Credit Opinion: UniCredit Bank AG

Transcription

1 Credit Opinion: UniCredit Bank AG Global Credit Research - 02 Feb 2016 Munich, Germany Ratings Category Outlook Bank Deposits Baseline Credit Assessment Adjusted Baseline Credit Assessment Counterparty Risk Assessment Issuer Rating Senior Unsecured -Dom Curr Subordinate Other Short Term Parent: UniCredit SpA Outlook Bank Deposits Baseline Credit Assessment Adjusted Baseline Credit Assessment Counterparty Risk Assessment Senior Unsecured Subordinate Jr Subordinate -Fgn Curr Jr Subordinate -Dom Curr Pref. Stock Non-cumulative -Dom Curr Other Short Term -Dom Curr Moody's Rating Stable A2/P-1 baa2 baa2 A1(cr)/P-1(cr) Baa1 Baa1 Baa3 (P)P-1 Stable Baa1/P-2 ba1 ba1 Baa1(cr)/P- 2(cr) Baa1 Ba1 Ba3 Ba3 (hyb) B1 (hyb) (P)P-2 Contacts Analyst Phone Katharina Barten/Frankfurt am Main Mathias Kuelpmann/Frankfurt am Main Carola Schuler/Frankfurt am Main Christina Gerner/Frankfurt am Main Key Indicators UniCredit Bank AG (Consolidated Financials)[1] [2]9-15 [2]12-14 [3]12-13 [3]12-12 [3]12-11 Avg. Total Assets (EUR billion) [4]-2.5 Total Assets (USD billion) [4]-6.1 Tangible Common Equity (EUR billion) [4]-1.7 Tangible Common Equity (USD billion) [4]-5.3 Problem Loans / Gross Loans (%) [5]6.0 Tangible Common Equity / Risk Weighted Assets (%) [6]24.1 Problem Loans / (Tangible Common Equity + Loan Loss [5]29.8

2 Reserve) (%) Net Interest Margin (%) [5]1.0 PPI / Average RWA (%) [6]1.4 Net Income / Tangible Assets (%) [5]0.4 Cost / Income Ratio (%) [5]67.9 Market Funds / Tangible Banking Assets (%) [5]45.2 Liquid Banking Assets / Tangible Banking Assets (%) [5]49.3 Gross loans / Due to customers (%) [5]114.2 Source: Moody's [1] All figures and ratios are adjusted using Moody's standard adjustments [2] Basel III - fully-loaded or transitional phase-in; IFRS [3] Basel II; IFRS [4] Compound Annual Growth Rate based on IFRS reporting periods [5] IFRS reporting periods have been used for average calculation [6] Basel III - fully-loaded or transitional phase-in & IFRS reporting periods have been used for average calculation Opinion SUMMARY RATING RATIONALE On 26 January, we affirmed UniCredit Bank AG's (UCB) A2/Prime-1 deposit ratings, and downgraded the bank's long-term debt ratings to Baa1 from A3. UCB's short-term debt ratings were upgraded to Prime-1 from Prime-2. We also changed the outlooks on the Baa1 long-term debt ratings and the A2 deposit ratings to stable, from negative (for senior debt) and positive (for deposits) previously. UCB's baa2 baseline credit assessment (BCA), baa2 adjusted BCA, the A1(cr)/Prime-1(cr) Counterparty Risk (CR) Assessments, and various subordinated instrument ratings (see details at the end of this report) were unaffected by this rating action. The downgrade of UCB's senior unsecured debt rating to Baa1 resulted from the subordination of certain senior unsecured debt obligations relative to other senior liabilities including deposits, according to Germany's insolvency legislation which will take effect from January The changed legislation implies a higher severity of loss in resolution for senior unsecured debt instruments, i.e., bonds and notes issued to the market or privately placed with non-retail investors. This is because these will no longer benefit from their current pari-passu status with junior deposits. Conversely, for junior deposits the new law implies a lower severity of loss as these will benefit from the subordination of debt instruments. To mirror the revised creditor ranking in resolution for German banks in our rating assessment for UCB, we adjusted our advanced Loss Given Failure (LGF) analysis, which takes into account the severity of loss faced by the different liability classes in resolution. These adjustments resulted in an unchanged two notches of uplift for UCB's deposit ratings and no uplift for senior debt. The ratings incorporate: (1) the bank's baa2 BCA, which is two notches above the BCA of its Italian parent bank, UniCredit SpA (deposits Baa1 stable, senior unsecured debt Baa1 stable, BCA ba1); (2) the results of our advanced Loss Given Failure (LGF) analysis, which provides two notches of rating uplift from the baa2 adjusted BCA for the deposit ratings and no rating uplift for the senior debt ratings; and (3) our assumption of a moderate probability of government support in the event of need, resulting in one notch of rating uplift for government support. The bank's BCA of baa2 remains constrained by the somewhat weaker credit strength of UCB's Italian parent. UCB's BCA is positioned two notches above the BCA of its parent bank as Europe's resolution regime, albeit untested, allows strong and viable subsidiaries to be ring-fenced in case of a resolution prompted by distress at the parent level and because of sufficient restrictions on intergroup exposures implemented by UCB. In addition, UCB's baa2 BCA is underpinned by very strong capitalisation, which duly mitigates elevated asset risk, an adequate funding structure and sound liquidity. Rating Drivers - Reduced intra-group exposures imply ring-fencing from higher risk elsewhere in UniCredit Group - Very strong regulatory capitalisation

3 - Asset quality has improved, but stock of problem loans remains high - Profitability is adequate but volatile - Funding and liquidity is sound - UCB's ratings are supported by its Strong+ Macro Profile Rating Outlook The outlook on the A2 long-term deposit ratings and the Baa1 long-term senior unsecured debt and issuer ratings is stable. What Could Change the Rating - Up Upward pressure on UCB's baa2 BCA remains subject to an improvement of UniCredit SpA's BCA. If UCB's BCA was not constrained (or was less constrained) by the BCA of its parent bank, additional upward pressure could be exerted on UCB's BCA by (1) changes in the bank's earnings profile, that is, with larger earnings contributions from less volatile businesses; and (2) sustained improvements in asset-risk indicators. Additional volumes of subordinated instruments would imply higher protection for senior creditors and a lower lossgiven-failure in resolution, which could lead to additional uplift for the senior debt ratings. The same does apply to UCB's deposit ratings because, with two notches of rating uplift from the adjusted BCA, the deposit ratings could benefit from a rise in volume of deposits or subordinated instruments. What Could Change the Rating - Down UCB's BCA could be downgraded (1) if the bank's financial fundamentals deteriorate materially, although there is some leeway at baa2 BCA level; (2) as a result of a downgrade of UniCredit SpA's ba1 BCA; or (3) if any new regulation seeks to weaken or even disallow the ring-fencing of systemically relevant cross-border subsidiaries in the EU. Negative pressure on the long-term debt ratings could arise if UCB's volume of unsecured debt instruments decreases relative to its total banking assets, and/or indications that a weakening readiness of the German government to support systemically relevant institutions warrant the exclusion of our government support assumptions in UCB's senior debt and deposit ratings. DETAILED RATING CONSIDERATIONS REDUCED INTRA-GROUP EXPOSURES IMPLY RING-FENCING FROM HIGHER RISKS ELSEWHERE IN UNICREDIT GROUP, BUT CONSTRAINTS REMAIN UCB's BCA remains constrained not only by its higher-risk investment banking operations and resulting earnings volatility, but also by its strategic, financial and business-related operational interconnectedness with its parent bank. Its position as the group's centre for corporate and investment banking (CIB) activities implies correlation in the areas of reputation and investor confidence which is a material constraining factor. That said, we recognise the reduction in intra-group exposures in recent years and the resulting higher level of ring-fencing. UCB tightly manages collateral of its derivatives positions and has reduced unsecured intra-group exposures to a level considerably below the exposure allowed by the German banking act (which permits up to 100% of capital). As of December 2014, UCB had a net exposure to group entities of roughly EUR8 billion, or 42% of its Common Equity Tier 1 (CET1) capital. We note that the intra-group risk ring-fencing may be challenged under the Single Supervisory Mechanism (SSM) as the ECB, in its position as regulator, may seek to enhance the free allocation of financial resources. If the UCB raises its direct exposures to group members, or if UniCredit SpA no longer supported UCB's efforts to maintain major excess capital, we would review the BCA. VERY STRONG REGULATORY CAPITALISATION We expect UCB to remain strongly capitalised, as reflected by UCB's Capital score of aa1. It reported a very solid Common Equity Tier 1 (CET1) ratio of 23.8% under the Capital Requirements Regulation and Directive (CRR/CRD IV) as of September UCB's ratio is well above the peer group average and is a key factor

4 supporting the baa2 BCA. UCB's reported transitional regulatory leverage ratio of 6.0% as of September 2015 also compares very favourably with its German peers. ASSET QUALITY HAS IMPROVED, BUT STOCK OF PROBLEM LOANS REMAINS HIGH We expect UCB's overall risk profile to remain stable in the next three to four quarters. Problem loans are likely to remain flat for some time or even reduce given that low risk charges during recent quarters indicate modest additions to problem loans. While we expect a normalisation of risk charges over the next two to three years, UCB's sizeable operating risk charges of recent years are likely to trend down because pre-2008 litigation cases related to alleged mis-selling have been or will soon be concluded. In 2014, the bank's total problem loans continued their decreasing trend, standing at EUR6.25 billion (2013: EUR6.4 billion), reflecting the benign credit conditions in Germany. This translates into a problem loan ratio of 5.6% (2013: 5.7%). The total expected loss of UCB's problem loan exposure and the disclosed risk density, that is, the expected loss relative to exposure, also trended lower. UCB maintains high concentration risks in its loan book and securities investment portfolio, which exposes the bank to the risk of occasional large losses related to individual names and transactions or to changes in volatilities, correlations or liquidity. UCB's sector as well as borrower concentrations are primarily on banks and insurances (EUR48.4 billion, or 23% of the total EUR213.3 billion exposure as of September 2015), real-estate lending (EUR24.2 billion, 11%), ship finance (EUR5.2 billion, 2%) and international project finance, as well as in debt capital market underwriting for corporates. The residual position of asset-backed securities, EUR4.76 billion as of December 2014, included EUR1.1 billion in mezzanine (but no junior) tranches, and does not pose any undue risk. UCB has a relatively large exposure to Italy (Baa2, stable) amounting to EUR9.7 billion (including amounts outstanding to the parent bank) as of June 2015, albeit materially reduced from EUR12.8 billion as of year-end To reflect the substantial market and operational risk inherent in UCB's CIB business, we adjust downwards the Asset Risk score to ba3. PROFITABILITY IS ADEQUATE BUT VOLATILE We expect UCB's profit generation to decline to more modest levels in 2016 because of a combination of revenue pressure on CIB and high regulatory costs. As UCB struggles to generate profits in its sizeable retail operations, it has started to significantly downsize its branches to 579 from 796, and its workforce to 16,706 full-time employees from 17,980 within the first nine months of The cost savings derived from this downsizing exercise should be visible from That said, we expect UCB's proven ability to absorb credit losses in its income statement to remain robust. UCB is one of the more profitable banks in Germany, although profits are modest on a wider European or global comparison. Its profits are almost exclusively generated by the commercial banking and CIB divisions, with the latter generating relatively volatile revenues and profits. Taken together, this results in an assigned Profitability score of ba3. FUNDING AND LIQUIDITY IS SOUND UCB's funding profile is adequate, although it relies on market funds for a large share of its funding needs. That said, with the combination of relatively long maturities of its outstanding debt and sizeable deposit base, UCB needs to tap the market for relatively modest amounts of five to eight billion euros annually. Retail and corporate deposits represent one third of total liabilities and UCB has good access to the German covered bond market. UCB's satisfactory liquidity levels are illustrated by the 30-day cash-outflow coverage ratio of 1.2x (based on German regulation, unchanged from the ratio as of year-end 2014). UCB also has a satisfactory loans-to-deposits ratio of 109%. Net borrowings in the interbank market and funding through securities issued (net of cash reserves) totalled EUR42.3 billion as of September 2015, equivalent to 14% of total assets. To capture the mitigating factor of UCB's well-matched funding profile, we adjust the Funding Structure score upward to ba2. The a1 Liquid Resources score reflects UCB's strong Liquidity Coverage Ratio, but also our adjustments to the ratio for encumbered liquid assets. UCB's RATINGS ARE SUPPORTED BY ITS STRONG+ MACRO PROFILE

5 Over 60% of UCB's assets are in Germany, with the remainder widely diversified across EU countries, the US and Eastern Europe, resulting in a macro score of Strong+ (S+), somewhat below the Very Strong- (VS-) assessment for Germany. German banks benefit from operating in an environment with very high economic, institutional and government financial strength and very low susceptibility to event risk. Low and declining private-sector debt and a stable house price cycle support credit conditions. Funding conditions benefit from a strong domestic deposit base and good wholesale market access. However, operating conditions for the German banking system are constrained by high fragmentation in an over-saturated market, low fee income generation and intensifying competition for domestic business. NOTCHING CONSIDERATIONS AFFILIATE SUPPORT We believe that UniCredit SpA would likely support its German subsidiary in case of need. However, parental support does not result in any rating uplift because UCB's BCA is higher than that of its parent bank. UCB's adjusted BCA is therefore baa2, in line with the BCA. LOSS GIVEN FAILURE In our Advanced LGF analysis, we consider the risks faced by the different debt and deposit classes across the liability structure in resolution. We assume residual tangible common equity of 3% and losses post-failure of 8% of tangible banking assets, a 25% run-off in "junior" wholesale deposits and a 5% run-off in preferred deposits. These ratios are in line with our standard assumptions. In line with the new German insolvency legislation that will effectively subordinate senior bonds and notes to deposits in resolution from January 2017, we base our calculation on the assumption that deposits are preferred to most senior unsecured debt instruments. For deposits of UCB, our LGF analysis indicates a very low loss-given-failure, leading to a two-notch uplift from the bank's baa2 adjusted BCA. For senior unsecured debt issued by UCB, our LGF analysis indicates a moderate loss-given-failure, leading to zero uplift from the bank's baa2 adjusted BCA. For senior subordinated debt issued by UCB, rated Baa3, our LGF analysis indicates a high loss-given-failure, resulting in the positioning of this rating one notch below the adjusted BCA. The dated silent partnership certificates issued by HVB Funding Trust and HVB Funding Trust II and III are rated Ba1(hyb). The notching reflects their deeply subordinated claim in liquidation and the non-cumulative coupon-skip mechanism tied to the breach of a regulatory minimum requirement trigger. GOVERNMENT SUPPORT Although German banks operate in an environment of materially weakened prospects for financial assistance from the government, we maintain one notch of rating uplift in our senior unsecured debt and deposit ratings, reflecting our expectation of a moderate probability of government support for senior debt and deposits. This support takes into account UCB's substantial size and strong national market shares in retail and corporate lending. About Moody's Bank Scorecard Our Scorecard is designed to capture, express and explain in summary form our Rating Committee's judgment. When read in conjunction with our research, a fulsome presentation of our judgment is expressed. As a result, the output of our Scorecard may materially differ from that suggested by raw data alone (though it has been calibrated to avoid the frequent need for strong divergence). The Scorecard output and the individual scores are discussed in rating committees and may be adjusted up or down to reflect conditions specific to each rated entity. Rating Factors UniCredit Bank AG Macro Factors

6 Weighted Macro Profile Strong + Financial Profile Factor Historic Ratio Macro Adjusted Score Solvency Asset Risk Problem Loans / Gross Loans Credit Trend Assigned Score Key driver #1 Key driver #2 6.0% baa2 ba3 Market risk Operational risk Capital TCE / RWA 24.9% aa1 aa1 Profitability Net Income / Tangible Assets Combined Solvency Score Liquidity Funding Structure Market Funds / Tangible Banking Assets Liquid Resources Liquid Banking Assets / Tangible Banking Assets Combined Liquidity Score 0.2% b1 ba3 a3 baa2 43.7% b1 ba2 51.9% aa2 a1 Encumbrance baa2 baa2 Financial Profile baa2 Qualitative Adjustments Adjustment Business Diversification 0 Opacity and Complexity 0 Corporate Behavior 0 Total Qualitative Adjustments 0 Sovereign or Affiliate constraint Scorecard Calculated BCA range Baa2 baa1 - baa3 Assigned BCA baa2 Affiliate Support notching 0 Adjusted BCA baa2 Instrument Class Loss Given Failure notching Additional notching Preliminary Rating Assessment Government Support notching Local Currency rating Foreign Currency rating Deposits 2 0 a3 1 A2 A2 Senior unsecured bank 0 0 baa2 1 Baa1 (P)Baa1 debt

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