FITCH DOWNGRADES OEVAG'S IDRS; PUTS VB-VERBUND'S VR ON RWP

Transcription

1 FITCH DOWNGRADES OEVAG'S IDRS; PUTS VB-VERBUND'S VR ON RWP Fitch Ratings-Frankfurt/London-08 October 2014: Fitch Ratings has downgraded Oesterreichische Volksbanken-Aktiengesellschaft's (OeVAG) Long-term Issuer Default Rating (IDR) to 'BBB-' from 'A' and Short-term IDR to'f3' from 'F1' and placed the IDRs on Rating Watch Negative (RWN). At the same time, Fitch has affirmed the Long-term IDR of Volksbanken-Verbund (VB-Verbund) and its member banks at 'A' with Negative Outlook and placed the group's 'bb-' Viability Rating (VR) on Rating Watch Positive (RWP). A full list of rating actions is at the end of this commentary. The rating actions have been driven by the decision of OeVAG's board, announced on 2 October 2014, to spin off OeVAG's non-core business from VB-Verbund. According to the plan, OeVAG will leave VB-Verbund's mutual support scheme, return its bank licence and focus exclusively on the orderly wind-down of its non-core assets as a non-regulated wind-down institution. OeVAG's remaining core assets and central clearing and support functions for VB-Verbund's members will be transferred to one of VB-Verbund's primary banks (most likely the largest of the group, Volksbank Wien-Baden AG; A/Negative). OeVAG intends to implement most of these transformations by end-1h15. KEY RATING DRIVERS - IDRS, SUPPORT RATINGS, SUPPORT RATING FLOORS AND SENIOR DEBT The downgrade of OeVAG's support-driven ratings reflects our view that OeVAG's accelerated winddown demonstrates the Austrian state's significantly reduced propensity to support the bank. If the spin-off is concluded according to the plan, OeVAG will be a non-regulated entity, likely minorityowned by the Austrian state (AAA/Stable) and without the benefit of any explicit new guarantees. The plan to remove OeVAG's non-core business from VB-Verbund means that OeVAG's IDRs are now purely driven by systemic support considerations and are no longer based on Fitch's rating criteria for banking structures backed by mutual support mechanisms, which continue to apply to VB-Verbund and its remaining members. If the spin-off is executed as planned, we consider that the likelihood of future state support for OeVAG will be low. However, in our view, there is a possibility that the Austrian state will ultimately become the majority owner of OeVAG, which could incentivise the government to continue providing support during the entire wind-down period. Majority government ownership could for instance result from non-state shareholders wanting to reduce their own ties to OeVAG to a greater extent than the plan entails or the asset transfer process deviating from the current plan, for instance due to different asset valuations than currently incorporated in the spin-off plan. For this reason, the rating remains inside the investment grade range until details of OeVAG's future ownership and wind-down plan are clearer and we can see that potential obstacles have been removed. The RWN on OeVAG's IDRs, Support Rating and Support Rating Floor (SRF) reflects our view that the plan is likely to go ahead, which will result in further downgrades. At this stage, the limited information on the bank's future setup prevents a final assessment of potential residual state support.

2 We have affirmed VB-Verbund's Support Rating Floor at 'A', to reflect our view that the shortterm availability of state support for the group is unaffected by last week's announcement. The Negative Outlook continues to reflect our view that state support is generally decreasing for most EU-based banks (see 'Rating Paths for EU State-Sponsored Banks', dated 14 April 2014 at RATING SENSITIVITIES - IDRS, SUPPORT RATINGS, SUPPORT RATING FLOORS AND SENIOR DEBT We expect to resolve the RWN on OeVAG's ratings when sufficient information on the bank's new setup becomes available and at the latest when it executes its planned exit from VB-Verbund's mutual support scheme. The resolution of the RWN could extend beyond the typical six-month horizon as technical, legal and regulatory aspects may delay the process, which is expected to be concluded in 1H15. In resolving the RWN, we will in particular assess OeVAG's new ownership structure, asset winddown profile and performance implications, funding structure, any residual explicit or implicit government support and VB-Verbund's funding and equity exposure to OeVAG. We could affirm OeVAG's IDRs at 'BBB-' if we consider that the Austrian state views the protection of OeVAG's senior unsecured investors as necessary to safeguard financial stability rather than risk undermining investor confidence in Austrian banks, particularly in the transition period of practical implementation of BRRD tools in European banks. To affirm the ratings, we would need to gain sufficient confidence that OeVAG's status and wind-down profile entailed remote bail-in risk for senior creditors during the entire wind-down period. However, if the plan goes ahead, we are likely to conclude that state support for OeVAG can no longer be relied upon, which would trigger a downgrade of OeVAG's ratings. Depending on the remaining links and financial ability, OeVAG's IDRs will likely become driven by the likelihood of institutional support from the restructured VB-Verbund. However, this support would be limited to VB-Verbund's incentive to protect its residual exposure rather than strategic interests. Therefore, we would probably notch OeVAG's Long-term IDR more than once from VB-Verbund's VR, most likely resulting in a Long-term IDR in the 'B' range. The Outlook on VB-Verbund's Long-term IDR has been Negative since 1Q14 as part of Fitch's review of EU state-sponsored banks (see 'Fitch Revises Outlooks on 18 EU State-sponsored Banks to Negative on Weakening Support', dated 26 March 2014 at The structure unveiled last week supports our assumption which was already underpinning this Negative Outlook, ie that the Austrian authorities' willingness to inject additional capital is rapidly declining and will soon become unreliable. This is also consistent with Austria's recent draft BRRD implementation law, which the authorities intend to put into force (including its bail-in provisions) in early Consequently, we now expect to revise VB-Verbund's Support Rating Floor to 'No Floor' and downgrade its Long-term IDR to the level of its VR by end-2014 or in 1H15, in line with other Austrian and EU banks. KEY RATING DRIVERS - VB Verbund's VR VB-Verbund's VR is burdened by legacy weaknesses and capitalisation issues at OeVAG, offsetting the primary banks' lower-risk and more stable, retail-based business model. The RWP on VB-Verbund's VR reflects the likely improvement of the group's regulatory capital ratios and asset quality arising from the spin-off of OeVAG's non-core business. VB-Verbund's asset quality will benefit from the spin-off of OeVAG's weak non-core portfolio (mostly consisting of real estate loans in Central and Eastern Europe and retail loans in Romania), which sharply contrasts with

3 the primary banks' lower-risk domestic retail business. Capital relief for VB-Verbund will arise from the deconsolidation of OeVAG's highly risk-weighted non-performing assets. KEY RATING SENSITIVITIES - VB-Verbund's VR We do not yet have sufficient information to assess the scale of the relief for VB-Verbund's capitalisation and risk profile, but we expect it to be material enough to trigger an upgrade of the VR at the end of the Rating Watch review period. We expect these benefits to be only partly offset by the write-down of the primary banks' stakes in OeVAG that is likely to arise from OeVAG's asset revaluation prior to the bank's spin-off and by the 100% risk-weighted residual exposure of the primary banks to OeVAG (we understand that they will not be required to deduct the stake from regulatory capital). This residual exposure is likely to remain material until OeVAG's wind-down is completed, creating substantial contingent risk for VB-Verbund. However, we do not expect that the spin-off will be sufficient for VB-Verbund to achieve an investment-grade VR in the short term. This is because the planned restructuring of the 44 primary banks and 11 specialised institutions, which are due to consolidate into nine larger entities and three special institutions in the next three years, bears significant execution risk with uncertain one-off burdens that might trigger a need for intragroup support at weaker individual banks. However, we believe that VB-Verbund has the potential to achieve a VR sustainably in the 'bbb' range in the medium term, once the primary banks' restructuring and OeVAG's wind-down have made significant progress. The VR is unlikely to rise above the 'bbb' range in the long term in light of VB- Verbund's small market share (7%) in the overcrowded, generally low-margin Austrian retail market. The resolution of the RWP could extend beyond the typical six-month horizon as technical, legal and regulatory aspects may delay the restructuring process. The rating actions are as follows: OeVAG Long-term IDR: downgraded to 'BBB-' from 'A' and placed on RWN Short-term IDR: downgraded to 'F3' from 'F1' and placed on RWN Support Rating: downgraded to '2' from '1' and placed on RWN Support Rating Floor: revised to 'BBB-' from 'A' and placed on RWN Senior unsecured notes: downgraded to 'BBB-' from 'A' and placed on RWN Market linked securities: downgraded to 'BBB- emr' from 'Aemr' and placed on RWN Volksbanken-Verbund Long-term IDR: affirmed at 'A'; Outlook Negative Short-term IDR: affirmed at 'F1' Support Rating: affirmed at '1' Support Rating Floor: affirmed at 'A' Viability Rating: 'bb-' placed on RWP The Long-term IDRs of VB-Verbund's member banks excluding OeVAG have also been affirmed at 'A' with Negative Outlook and Short-term IDRs at 'F1'. These ratings are "group" ratings assigned under Fitch's rating criteria for banking structures backed by mutual support mechanisms and are sensitive to the same drivers as VB-Verbund's IDRs. The ratings of the following members of VB- Verbund have been affirmed (the list reflects the status as of 7 October 2014): Allgemeine Bausparkasse reg.gen.m.b.h. Bank fuer Aerzte und Freie Berufe AG

4 Gaertnerbank reg.gen.m.b.h. IMMO-BANK AG Oesterreichische Apothekerbank eg SPARDA-BANK AUSTRIA Nord egen SPARDA-BANK AUSTRIA Sued egen Volksbank Almtal e. Gen. Volksbank Alpenvorland e.gen. Volksbank Bad Goisern eingetragene Genossenschaft Volksbank Bad Hall e.gen. Volksbank Donau-Weinland reg.gen.m.b.h. Volksbank Eferding - Grieskirchen reg.gen.m.b.h. Volksbank Enns - St.Valentin eg Volksbank Obersteiermark egen Volksbank Feldkirchen eg Volksbank Fels am Wagram e.gen. Volksbank Strasswalchen-Voecklamarkt-Mondsee egen Volksbank fuer den Bezirk Weiz reg.gen.m.b.h. Volksbank fuer die Sued- und Weststeiermark eg Volksbank Gmuend eingetragene Genossenschaft VOLKSBANK Graz-Bruck e. Gen. Volksbank Kaernten Sued e.gen. Volksbank Krems-Zwettl AG Volksbank Kufstein-Kitzbuehel eg Volksbank Laa egen Volksbank Landeck eg Volksbank Linz-Wels-Muehlviertel AG Volksbank Marchfeld e.gen. Volksbank Niederoesterreich Sued eg Volksbank Oberes Waldviertel reg.gen.m.b.h. Volksbank Oberkaernten reg.gen.m.b.h. Volksbank Oberndorf reg.gen.m.b.h. Volksbank Obersdorf - Wolkersdorf - Deutsch-Wagram e. Gen. Volksbank Ost reg.gen.m.b.h. Volksbank Osttirol-Westkaernten eg Volksbank Oetscherland eg Volksbank Ried im Innkreis eg Volksbank Salzburg eg Volksbank Schaerding eg Volksbank Steirisches Salzkammergut reg.gen.m.b.h. Volksbank Suedburgenland eg Volksbank Sued-Oststeiermark e.gen. Volksbank Tirol Innsbruck - Schwaz AG Volksbank Tullnerfeld eg Volksbank Voecklabruck-Gmunden e.gen. Volksbank Vorarlberg e. Gen. Volksbank Weinviertel e.gen. Volksbank Wien-Baden AG Volksbank, Gewerbe- und Handelsbank Kaernten AG Waldviertler Volksbank Horn reg.gen.m.b.h. Spar- und Vorschuss-Verein der Beamtenschaft der Oesterreichischen Nationalbank reg.gen.m.b.h. Spar- und Vorschussverein "Graphik" reg.gen.m.b.h. Spar- und Vorschussverein der Mitarbeiter der Niederoesterreichischen Landesbank- Hypothekenbank AG, reg.gen.m.b.h.

5 Spar- und Vorschusskasse der Angestellten der "Wiener Staedtische Versicherung AG Vienna Insurance Group" e.gen. Contact: Primary Analyst Patrick Rioual Director Fitch Deutschland GmbH Taunusanlage Frankfurt am Main Secondary Analyst Krista Davies Associate Director Committee Chairperson Artur Szeski Senior Director Media Relations: Christian Giesen, Frankfurt am Main, Tel: , Additional information is available on Applicable criteria, 'Global Financial Institutions Rating Criteria', dated 31 January 2014, are available at Applicable Criteria and Related Research: Global Financial Institutions Rating Criteria ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE ' PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.