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Rating Action:

Moody's affirms Bank Millennium's Ba1 deposit ratings, ba3 standalone BCA

22 Jun 2016

Rating action follows affirmation of majority shareholder Banco Comercial Portugues' ratings

London, 22 June 2016 -- Moody's Investors Service has today affirmed the long and short-term bank deposit ratings at Ba1/Not Prime, the baseline credit assessment (BCA) ba3, Adjusted BCA of ba3 and the Counterparty Risk Assessment (CRA) at Baa3(cr)/Prime-3(cr) of Bank Millennium S.A. (BM). Concurrently, Moody's maintains a stable outlook on BM's long-term ratings.

The rating action follows the upgrade of the BCA of BM's parent that holds a majority stake at 50.1%, Banco Comercial Portugues, S.A. (BCP), to b3 from caa1. As part of the action, BCP's long-term deposits and senior debt ratings were affirmed at B1 stable and B1 negative respectively (for additional information on BCP's ratings, see the relevant press release dated 14 June 2016; https://www.moodys.com/viewresearchdoc.aspx?docid=PR_350415).

RATINGS RATIONALE

Affirmation of Deposit Ratings, Adjusted BCA and CRA

The affirmation of BM's deposit ratings reflects: 1) affirmation of the bank's BCA; and (2) the results from our Advanced Loss Given Failure (LGF) analysis, which takes into account the severity of loss faced by the different liability classes in resolution, and which leads to two notches of rating uplift off its adjusted BCA - reflecting the likely reduction in expected loss due to the loss absorption provided by the substantial volume of deposits, as well as some senior and subordinated debt.

We assess the probability of parental support from BCP to be high. However, this does not bring any benefit owing to BCP's significantly weaker b3 BCA, resulting in Adjusted BCA of BM being equal to its BCA. We incorporate a low likelihood of public support for BM's deposits in the event of its failure, which we don't consider as a systemically important bank. BM operates in Poland (A2, negative), which is an EU-member country. As such, under the Bank Recovery and Resolution Directive (BRRD) it is subject to an Operation Resolution Regime, similar to other EU countries. Poland is on its way to adopt a national version of the directive in the course of 2016. Furthermore, it reflects the operational resolution regime which is likely to restrict the ability of the government to provide such support, even if it were willing to do so, requiring losses to be imposed on even senior creditors and large depositors under many circumstances. As a result, BM's deposit ratings do not benefit from any support from Polish authorities.

The Baa3(cr)/P-3(cr) CR Assessment of BM is positioned three notches above the Adjusted BCA, based on the cushion against default provided to the senior obligations. In addition, the low probability of government support does not result in any uplift.

Affirmation of standalone BCA

The affirmation of BM's BCA is driven by BM's largely stable asset quality, good earnings generation and adequate capitalisation levels. As of year-end 2015 BM's (i) market shares are at established 5% of loans and deposits, (ii) asset quality with non-performing to gross loans at 4.5% is significantly better than the system average of 6.8%, and (iii) the capital position measured by the adjusted Tangible Common Equity to Risk Weighted Assets stands at a solid 16.4%. BM's profitability is at an adequate 0.84% largely in line with system average of 0.79% during the first quarter of 2016, as measured by the annualized net income to tangible assets.

At the same time the ba3 BCA is constrained by the significant portion of legacy foreign currency mortgages (predominantly CHF denominated), at 38.3% of BM's gross loan book and 2.9x its tier 1 capital, amongst the highest in the sector. The related risks are associated with asset quality, funding and cash collateral needs, due to CHF funding needs, under cross-currency swap agreements, which could be subject to fluctuations in the currency markets. Furthermore, the bank is highly sensitive, due to the high level of its exposure and weaker credit profile of its parent, to a potential foreign-currency mortgages conversion into the local currency, the zloty, due to an anticipated law where currently there is a high level of uncertainty around its final terms and impact on banks. As a result, BM's BCA is positioned at the lower end of the BCA range reflecting these material contingent risks.

The three-notch difference, one of the highest amongst Moody's rated banks' universe, between the BCA of the parent (BCP) and the subsidiary (BM) is underpinned by (1) the limited operational inter-linkages between BM and BCP, given BM's purely domestic focus within Poland and the absence of a common client base with its parent; (2) BM's full funding independence from its parent; and (3) close supervision of capital and liquidity buffers by the Polish regulatory authority (KNF), which provides, among others, annual dividend distribution guidelines. In our opinion, a wider gap than this would suggest minimal correlation between the default probabilities between the entities in the same group, which given some of the indirect linkages through the management and brand association, is in our opinion unlikely.

WHAT CAN CHANGE THE RATING UP/DOWN

There is no upwards pressure on the ratings of BM at present, given the high CHF mortgage exposure of the bank and the uncertainty surrounding the foreign-currency mortgages conversion into the local currency and its financial impact on banks. In addition, the inverse BCA gap with its parent represent a constraint due to BCP's still weak credit profile. Upward pressure on the ratings could materialize over the medium term, following a significant reduction in the CHF mortgage exposure of the bank, a benign outcome from the foreign-currency mortgages conversion and/or an improvement in BCP's BCA. Any additional volumes of subordinated instruments implying higher protection for senior creditors and a lower loss-given-failure in resolution, which could lead to an additional uplift for the deposit ratings up to one notch.

Negative pressure on the long-term deposit ratings could arise in the event of: (i) a downgrade of the parent combined with the erosion of the bank's franchise owing to group-related pressures; (ii) a substantial weakening in BM's profitability, erosion of its capital base and/or deterioration in asset quality resulting in our lowering its BCA; or (iii) BM's volume of subordinated instruments decreases relative to its total banking asset resulting in the reduction in the two notch rating uplift BM's deposits ratings current enjoy per our Advanced LGF analysis.

PRINCIPAL METHODOLOGY

The principal methodology used in these ratings was Banks published in January 2016. Please see the Ratings Methodologies page on www.moodys.com for a copy of this methodology.

REGULATORY DISCLOSURES

For ratings issued on a program, series or category/class of debt, this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

Arif Bekiroglu
Asst Vice President - Analyst
Financial Institutions Group
Moody's Investors Service Ltd.
One Canada Square
Canary Wharf
London E14 5FA
United Kingdom
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

Carola Schuler
MD - Banking
Financial Institutions Group
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

Releasing Office:
Moody's Investors Service Ltd.
One Canada Square
Canary Wharf
London E14 5FA
United Kingdom
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

Moody's affirms Bank Millennium's Ba1 deposit ratings, ba3 standalone BCA
No Related Data.
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