Fitch Ratings-Milan-28 October 2021:
This commentary corrects an error with respect to the rating
action commentary published on 20 October 2021 and upgrades
Unicredit Bank (Ireland) plc's senior preferred debt issues. The
correction reflects our expectations that the notes should rank
pari passu with other senior preferred debt issued by Unicredit
Bank AG (BBB/Negative).
Fitch Ratings has affirmed Unicredit S.p.A.'s (Unicredit)
Long-Term Issuer Default Rating (IDR) at 'BBB-' and Viability
Rating (VR) at 'bbb-'. The Outlook on the Long-Term IDR is
Stable.
A full list of rating actions is detailed below.
The ratings affirmation and Stable Outlook reflect stable
prospects for Unicredit, which benefits from geographic
diversification in economies that are rebounding, especially in its
largest market of Italy, which should support improvement in
operating profitability. At the same time, the asset de-risking it
has achieved so far and solid capitalisation provide some headroom
to absorb asset-quality pressures we expect to emerge in the coming
quarters due to the pandemic.
Key Rating Drivers
IDRS, VR, DERIVATIVE COUNTERPARTY RATING (DCR) AND SENIOR
DEBT
The ratings of Unicredit reflect its well-established retail and
commercial banking franchise in several countries in Europe,
including in more stable and higher-growth countries (Germany and
Austria) than in Italy, which is counterbalanced by its large
operations in and exposure to Italy (BBB-/Stable). In our view,
Italy has a proportionately higher influence on Unicredit's overall
credit profile, as reflected in the sensitivity of the group's
overall performance to the operating environment in Italy.
Unicredit's ratings also factor in the full rundown of non-core
assets by end-2021, in line with the bank's stated objectives; a
gradual recovery in operating profitability; satisfactory capital
buffers over regulatory minimum requirements; and a stable and
well-diversified funding profile.
Our assessment of capitalisation reflects our expectation that
the bank will maintain sound capital buffers above regulatory
requirements. We view the 16.1% common equity Tier 1 (CET1) ratio
at end-1H21 as a rating strength, after improving on end-2020, due
to internal capital generation and despite a slight increase in
risk-weighted assets (RWAs).
In the medium term, we expect Unicredit to operate with a
somewhat lower CET1 ratio as the group optimises its capital
structure. Our assessment also considers a reduced exposure to
unreserved impaired loans, which was below 10% of CET1 capital at
end-June 2021, and compares well internationally. Exposure to
domestic government bonds, which remained stable at below 90% of
CET1 capital at end-1H21, still leaves the bank vulnerable to
sovereign risk, in our opinion. Our assessment of capital also
reflects its well-capitalised foreign subsidiaries.
In our view, downside risks to Unicredit's asset quality have
reduced due to improved macro-economic prospects and the monetary
and fiscal support made available by governments to the private
sector (eg. moratoriums and state-guaranteed loans), particularly
in the largest economies. This, combined with the group's focus on
risk discipline and active management of impaired loans resulted in
contained new impaired loan inflows and should allow the full
non-core assets rundown by end-2021.
At end-1H21, Unicredit's impaired loan ratio was 5.1% and we
expect it to narrow to around 4.5% by year-end and remain below 5%
thereafter. As a result of better-than-expected asset-quality
performance and trends, we have revised upwards our asset-quality
assessment score to 'bb+' from 'bb'. At end-1H21, impaired loans
coverage was adequate at 76%, despite the impact of the sale of
highly provisioned impaired loans during 2021.
The economic rebound of Unicredit's core markets of Italy,
Germany and Austria facilitated Unicredit's performance recovery in
in 1H21, due to increasing volumes in fee-driven activities and a
sharp decline in loan impairment charges (LICs). We expect the more
benign operating environments to continue supporting the
improvement of the bank's operating profitability. This is despite
likely higher LICs in 2022, owing to the expected asset-quality
deterioration arising from the pandemic.
Profitability improvements should be achieved through growing
revenues and stable operating costs as the bank continues to
streamline its organisation and advances its digitalisation
strategy. This should help bring Unicredit's four-year average
operating profit/RWAs to around 1% on a sustained basis. As a
result, we have revised the outlook of our profitability and
earnings assessment score of 'bb+' to stable from negative.
Funding benefits from Unicredit's deposit franchise in retail
and commercial banking in several countries in Europe. Its
loans/customer deposits ratio has been satisfactory relative to
European peers', at below 100% since end-2020, as a result of
growing customer deposits and controlled loan growth. At end-June
2021, more than 50% of total funding consisted of customer
deposits, which have been resilient, including during periods of
market volatility. Wholesale funding, which is predominately
euro-denominated, is well-diversified as the group accesses capital
markets in different formats and from different issuing
geographies.
The Short-Term IDR and short-term senior debt ratings of 'F3'
are in line with our rating correspondence table for a 'BBB-'
Long-Term IDR.
Senior preferred notes are rated in line with the bank's
Long-Term IDR as we expected these to be part of the bank's
resolution buffers and we do not expect more junior debt buffers to
exceed 10% of RWAs on a sustained basis.
UniCredit's senior non-preferred notes (SNP) are rated one notch
below the bank's Long-Term IDR. This reflects the risk of
below-average recoveries arising from the use of more senior debt
to meet resolution buffer requirements and the combined buffer of
additional Tier 1 (AT1), Tier 2 and SNP debt being unlikely to
exceed 10% of RWAs.
Unicredit's DCR is at the same level as the Long-Term IDR
because in Italy derivative counterparties have no preferential
legal status over other senior obligations in a resolution.
SUPPORT RATING AND SUPPORT RATING FLOOR
Unicredit's Support Rating (SR) and Support Rating Floor (SRF)
reflect Fitch's view that although external support is possible it
cannot be relied on. Senior creditors can no longer expect to
receive full extraordinary support from the sovereign in the event
that the bank becomes non-viable. The EU's Bank Recovery and
Resolution Directive and the Single Resolution Mechanism for
eurozone banks provide a framework for the resolution of banks that
requires senior creditors to participate in losses, if necessary,
ahead of a bank receiving sovereign support.
SUBSIDIARY AND AFFILIATED COMPANY
The ratings of senior preferred debt under Unicredit's EMTN
programme, including the bank's funding vehicles, UniCredit Bank
(Ireland) plc, and UniCredit International Bank Luxembourg SA, are
equalised with that of the parent because the debt is
unconditionally and irrevocably guaranteed by UniCredit, and Fitch
expects the parent to honour this guarantee.
The ratings of the notes issued by Unicredit Bank (Ireland) plc
under Unicredit's EMTN programme are upgraded to 'BBB+' from 'BBB'
to reflect that Unicredit Bank AG will replace the original issuer
as the principal debtor, as part of the proposed merger of
Unicredit Bank (Ireland) into Unicredit S.p.A. and our expectation
that the notes rank pari passu with other senior preferred notes
issued by Unicredit Bank AG.
DEPOSIT RATING
Unicredit's Long-Term Deposit Rating is rated one-notch above
the Long-Term IDR because we believe the bank has sufficient
combined buffers of junior and senior debt that result in a lower
probability of default on deposits relative to its Long-Term IDR.
The one-notch uplift also reflects our expectation that the bank
will maintain sufficient buffers, given its status as a globally
systemically important bank (G-SIB) and the need to comply with
total-loss absorbing capacity (TLAC) and minimum requirement for
own funds and eligible liabilities (MREL).
The 'F3' Short-Term Deposit Rating of Unicredit is the baseline
option for a 'BBB' Long-Term Deposit Rating, based on a 'bbb'
funding and liquidity score.
SUBORDINATED DEBT AND OTHER HYBRID SECURITIES
Subordinated debt and other hybrid capital securities issued by
Unicredit are notched down from the VR in accordance with Fitch's
assessment of each instrument's respective non-performance and
relative loss-severity risk profiles.
Unicredit's Tier 2 subordinated debt is rated one notch below
the VR for loss severity to reflect below-average recovery
prospects. No notching is applied for incremental non-performance
risk because write-down of the notes will only occur once the point
of non-viability is reached and there is no coupon flexibility
before non-viability.
Unicredit's Additional Tier 1 notes are rated four notches below
the VR, comprising two notches for loss severity relative to senior
unsecured creditors and two notches for incremental non-performance
risk. The latter reflects the instruments' fully discretionary
interest payment.
Unicredit's Legacy Tier 1 notes are notched down four times from
the VR, comprising two notches for loss severity for deep
subordination and another two for non-performance risk as coupon
deferral is constrained by look-back clauses.
RATING SENSITIVITIES
Factors that could, individually or collectively, lead to
positive rating action/upgrade:
Positive rating action would require an upgrade of Italy,
combined with operating profit/RWA stabilising above 1% with
prospects to reach 1.5% on a sustained basis and further
improvement in asset-quality metrics (impaired loans ratio
sustainably below 4%).
Senior preferred and SNP debt ratings could also be upgraded if
Unicredit is expected to meet the resolution buffer requirements of
the consolidated entity with SNP and more junior instruments, or if
resolution buffers represented by SNP and more junior instruments
are expected to be at least 10% of RWAs on a sustained basis,
neither of which is currently the case.
An upgrade of the SR and upward revision of the SRF would be
contingent on a positive change in the sovereign's propensity to
support the bank. In Fitch's view, this is highly unlikely,
although not impossible.
Factors that could, individually or collectively, lead to
negative rating action/downgrade:
UniCredit's ratings are likely to be downgraded if Italy's
sovereign rating is downgraded. The ratings are also sensitive to
an unexpected severe setback in the economic recovery in the
group's core markets. A downgrade could be triggered if the CET1
ratio decreases below 13% with no discernible plans to restore
this, if the four-year average impaired loans ratio increases above
6% without a clear path to reduction, or if there is prolonged
earnings weakness with operating profit persistently below 1% of
RWAs.
SR AND SRF
An upgrade of the SR and upward revision of the SRF would be
contingent on a positive change in the sovereign's propensity to
support the bank. In Fitch's view, this is highly unlikely,
although not impossible.
SUBSIDIARY AND AFFILIATED COMPANIES
The ratings of the senior debt issued by UniCredit's funding
vehicle, UniCredit International Bank Luxembourg SA, are sensitive
to the same considerations as the senior unsecured debt issued by
the parent.
The ratings of the notes issued by UBI are sensitive to the same
considerations as the senior preferred debt issued by UniCredit
Bank AG or a change in the status of the notes relative to our
expectations.
DEPOSIT RATING
The deposit ratings are primarily sensitive to changes in the
bank's IDRs, from which they are notched. The Long-Term Deposit
Rating is also sensitive to a reduction in the size of the senior
and junior debt buffers, although we view this unlikely in light of
the bank's current and future TLAC/MREL requirements.
SUBORDINATED DEBT AND OTHER HYBRID SECURITIES
The subordinated debt's and hybrid securities' ratings are
primarily sensitive to changes in the VR, from which they are
notched. The ratings are also sensitive to a change in the notes'
notching, which could arise if Fitch changes its assessment of
their non-performance relative to the risk captured in the VR or
their expected loss severity. For AT1 issues, this could reflect a
change in capital management or flexibility, or an unexpected shift
in regulatory buffers and requirements, for example.
Best/Worst Case Rating Scenario
International scale credit ratings of Financial Institutions and
Covered Bond issuers have a best-case rating upgrade scenario
(defined as the 99th percentile of rating transitions, measured in
a positive direction) of three notches over a three-year rating
horizon; and a worst-case rating downgrade scenario (defined as the
99th percentile of rating transitions, measured in a negative
direction) of four notches over three years. The complete span of
best- and worst-case scenario credit ratings for all rating
categories ranges from 'AAA' to 'D'. Best- and worst-case scenario
credit ratings are based on historical performance. For more
information about the methodology used to determine sector-specific
best- and worst-case scenario credit ratings, visit
https://www.fitchratings.com/site/re/10111579
REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER
OF RATING The principal sources of information used in the analysis
are described in the Applicable Criteria. Public Ratings with
Credit Linkage to other ratings
The rating of Unicredit Bank Ireland's SP debt is linked to
Unicredit Bank AG's, while Unicredit International Bank
Luxembourg's is to Unicredit's.
ESG Considerations
Unless otherwise disclosed in this section, the highest level of
ESG credit relevance is a score of '3'. This means ESG issues are
credit-neutral or have only a minimal credit impact on the entity,
either due to their nature or the way in which they are being
managed by the entity. For more information on Fitch's ESG
Relevance Scores, visit www.fitchratings.com/esg
UniCredit International Bank Luxembourg SA
----Senior preferred; Long Term Rating; Affirmed; BBB-
UniCredit S.p.A.; Long Term Issuer Default Rating; Affirmed;
BBB-; Rating Outlook Stable
; Short Term Issuer Default Rating; Affirmed; F3
; Viability Rating; Affirmed; bbb-
; Support Rating; Affirmed; 5
; Support Rating Floor; Affirmed; NF
; Derivative Counterparty Rating; Affirmed; BBB-(dcr)
----subordinated; Long Term Rating; Affirmed; BB
----subordinated; Long Term Rating; Affirmed; B+
----long-term deposits; Long Term Rating; Affirmed; BBB
----Senior preferred; Long Term Rating; Affirmed; BBB-
----Senior non-preferred; Long Term Rating; Affirmed; BB+
----short-term deposits; Short Term Rating; Affirmed; F3
----Senior preferred; Short Term Rating; Affirmed; F3
Unicredit Bank (Ireland) p.l.c
----Senior preferred; Long Term Rating; Upgrade; BBB+
Contacts:
Primary Rating Analyst
Gianluca Romeo,
Director
+39 02 879087 201
gianluca.romeo@fitchratings.com
Fitch Ratings Ireland Limited Sede Secondaria Italiana
Via Morigi, 6 Ingresso Via Privata Maria Teresa, 8
Milan 20123
Secondary Rating Analyst
Francesca Vasciminno,
Senior Director
+39 02 879087 225
francesca.vasciminno@fitchratings.com
Committee Chairperson
Cristina Torrella Fajas,
Senior Director
+34 93 323 8405
cristina.torrellafajas@fitchratings.com
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Email: louisa.williams@thefitchgroup.com
Stefano Bravi, Milan, Tel: +39 02 879087 281, Email:
stefano.bravi@fitchratings.com
Additional information is available on www.fitchratings.com
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