Fitch Affirms Bank Austria at 'BBB ' on UniCredit's Restructuring Plans
The rating actions follow the announcement on 11 November 2015 by Bank Austria's parent, Unicredit SpA (UC, BBB+/Stable/bbb+), of its 2018 strategic plan, which includes a transfer of Bank Austria's Central and Eastern European (CEE) subsidiaries to UC and a sale or a restructuring of Bank Austria's domestic retail franchise by end-2016. This will considerably change Bank Austria's company profile but, in Fitch's view, is likely to have neutral implications for its risk profile.
A full list of rating actions is provided at the end of this rating action commentary.
KEY RATING DRIVERS - IDRS, SUPPORT RATING
The affirmation of Bank Austria's IDRs and Support Rating reflects our view that the announced restructuring does not affect UC's high propensity to support its Austrian subsidiary. We believe that Bank Austria's importance for UC will not decrease materially despite the planned transfer of its CEE subsidiaries and its 41% stake in its Turkish unit to UC, where the group's CEE activities will be centralised.
The affirmation also reflects our opinion that, following the transfer of the CEE business, UC's ability to support will no longer be constrained by Bank Austria's size relative to the group's parent. We expect Bank Austria's risk-weighted assets (RWAs) to decrease to about EUR30bn or 7% of UC's total (or significantly less if it sells its retail business) from EUR131bn or a third of UC's total at end-3Q15.
KEY RATING DRIVERS - VR
The affirmation of Bank Austria's VR reflects our expectation that the bank will emerge from the restructuring with a significantly narrower, more focused business model but that the implications for its risk profile are likely to be broadly neutral.
The bank's considerably reduced business scope is likely to affect its company profile as it will eventually include, in our view, a moderately profitable corporate banking franchise and, if retained, a low-margin and initially hardly profitable retail banking business, which is likely to incur substantial restructuring costs in the medium term. We believe that the combination of weak performance and strong contractual protection enjoyed by some of its employees makes a sale of the retail business uncertain.
A sale of the retail business would likely turn Bank Austria into a predominantly wholesale bank, albeit one with a solid client portfolio and a significant market position in Austrian corporate banking but lacking strong pricing power. In addition, the new business model focused on the small Austrian market will no longer benefit from its current strong geographic diversification, which has been so far underpinned by the bank's presence in 13 CEE markets.
The downsized bank could benefit from its focus on domestic assets in light of the solid operating environment in Austria (AA+/Stable), which is considerably more developed and resilient than most CEE economies in which the bank has been operating so far. The focus on a single market with a consistent regulatory framework should also significantly reduce complexity and could have positive implications for the bank's underwriting standards and risk controls relative to some less advanced CEE markets. We believe that UC's growth and risk appetite in Austria will remain moderate in the foreseeable future.
The spin-off of the CEE portfolio will strongly relieve the bank's asset quality and we expect its non-performing loan ratio to decrease to the low single-digits. On the other hand, the downsized bank's loan book will be significantly less granular, especially if the domestic retail portfolio is divested. This is likely to be compounded by the shrinkage of the bank's capital base as we expect most of its capital hitherto allocated to CEE to be transferred to the group's parent.
However, we expect this to be adequately mitigated by the solid credit quality of the bank's large corporate borrowers. The exit from CEE is also likely to improve the bank's market risk profile by reducing its exposure to foreign currency risk.
The CEE business is currently facing heavy losses in Ukraine, a fairly modest (but still reasonable) performance in Russia and one-off charges in various other CEE countries. The Ukrainian subsidiary is up for sale, and exclusive talks with a potential buyer are ongoing. However, CEE has historically contributed the lion's share of Bank Austria's profits and we expect weaker through-the-cycle internal capital generation after the planned spin-off of the CEE portfolio. This could be mitigated by a sale of the retail business at acceptable terms or a partial run-down on Bank Austria's balance sheet if restructuring costs are contained.
We estimate that the abovementioned VR drivers are likely to have neutral implications for the bank's overall risk profile, which should therefore remain commensurate with the current 'bbb+' VR. The affirmation of the VR also reflects our expectation that UC will remain committed to maintaining a solid capital structure at Bank Austria that is in line with market expectations, including a comfortable buffer above regulatory requirements.
We also assume Bank Austria will retain a reasonably solid funding and liquidity profile. The VR also takes into account the fungibility of capital and funding within the UC group and our expectations that Bank Austria's downsizing should improve UC's ability to provide its subsidiary with ongoing capital or funding support, if needed.
KEY RATING DRIVERS - SENIOR DEBT
The RWE on Bank Austria's senior debt rating reflects the possibility that some outstanding senior notes could be sold together with the Austrian retail portfolio. Their rating would then be driven by the credit profile of the buyer, which could be stronger, similar or weaker than Bank Austria's 'BBB+'.
RATING SENSITIVITIES - IDRS, SUPPORT RATING
Bank Austria's Long- and Short-term IDRs are now equalised with - and are thus subject to the same sensitivities as - UC's IDRs, as the standalone credit profile will no longer influence the IDRs. A change to UC's IDRs would trigger a corresponding change to Bank Austria's IDRs.
In addition, a scenario in which UC would no longer consider the downsized Bank Austria as core to its strategy could trigger a notching of Bank Austria's Long-term IDR from that of UC, potentially by several notches. However, we view this scenario as unlikely in the foreseeable future.
RATING SENSITIVITIES - VR
Upside is limited for the VR in light of the narrow diversification and predominantly wholesale nature of Bank Austria's future business model. This is likely to constrain the VR within the 'bbb' category, even if the bank retains and significantly improves the performance of its retail business.
The VR would most likely be downgraded if UC targets for the reorganised Bank Austria a more aggressive financial profile than we currently expect. A downgrade could also arise from a failure to address a deterioration of the domestic retail business' performance.
RATING SENSITIVITIES - SENIOR DEBT
We expect to resolve the RWE on the senior debt rating when a sale of the Austrian retail business is concluded or when UC makes a final decision to retain and continue to operate the portfolio on Bank Austria's balance sheet. The resolution of the RWE could extend beyond the typical six-month horizon as technical, legal and regulatory aspects may delay the process, which we expect to be concluded by end-2016.
In case of a sale of the retail business, the rating of the individual senior notes will depend on whether some or all of these notes are transferred to the new owner or retained by Bank Austria. Any notes transferred to the buyer could be upgraded, downgraded or affirmed, depending on Fitch's assessment of the buyer's credit quality. Any notes retained by Bank Austria would be equalised with the bank's Long-term IDR and become subject to the same sensitivities.
The rating actions are as follows:
UniCredit Bank Austria AG
Long-term IDR: affirmed at 'BBB+'; Outlook Stable
Short-term IDR: affirmed at 'F2'
Viability Rating: affirmed at 'bbb+'
Support Rating: affirmed at '2'
Senior unsecured notes: 'BBB+' placed on RWE
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