely high probability that these entities would be supported, if required, by their ultimate almost 70% shareholder, Commerzbank AG (A+/Negative/bbb).

Fitch believes that mBank is a strategically important subsidiary of Commerzbank, and its support-driven Long-term IDR is notched once from that of the parent. The potential cost of support would be easily manageable for Commerzbank in light of mBank Group's small size (about 5% of Commerzbank's assets at end-2014). mBank has gradually reduced reliance on funding (almost solely in foreign currency; FC) from Commerzbank to 16% of total funding at end-2014 (end-2012: 21%). However, in Fitch's opinion, parent facilities will remain available if mBank is unable to continue to refinance its sizeable stock of FC loans with market funding.

The agency views mBank Hipoteczny and mLeasing as core subsidiaries of mBank, and equalises their IDRs with those of the direct parent. This reflects their high dependence on mBank for funding and close operational integration with and supervision by the parent. Potential support from Commerzbank for mBank Hipoteczny and mLeasing could be extended directly or flow through mBank.

The Negative Outlooks on the Long-term IDRs reflect that on Commerzbank.

RATING SENSITIVITIES: MBANK AND SUBSIDIARIES' IDRS, SUPPORT RATING AND SENIOR DEBT
Fitch expects that the propensity of Commerzbank to support mBank, mBank Hipoteczny and mLeasing will remain strong. However, the parent's support ability will weaken due to a clear intention to ultimately reduce implicit state support for financial institutions in the EU, as demonstrated by a series of legislative, regulatory and policy initiatives. Fitch expects to downgrade ratings driven by sovereign support by mid-2015. Consequently, Fitch is likely to downgrade Commerzbank's Long-term IDR by four notches, to the level of its 'bbb' Viability Rating (VR).

Following the alignment of Commerzbank's Long-Term IDR with its VR, the Long-term IDRs of mBank, mBank Hipoteczny and mLeasing will likely be downgraded to 'BBB-'. The Outlook on the ratings at this level could be Positive, reflecting the potential for an upgrade of Commerzbank's VR during the next 12 to 18 months (for more details see 'Fitch Affirms Commerzbank & Hypothekenbank Frankfurt's IDRs; Withdraws Subsidiaries' Ratings' at www.fitchratings.com).

KEY RATING DRIVERS AND SENSITIVITIES: ALIOR, GETIN AND MILLENNIUM's IDRs; ALL BANKS' VRS
The IDRs of Alior, Getin and Millennium are driven by their standalone strength, reflected in their VRs, and are sensitive to changes in the VRs.

The VRs of mBank, Millennium and Getin are constrained by their material (albeit slowly declining) exposures to FC mortgages and substantial FC refinancing needs. The higher (bbb-) VRs of mBank and Millennium reflect their lower risk appetite, better asset quality, stronger franchises, solid capitalisation and resilient recent performance. The lower VRs (bb) of Getin and Alior reflect their weaker capitalisation and asset quality. Alior's VR also factors in its rapid credit expansion, significant impaired loan origination and modest, albeit improving, internal capital generation. Fitch believes that Alior's acquisition of Meritum Bank (in 1Q15) is neutral for its credit risk profile due to the relatively small size of the target.

In mid-January 2015, the Polish zloty fell about 20% against the Swiss franc, after the Swiss National Bank abandoned the euro/franc ceiling in place since September 2011. However, by early March 2015 the year-to-date depreciation moderated to around 9%. Getin, mBank and Millennium are vulnerable to a weakening of the Polish zloty due to their high exposure to FC residential mortgages, which equalled 30% (end-3Q14), 29% (end-2014) and 39% (end-2014) of gross loans, respectively. The quality of FC mortgages at mBank and Millennium has held up well to date due to selective credit origination and a more urban geographical focus. However, the impaired loans ratio for CHF mortgages at Getin was high at 17% (end-3Q14). Alior's exposure to FC mortgages is low.

The impact of the Swiss franc appreciation in 1Q15 on monthly instalment payments should be largely cushioned by the negative CHF LIBOR (passed on to most CHF borrowers) and reduced FC bid-ask spreads charged by banks. The majority of CHF loans were issued before 2008 and have been exposed to much stronger zloty depreciation in the past (almost 60% between August 2008 and end 1Q09). Therefore, we do not expect immediate pressure on asset quality. However, the weaker zloty drags on collateralisation of mortgages and consequently could result in somewhat higher impairment charges due to weaker recovery expectations. At end-2014, the majority of FC mortgages at Getin, mBank and Millennium had loan/value ratios above 80%.

In 2014, impaired loans ratios at Getin, mBank and Millenium remained stable due to the supportive operating environment and NPL sales (particularly at Getin). However, the fast inflow of new bad debts at Alior is likely to continue in 2015 due to seasoning of the loan portfolio (after rapid growth) and the bank's focus on more risky unsecured retail lending.

In Fitch's opinion, capitalisation at mBank and Millennium is stronger than at Alior and Getin, due to higher internal capital generation and a smaller proportion of unreserved impaired loans (Millennium). mBank's and Millenium's loss absorption capacity is sufficient to cushion large credit losses. Getin's capitalisation is more sensitive to FX rate changes and its Common Equity Tier 1 (CET1) ratio came under pressure in mid-January 2015 when it temporarily fell very close to the local regulatory requirement of 9%.

At end-2014, CET1 ratios at mBank (12.3%) and Millennium (14.5%) should be seen in light of lower risk weights for mortgages in foreign currency calculated under the advanced internal ratings-based method. Polish banks applying the standardised method (such as Getin) use a 100% risk weight required by the local regulator. Getin and Alior's CET1 ratios were 9.5% (end-3Q14) and 11.2% (end-2014), respectively. The latter somewhat weakened in 1Q15 after the acquisition of Meritum Bank.

Getin and Millennium are substantially reliant on FX swaps to refinance their FC mortgage portfolios. However, their refinancing risk is mitigated by improving swap average maturity, relatively granular concentration of contract amounts and the long track record of maintaining swap market access. Getin has already prefinanced almost all Swiss franc swaps maturing in 2015, while in 2016, 29% of Getin's swap book matures. Millennium faces maturity of 12% and 32% of its total currency swaps in 2015 and 2016, respectively. mBank refinances its FC mortgages mostly through on-balance sheet financing, sourced mainly from Commerzbank, but increasingly also through medium-term bond issuance.

At end-2014, customer deposits accounted for 86% of Alior's total funding (excluding derivatives), of which 65% were retail savings. The bank's non-deposit funding falling due in 2015 and 2016 was fully covered by liquid assets.

Getin's and Millennium's liquidity position in zloty is comfortable, but it is sensitive to margin calls when the zloty weakens against major currencies. In mid-January 2015, margin calls for Getin, Millennium and mBank absorbed about 20%, 20% and 5%, respectively, of their available liquidity. At end-January 2015, Getin's liquidity buffer comprised liquidity in foreign currency sufficient to cushion margin calls in case of a further 25% depreciation of the zloty. Millennium's liquidity buffer in zloty equalled 15% of its total balance sheet at end-January 2015. mBank's strong liquidity is underpinned by a stable and diversified deposit base. Alior's liquidity is adequate in light of its substantial growth plans and the relatively short tenor of the loan book.

mBank's and Millenium's solid 2014 results benefited from lending growth, reduced funding costs and contained loan impairment charges. Getin's operating profit remained flat in 2014 and its ambitious plans to reach a PLN1bn result in 2015 will most likely be delayed due to the still high cost of risk (driven mainly by legacy FC mortgages) and slower progress in funding cost optimisation. In 2014, Alior's operating profit increased by almost 40% yoy, but its income is sensitive to the volume of disbursed loans, the fast growth of which may not be sustainable.

In 2015, profitability will be affected by the 50bp interest and Lombard rate cuts in early March 2015, reduction of interchange fees and increased deposit insurance contributions. This could be somewhat mitigated by revised pricing strategies, particularly higher and/or new fees on loans and services. The supportive operating environment bodes well for the cost of risk, assuming no further material zloty depreciation.

RATING SENSITIVITIES: VIABILITY RATINGS OF ALL BANKS
Fitch does not expect to upgrade the banks' VRs in the foreseeable future. Upgrades of VRs would likely require (i) significant reductions in exposures to FC mortgages (Getin, mBank, Millennium); (ii) stronger capitalisation (Getin, Alior); (iii) a further significant reduction in reliance on parental funding (mBank); (iv) a moderation of growth rates (Alior); and (iv) a longer track record of solid performance and stable asset-quality trends (Alior, Getin).

Downward pressure on the VRs of all four banks could arise from (i) material deterioration in asset quality (mainly at Alior); (ii) considerably weaker internal capital generation; and (iii) a further sharp and prolonged depreciation of the domestic currency combined with a deterioration of the operating environment.

The VRs of Getin, mBank and Millennium could also come under pressure should a systemic solution to FC residential mortgages (imposed by the regulator or the government) bring about material one-off losses and/or put refinancing of FC loans under pressure. In February 2015, the head of the Polish regulator proposed a non-binding potential solution to the issue of high household indebtedness in foreign currency. According to the regulator's estimate, this solution could bring about a PLN1.3bn annual charge, or PLN24bn one-off charge, for the banking sector (the latter equal to around 20% of the sector's CET1 capital at end-3Q14). Fitch understands that the Polish banking association is preparing a counter proposal, which is likely to be considerably less onerous and should be announced by mid-March 2015. Fitch's base case assumption is that measures will not be taken which would result in significant one-off losses for the banking sector.

Millennium's Long-term IDR is one notch above that of its parent, Banco Comercial Portugues, S.A. (BCP; BB+/Negative/bb-). The agency's base case expectation is that any further weakening of BCP's credit profile, including a potential downgrade of its Long-term IDR to the level of its VR, will not lead to a negative rating action on Millennium. We outlined our view of low contagion risk for Millennium from BCP in "Fitch Affirms Bank Millennium at 'BBB-'; Outlook Stable" dated 20 May 2013 at www.fitchratings.com.

KEY RATING DRIVERS AND SENSITIVITIES: SUPPORT RATING FLOOR AND SUPPORT RATINGS (ALIOR, GETIN, MILLENNIUM)
The Support Rating Floors (SRFs) and SRs of Getin and Millennium are underpinned by Fitch's view of the moderate probability of support from the Polish sovereign. This reflects their significant systemic importance, reflected in considerable market shares in domestic retail deposits (6.7% and 5.1% at end-3Q14, respectively).

Fitch believes that progress in implementing the legislative and practical aspects of enabling effective bank resolution frameworks 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 BRRD. As a result of these changes, Getin's and Millennium's SRs are likely to be downgraded to '5' and their SRFs be revised down to 'No Floor' by mid-2015. Provided Getin's and Millennium's VRs are not downgraded in the meantime (Fitch's base case), any downward revision of their SRs or SRFs will have no impact on their Long-Term IDRs, the Outlooks on which are likely to remain Stable.

Alior's SR of '5' reflects Fitch's view that potential support from the bank's largest shareholders cannot be relied upon. Carlo Tassara (an Italian holding company) held a 25.3% stake at end-February 2015 and plans to exit the bank by end-1H16. Alior's SRF of 'No Floor' reflects Fitch's opinion that potential sovereign support cannot be relied upon in light of Alior's small systemic importance.

The rating actions are as follows:
Alior
Long-Term foreign currency IDR: affirmed at 'BB', Stable Outlook
Short-Term foreign currency IDR: affirmed at 'B'
National Long-Term Rating: affirmed at 'BBB+(pol)', Stable Outlook
National Short-Term rating: affirmed at 'F2(pol)'
Viability Rating: affirmed at 'bb'
Support Rating: affirmed at '5'
Support Rating Floor: affirmed at 'No Floor'

Millennium
Long-Term foreign currency IDR: affirmed at 'BBB-'; Outlook Stable
Short-Term foreign currency IDR: affirmed at 'F3'
National Long-Term Rating: affirmed at 'A-(pol)'; Outlook Stable
Viability Rating: affirmed at 'bbb-'
Support Rating: affirmed at '3'
Support Rating Floor: affirmed at 'BB'

Getin
Long-term foreign currency IDR: affirmed at 'BB'; Outlook Stable
Short-term foreign currency IDR: affirmed at 'B'
National Long-Term Rating: affirmed at 'BBB(pol) '; Outlook Stable
Viability Rating: affirmed at 'bb'
Support Rating: affirmed at '3'
Support Rating Floor: affirmed at 'BB'

mBank
Long-term foreign currency IDR: affirmed at 'A'; Outlook Negative
Short-term foreign currency IDR: affirmed at 'F1'
Viability Rating: affirmed at 'bbb-'
Support Rating: affirmed at '1'
Long-term senior unsecured debt rating: affirmed at 'A'
Short-term senior unsecured debt rating: affirmed at 'F1'

mFinance France
Long-term senior unsecured debt rating: affirmed at 'A'

mBank Hipoteczny
Long-term foreign currency IDR: affirmed at 'A'; Outlook Negative
Short-term foreign currency IDR: affirmed at 'F1'
Support Rating: affirmed at '1'

mLeasing
Long-term foreign currency IDR: affirmed at 'A'; Outlook Negative
Short-term foreign currency IDR: affirmed at 'F1'
Support Rating: affirmed at '1'