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Fitch Affirms Unicredit Bank AG at 'A-'; Negative Outlook
December 22, 2016 / 6:23 PM / 10 months ago

Fitch Affirms Unicredit Bank AG at 'A-'; Negative Outlook

(The following statement was released by the rating agency) LONDON, December 22 (Fitch) Fitch Ratings has affirmed Unicredit Bank AG's (HVB) Long-Term Issuer Default Rating (IDR) at 'A-' and its Viability Rating (VR) at 'a-'. The Outlook on the Long-Term IDR is Negative. A full list of rating actions is available at the end of this commentary. The rating action 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 HVB's Long-Term IDR mirrors that of UC. A downgrade of UC's Long-Term IDR could result in a downgrade of HVB's Long-Term IDR and VR, and the Outlook reflects the potential negative implications of a deterioration of UC's financial strength for HVB's capitalisation and financial flexibility. Such deterioration could, in our opinion, result in a need to upstream further capital from HVB to UC. We believe that the increased fungibility of capital within the UC group could constrain HVB's financial flexibility. KEY RATING DRIVERS - IDRs, VRs AND SENIOR DEBT HVB's IDRs and senior debt ratings reflect the bank's standalone credit strength as expressed by its VR. The VR reflects the bank's strong capitalisation, which remains well above its peer group's average even after the planned dividend payment to UC. The VR also reflects the bank's company profile, which benefits from its well-established domestic corporate and investment banking franchise, its solid asset quality, which benefits from the resilient German economy and its profitability, which is the result of stable contributions from commercial banking with potentially more volatile earnings from corporate and investment banking. HVB's VR reflects our assumption that UC's strategic plan announced last week will not have a material impact on HVB's standalone strength. The measures, which include the payment of a EUR3bn special dividend from HVB to UC in May 2017, confirm our expectation that capital is increasingly managed across the UC group. However, we expect HVB's capitalisation to remain in line with its VR, which is one notch above UC's VR. In Fitch's view, intragroup contagion risk means that a subsidiary's VR would not typically be rated more than a notch above its parent's within the eurozone. HVB's fully loaded common equity tier 1 ratio (CET1) will drop to about 19% from 22.3% at end-2Q16 as a direct effect of the special dividend payment. At the same time, the bank's leverage ratio is expected to fall to about 5% from 6% at end-2Q16. Therefore, HVB will remain strongly capitalised and we expect that the bank will comfortably exceed current and future regulatory requirements. In addition, UC and HVB have agreed with their respective national regulators that HVB's own funds ratio must not fall below 13%. UC has stated that it assumes a single-point-of-entry resolution model, continuing to operate under its current parent bank structure. We believe that further material cross-border transfers of capital and liquidity to the parent could become more likely under this approach, and that capital will become more fungible between legal entities. DCR AND DEPOSIT RATINGS HVB's DCR and Deposit Ratings are aligned with its IDRs. The bank's qualifying junior and vanilla/non-structured senior debt buffers are large, but Fitch believes that the sustainability of these buffers is not yet clear. This is because there are still some uncertainties on the timing of UC's plans to allocate total loss absorbing capacity (TLAC) resources within the group, which could change HVB's liabilities structure over the medium term. SUPPORT RATING HVB's Support Rating (SR) reflects our opinion that there is a moderate likelihood of extraordinary support from its parent UC if needed. This probability of support indicates a 'BB' Long-term rating floor based on institutional support. The SR reflects Fitch's view that UC has a strong propensity to support HVB, but its ability to provide support, in our opinion, is constrained by the likely large size of any solvency support that would be required relative to the capital available in the rest of the group, given that a large proportion of UC's consolidated equity is in HVB. Our view that the parent's propensity to support is strong is primarily based on HVB's role in the UC group, for which it acts as the investment banking hub and operates a sizeable corporate banking franchise in Europe's largest economy. SUBORDINATED DEBT AND HYBRID SECURITIES The ratings of HVB's hybrid capital instruments (issued through HVB Funding Trusts I and II) are notched from the bank's VR. These instruments are rated four notches below the VR, two notches for loss severity and two notches for incremental non-performance risk. While Fitch acknowledges that the regulator could demand a deferral of coupon payment on these profit-linked instruments in line with the terms and conditions of the instruments, the agency does not expect such intervention in light of the bank's solid standalone financial profile. RATING SENSITIVITIES - IDRs, VRs AND SENIOR DEBT HVB's IDRs and VR are primarily sensitive to a change in UC's IDRs. A downgrade of UC's ratings would lead to a downgrade of HVB's ratings because Fitch believes that a weakening of UC's financial strength would increase the risk of upstreaming further capital from HVB to UC. HVB's ratings could be affirmed at their current level if UC's ratings are affirmed and if HVB demonstrates that it can maintain strong capitalisation and adequate internal capital generation through retained earnings. We understand that HVB has considerably reduced its net funding exposure to its parent and to other group entities. We understand that the bank currently has no plans for further extraordinary dividend payments exceeding HVB's annual profit. HVB's VR and IDR are also sensitive to increasing integration and capital and funding fungibility with the rest of the UC group, which we believe is likely under the SSM and SRM. Under Fitch's criteria, highly integrated subsidiary banks that account for a large proportion of the group's consolidated assets and contribute to the group's overall credit profile can be assigned common VRs with their parent. If capital movements between legal entities within the group become less restricted, and if we conclude that as a result it has become impossible to separate the credit profiles of the group's largest subsidiaries, we would likely assign common VRs to UC and HVB. HVB's VR, and therefore IDR, would then converge with UC's ratings, which are currently a notch below HVB's. HVB's VR and IDRs are also sensitive to a decline in HVB's recurring operating profitability in combination with increasing loan impairment charges, above normalised levels, which is unlikely, in our view. RATING SENSITIVITIES - DCR AND DEPOSIT RATINGS HVB's DCR and Deposit Ratings are primarily sensitive to changes in its IDRs. The DCR and Deposit Ratings could be notched above HVB's IDRs if Fitch concludes that the bank's qualifying junior and vanilla senior debt buffers are sustainably sufficient to restore viability and prevent a default on derivative obligations and deposits after a failure. Fitch believes that further clarity on the sustainability of these buffers should become available when UC starts to downstream internal TLAC into HVB. The DCR and Deposit Ratings are also sensitive to future changes to the resolution regime, which may alter the hierarchy of the various instruments in resolution, although this is not our current expectation in Germany. SUPPORT RATING The SR is sensitive to significant changes to UC's ability to support HVB that could be indicated by a change to UC's ratings. It is also sensitive to any negative changes to Fitch's view of UC's propensity to provide support, which we currently do not expect. We would withdraw HVB's SR if we decide to assign a common VR to UC and HVB. SUBORDINATED DEBT AND HYBRID SECURITIES HVB's subordinated debt and hybrid securities' ratings are sensitive to changes of HVB's VR or to a change in their notching, which could arise if Fitch changes its assessment of the notes' loss severity or relative non-performance risk. The rating actions are as follows: UniCredit Bank AG Long-term IDR affirmed at 'A-'; Negative Outlook Short-term IDR affirmed at 'F2' Viability Rating affirmed at 'a-' Derivative Counterparty Rating affirmed at 'A-(dcr)' Long Term Deposit Rating affirmed at 'A-' Short Term Deposit Rating affirmed at 'F2' Support Rating affirmed at '3' Senior unsecured certificates of deposit affirmed at 'F2' Senior unsecured debt issuance programme affirmed at 'A-'/'F2' Senior unsecured MTN programme affirmed at 'A-' Senior unsecured EMTN programme affirmed at 'A-'/'F2' Senior unsecured notes affirmed at 'A-' Subordinated notes affirmed at 'BBB+' HVB Funding Trusts I and II hybrid capital notes affirmed at 'BB+' Contact: Primary Analyst Patrick Rioual Director +49 69 7680 76 123 Fitch Deutschland GmbH Neue Mainzer Strasse 46-50 60311 Frankfurt Secondary Analyst Sebastian Schrimpf Analyst +49 69 7680 76 136 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. 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