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Rating Action:

Moody's affirms UniCredit SpA's Baa1/P-2 debt and deposit ratings and ba1 standalone BCA; outlook stable

19 Dec 2016

London, 19 December 2016 -- Moody's Investors Service has today affirmed UniCredit SpA's Baa1 long-term senior debt and deposit ratings, Prime-2 short-term ratings, ba1 standalone baseline credit assessment (BCA) and subordinated debt instruments and programmes.

The affirmation of UniCredit's ratings reflects Moody's view that the combination of a very large capital raising coupled with a reduction in problem loans and increased provisioning coverage places the bank in a better position to meet the challenges of an adverse operating environment in Italy. The affirmation assumes that the announced capital increase and associated reduction in net problem loans proceeds as anticipated.

Separate press releases will be issued for the group's rated subsidiaries not included within this action. A full list of rating actions follows at the end of this release.

RATINGS RATIONALE

The affirmation of the BCA of ba1 reflects the combination of a number of actions the bank announced on 13 December intended to improve its fundamentals. In particular, Moody's expects an increase in the bank's Common Equity Tier 1 (CET1) ratio to 12%, compared to 10.8% in September 2016, which places it in a stronger position to absorb unexpected shocks. The bank will reduce its stated gross problem loan ratio via a partial sale and asset reclassification to 11.7%, although this remains high by international standards, and will increase provisioning coverage to an average of 54% on the remaining problem loans. This increased coverage will result in a large net loss of about 1.2% of tangible assets in 2016, but the rating agency expects a net return on assets closer to 0.3% in 2017.

UniCredit's strategic transformation plan spans three years up to 2019. Key elements of the plan are (1) the securitisation and disposal of €17.7 billion of problem loans; (2) capital raising via a €13 billion share issue to be completed by March 2017, together with the disposal of certain valuable assets; (3) a €12.2 billion charge in 4Q 2016, including €8.1 billion of loan loss provisions to strengthen the bank's problem loan coverage and a €1.7 billion upfront charge aimed at lowering the cost base by €1.7 billion annually; and (4) a general transformation and simplification of the group's operating model.

The scope of the plan and the magnitude of the loss expected in 2016 underlines some of the challenges currently faced by the bank.

After the planned securitisation and disposals of problem loans, Moody's expects that the reported problem loan portfolio will fall to €57 billion in 2017, a significant decline versus the current total of €75 billion. However, the gross problem loan ratio of 11.7% will still be more than double the European average of 5.4% of gross loans. The resultant risk of further losses from this portfolio is mitigated however by value adjustments which cover the gross problem loans by 54%, resulting in a net problem loan ratio of around 5.4%.

UniCredit's capitalisation has historically been at the weaker end of a peer group of large systemically important banks. The circa €18 billion of capital raised from the share issue and disposals will fund the above-mentioned write-downs and charges and increase the CET1 ratio to 12%. While significantly stronger than the 10.8% reported at end-September 2016, this ratio is still weaker than at some of the bank's international peers.

The estimated €10 billion loss now expected in 2016 brings the total net loss incurred over the past five years (as adjusted by Moody's to exclude goodwill write down in 2013) to about €14 billion. Moody's believes that the additional provisioning planned in 4Q16 sets the stage for lower loan loss impairments henceforth, and expects a net profit of over €2 billion in 2017. UniCredit has set itself a target of €4.7 billion net profit for 2019, equivalent to a 9% return on tangible equity, compared to 4% in 2015. This is underpinned by slightly higher revenues, cost cutting and a lower cost of credit.

Moody's believes that this target will nevertheless be challenging and would mark a significant break from UniCredit's relatively chequered history of meeting its own targets. Successful execution hinges on (1) a 0.6% compounded annual growth rate of revenues in a negative interest rate environment; (2) a transformation plan targeting a 14% reduction of the cost base and a best-in-class cost-to-income ratio of 52% by 2019, despite the lack of potential for merger-related savings; and (3) a return to a relatively mild level of loan impairment charges, equivalent to 49 basis points of loans in 2019, which will depend on Italian economic growth, which Moody's expects to be limited.

That said, Moody's expects some improvement in profitability from weak historical levels because the execution risk of the plan is mitigated by the new management team's commitment to an in depth overhauling of the bank, with commensurate incentive schemes, and by agreements to reduce staff which are now largely in place.

OUTLOOK

The stable outlook reflects Moody's expectations that the capital issue and bad debt sale will be completed in line with the bank's announcement and that UniCredit will broadly meet its plan targets for 2017.

WHAT COULD CHANGE THE RATING UP/DOWN

Moody's could change the outlook to positive following tangible progress towards 2019 planned targets, including (1) a reduction of the problem loans below about 10%; (2) a further increase in the CET1 ratio to around 12.5%; and (3) a successful transition towards a more efficient business model. Moody's could thus raise the BCA if the bank fully meets its planned targets. An upgrade in the BCA would result in an upgrade of UniCredit's senior debt and deposit ratings.

Conversely, Moody's could downgrade UniCredit's BCA if the bank fails to execute its restructuring. More specifically, the agency could lower the BCA if (1) problem loans decline less than expected; (2) capital targets are not met; or (3) cost efficiency targets are missed. UniCredit's senior unsecured debt could also be downgraded if the BCA is lowered or the bank reduces its subordinated debt cushion below 8% of tangible banking assets at resolution.

LIST OF AFFECTED RATINGS

Issuer: UniCredit SpA

..Affirmations:

....Long-term Counterparty Risk Assessment, affirmed Baa1(cr)

....Short-term Counterparty Risk Assessment, affirmed P-2(cr)

....Long-term Deposit Ratings, affirmed Baa1 Stable

....Short-term Deposit Ratings, affirmed P-2

....Long-term Deposit Note/CD Program, affirmed (P)Baa1

....Senior Unsecured Regular Bond/Debenture, affirmed Baa1 Stable

....Senior Unsecured Medium-Term Note Program, affirmed (P)Baa1

....Subordinate Regular Bond/Debenture, affirmed Ba1

....Subordinate Medium-Term Note Program, affirmed (P)Ba1

....Junior Subordinated Regular Bond/Debenture, affirmed Ba3(hyb)

....Other Short Term Medium-Term Note Program, affirmed (P)P-2

....Pref. Stock Non-cumulative, affirmed B1(hyb)

....Adjusted Baseline Credit Assessment, affirmed ba1

....Baseline Credit Assessment, affirmed ba1

..Outlook Action:

....Outlook remains Stable

Issuer: UniCredit Bank Ireland p.l.c.

..Affirmations:

....Backed Senior Unsecured Regular Bond/Debenture, affirmed Baa1 Stable

....Backed Senior Unsecured Medium-Term Note Program, affirmed (P)Baa1

....Backed Subordinate Medium-Term Note Program, affirmed (P)Ba1

....Backed Other Short Term, affirmed (P)P-2

....Backed Commercial Paper, affirmed P-2

..Outlook Action:

....Outlook remains Stable

Issuer: UniCredit Int'l Bank (Luxembourg) S.A.

..Affirmations:

....Backed Senior Unsecured Regular Bond/Debenture, affirmed Baa1 Stable

....Backed Senior Unsecured Medium-Term Note Program, affirmed (P)Baa1

....Backed Commercial Paper, affirmed P-2

....Backed Other Short Term, affirmed (P)P-2

....Backed Pref. Stock Non-cumulative, affirmed B1(hyb)

..Outlook Action:

....Outlook remains Stable

Issuer: UniCredit Luxembourg Finance S.A.

..Affirmations:

....Backed Subordinate Regular Bond/Debenture, affirmed Ba1

..Outlook Action:

....No Outlook assigned

Issuer: UniCredito Italiano Delaware, Inc.

..Affirmations:

....Backed Commercial Paper, affirmed P-2

..Outlook Action:

....No Outlook assigned

Issuer: Unicredito SpA, New York Branch

..Affirmations:

....Long-term Deposit Rating, Affirmed Baa1 Stable

....Long-term Counterparty Risk Assessment, affirmed Baa1(cr)

....Short-term Counterparty Risk Assessment, affirmed P-2(cr)

..Outlook Action:

....Outlook remains Stable

PRINCIPAL METHODOLOGY

The principal methodology used in these ratings was Banks published in January 2016. Please see the Rating 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.

Carlo Gori
Vice President - Senior 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

Nicholas Hill
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

No Related Data.
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