December 23, 2016 / 11:25 AM / 9 months ago

Fitch Affirms Bank Austria at 'BBB+'; Negative Outlook

(The following statement was released by the rating agency) LONDON, December 23 (Fitch) Fitch Ratings has today affirmed UniCredit Bank Austria AG's Long-Term Issuer Default Rating (IDR) at 'BBB+' with a Negative Outlook and its Viability Rating (VR) at 'bbb+'. A full list of rating actions is at the end of this Rating Action Commentary. The affirmation of the ratings follows the affirmation of UniCredit S.p.A.'s (UC) Long-Term IDR at 'BBB+'/Negative (see "Fitch Affirms UniCredit at 'BBB+' Negative Outlook"). The Negative Outlook on Bank Austria's Long-Term IDR mirrors that of its parent. A downgrade of UC's Long-Term IDR could result in a downgrade of Bank Austria's IDR and VR, and the Outlook reflects the potential negative implications of a deterioration of UC's financial strength for Bank Austria's capitalisation and financial flexibility. In particular, the likely increased fungibility of capital within the UC group could constrain Bank Austria's financial flexibility as it works to realign its business model to becoming a purely domestic bank. KEY RATING DRIVERS IDRs, VRs AND SENIOR DEBT Bank Austria's IDRs, VR and senior debt ratings reflect our view that the bank should be able to generate sufficient earnings and maintain a conservative risk profile. Bank Austria's business model has changed materially as a result of the transfer of its central and eastern European (CEE) subsidiaries and 41% stake in its Turkish unit to UC in 4Q16. The transfer has considerably reduced its geographic diversification and business scope, but we expect the downsized bank to benefit from its focus on domestic assets in light of the solid operating environment in Austria, which is considerably more developed and resilient than most of the CEE economies in which the bank has been operating so far. Bank Austria's narrowed domestic setup will also lower risks and earnings volatility but will significantly weaken internal capital generation as CEE has historically generated the vast majority of profits. Profit generation is now dominated by the domestic corporate business, which we expect to remain moderately profitable across the cycle, while the low-margin and high-cost Austrian retail operations are likely to generate large restructuring expenses in the next few years. Cost pressure in Austria will also remain high due to high regulatory costs, and investments to adapt to the changing competitive landscape. Cost reduction measures implemented by the bank, and the reduction in Austrian bank levy charges from 2017 will provide some medium-term relief. SUPPORT RATING Bank Austria's Support Rating is based on institutional support from the parent and reflects our view of UC's high propensity to support its Austrian subsidiary. The transfer of CEE activities means Bank Austria's size is in our opinion no longer a constraint to UC's ability to provide support. RATING SENSITIVITIES IDRs, VR AND SENIOR DEBT Bank Austria's VR and IDRs are sensitive to UC's strategic plans for the Austrian operations and our perception of the way fungibility of capital will evolve within the UC group. A downgrade of UC's ratings would be likely to lead to a downgrade of Bank Austria's ratings because in, our opinion, weaker financial strength at the parent would increase the risk of a reallocation of excess capital from Bank Austria to UC. Bank Austria and UC are supervised by the same regulator, the ECB, and we believe this will eventually result in increased capital fungibility. However, Bank Austria's ratings could be affirmed at their current level even after a potential downgrade of UC's ratings if it demonstrates that it can maintain strong capitalisation and adequate internal capital generation through retained earnings from its domestically focused business model, and we conclude that Bank Austria's credit profile is sufficiently independent from its parent's at that point. Bank Austria's ratings are also sensitive to a deterioration of the performance of its domestic retail business. A downgrade of Bank Austria's VR would result in a downgrade of its IDR only if its parent's IDR is also downgraded. Upside potential for its VR is limited because of the links with its parent's ratings, and in light of the bank's narrow geographic diversification and higher reliance on wholesale (corporate) banking for profit generation. This is likely to constrain the VR within the 'bbb' category, at least until the bank establishes a track record of strongly and sustainably improved performance at its domestic retail business. SUPPORT RATING An upgrade of Bank Austria's Support Rating would be contingent on an upgrade of UC's Long-Term IDR, which we do not expect given the Negative Outlook on the parent's Long-Term IDR. A downgrade could occur if we perceive a decrease in UC's propensity to support, for example through a significant reduction in the importance of Bank Austria's role in the group, which is not our expectation, or if UC's ability to provide support weakens materially. The rating actions are as follows: UniCredit Bank Austria AG Long-Term IDR: affirmed at 'BBB+'; Outlook Negative Short-Term IDR: affirmed at 'F2' Viability Rating: affirmed at 'bbb+' Support Rating: affirmed at '2' Senior unsecured notes: affirmed at 'BBB+' EMTN programme: affirmed at 'BBB+'/'F2' Contact: Primary Analyst Krista Davies Director +44 20 3530 1579 Fitch Ratings Limited 30 North Colonnade London E14 5GN Secondary Analyst Christian Schindler Associate Director +44 20 3530 1323 Committee Chairperson Christian Scarafia Senior Director +44 20 3530 1012 Media Relations: Elaine Bailey, London, Tel: +44 203 530 1153, Email: elaine.bailey@fitchratings.com. Additional information is available on www.fitchratings.com. 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