OREANDA-NEWS. Fitch Ratings has downgraded Austria-based Meinl Bank AG's Long-Term Issuer Default Rating (IDR) to 'B-' from 'B' and its Viability Rating (VR) to 'b-' from 'b'. Both ratings have been placed on RWN. A full list of rating actions is available at the end of this commentary.

The rating action reflects Fitch's view that the bank's franchise will likely weaken as a result of the request by the Austrian Financial Market Authority (FMA) to replace the bank's two management board members within three months. The RWN reflects the possibility that further regulatory action could damage the bank's viability further.

KEY RATING DRIVERS
IDRS AND VR
The downgrade primarily reflects Fitch's view that Meinl Bank's management and strategy are under pressure from regulatory demands to replace its management board and put in place remedial action following a regulatory review completed in July 2015. The review identified serious shortcomings at the bank and the FMA has expressed concerns about the management board's ability to run the bank according to regulatory requirements.

The RWN reflects Fitch's view that the bank's viability could become uncertain if it fails to meet the regulatory demands, which could put its banking licence at risk. We believe that it will be challenging for a bank of Meinl Bank's size to implement the necessary corrective actions quickly. The RWN also reflects uncertainty about the potential need to adapt the bank's business model to fulfil the FMA's requirements.

Fitch believes that the outcome of the review has potential negative implications on Meinl Bank's franchise. Even if the bank's owners manage to appoint a suitable management team within the next three months, we expect the necessary corrective actions to divert significant management capacity from day-to-day operations in the short term.

Given that the bank's resources are already limited, potential adverse reactions from clients could require heightened management attention to defend the bank's franchise. The departure of the bank's long-standing board members, who have been instrumental in building up relationships with business partners, could permanently erode the bank's client base.

The reputation risk resulting from the FMA's allegations could create substantial pressure on revenues, and operating expenses are likely to rise as the bank will likely have to increase investments in systems and controls. This would further burden the bank's weak performance, which is weighed down by recurring litigation issues over the past few years.

SUPPORT RATING AND SUPPORT RATING FLOOR
The affirmation of the Support Rating at '5' and Support Rating Floor at 'No Floor' reflects our view that the EU's Bank Recovery and Resolution Directive (BRRD) and the Single Resolution Mechanism (SRM) are now sufficiently progressed to provide a framework for resolving banks that is likely to require senior creditors participating in losses, if necessary, instead of or ahead of a bank receiving sovereign support.

BRRD, which was implemented into Austrian legislation with effect from 1 January 2015, includes minimum loss absorption requirements before resolution financing or alternative financing (eg, government stabilisation funds) can be used. Austria is one of the first EU countries to have implemented the BRRD's bail-in tool.

RATING SENSITIVITIES
IDRS AND VR
We expect to resolve the RWN once there is more clarity on the bank's measures and timing to implement the FMA's requirements. Failure to do so is likely to trigger a downgrade, potentially by more than one notch, particularly if the withdrawal of the bank's licence becomes likely and if we believe that this would put the bank's senior creditors at risk.

The ratings could be affirmed at the current level if the bank manages to comply with the regulator's requirements and clarifies its management structure, particularly if the FMA's intervention results in more robust organisation, risk management, corporate governance and adherence to regulatory requirements.

Moreover, an affirmation would be contingent on concrete indications that the bank's franchise has suffered no lasting damage as a result of the negative publicity surrounding the FMA's intervention.

SUPPORT RATING AND SUPPORT RATING FLOOR
Any upgrade of the Support Rating and upward revision of the Support Rating Floor would be contingent on a positive change in the sovereign's propensity to provide support. This is highly unlikely in our view.

The rating actions are as follows:

Meinl Bank AG
Long-term IDR: downgraded to 'B-' from 'B' and placed on RWN
Short-term IDR: 'B' placed on RWN
Viability Rating: downgraded to 'b-' from 'b' and placed on RWN
Support Rating: affirmed at '5'
Support Rating Floor: affirmed at 'No Floor'