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Rating Action:

Moody's affirms the A2 deposit ratings of Powszechna Kasa Oszczednosci Bank Polski S.A.; outlook negative

16 May 2016

Baa1 issuer ratings of PKO Bank Hipoteczny S.A affirmed with stable outlook

London, 16 May 2016 -- Moody's Investors Service has today affirmed the A2/Prime-1 long- and short-term deposit ratings of Powszechna Kasa Oszczednosci Bank Polski S.A. (PKO BP). Moody's has also revised the outlook on the long-term deposit ratings to negative from stable.

This rating action follows a similar action on the ratings of the Polish sovereign (A2 negative), which Moody's put on negative outlook from stable on 14 May 2016 ("Moody's changes outlook on Poland's A2 rating to negative from stable; affirms rating"; https://www.moodys.com/research/--PR_348709). Today's outlook change indicates that the deposit ratings of PKO BP, which currently benefit from one notch uplift from government support, could be lowered in the scenario of a downgrade of the Polish sovereign.

The rating agency also affirmed the A3 senior unsecured debt rating of PKO BP and maintained the stable outlook, given that it is positioned one notch below the ratings of the Polish sovereign.

Moody's has also affirmed PKO BP's A2(cr)/P-1(cr) counterparty risk assessment, as well as its baa2 baseline credit assessment (BCA) and baa2 adjusted BCA.

At the same time, Moody's affirmed the ratings of PKO Bank Hipoteczny S.A. (PKO BH, PKO BP's mortgage bank subsidiary), namely the bank's Baa1/P-2 long- and short-term issuer ratings, and the A3(cr)/P-2(cr) counterparty risk assessment; the outlook on the long-term issuer ratings remains stable.

A list of affected ratings can be found at the end of this press release.

RATINGS RATIONALE

-- Powszechna Kasa Oszczednosci Bank Polski S.A.

The affirmation of PKO BP's A2 deposit and A3 senior unsecured debt ratings reflects Moody's expectation of continuous moderate support from Polish authorities, which currently results in a one-notch uplift, as well as the very low loss-given-failure for the deposits and low loss-given-failure for the senior unsecured debt based on Moody's analysis of the bank's liability structure under its Advanced Loss Given Failure (LGF) analysis.

The change in outlook to negative on the deposit ratings takes into account that in the case of a downgrade of the sovereign rating, the deposit ratings of PKO BP could lose the uplift from government support, which currently results in the bank's deposit ratings being at the same level as the sovereign rating. At the same time, the stable outlook on PKO BP's senior unsecured debt rating reflects the fact that the rating, at A3, is already lower than the rating of the sovereign and, as such, is unlikely to be affected in the case of a sovereign downgrade.

PKO BP is the largest commercial bank in Poland with a predominantly retail-oriented franchise. The affirmation of its baa2 BCA reflects its good asset quality and provisioning coverage, which have improved in recent years and stand at 6.6% and 64.6% in Q1 2016, respectively. At the same time, the bank has been strengthening its capital levels (following their decline at the time of the acquisition of the Polish subsidiary of Nordea in 2014), with a common equity tier 1 of 14.1% and a total capital ratio of 15.4% as of Q1 2016, which, however, remain somewhat below similarly rated peers. The profitability of the bank is under pressure, influenced negatively by the lower interest rate environment and the bank tax, which was introduced on 1 February 2016. PKO BP's moderate exposure to Swiss franc mortgages creates a contingent risk for its asset quality and capital in case of material volatility in the Swiss franc exchange rate. It also exposes the bank to the uncertainty from the possible introduction of a forced foreign currency mortgage conversion.

WHAT COULD MOVE THE RATINGS UP/DOWN

Upward pressure on PKO BP's BCA could result from significant strengthening of its capitalisation, while maintaining the improving trend in asset quality and coverage ratios, and preserving profitability. However, at this stage, any such upward pressure would be negated by the risks relating to a possible foreign-currency mortgages conversion. Upward pressure on the deposit ratings is unlikely given that they are already at the same level as the Polish sovereign rating, while an upgrade of the senior unsecured debt rating could only result from a higher notching from Moody's Advanced LGF analysis, which would require significant issuance of subordinated debt instruments.

Downwards pressure on the BCA could result from: (1) deterioration in capitalisation and/or asset quality; (2) weakening of profitability beyond Moody's expectations; and (3) a weakening of the bank's funding profile or liquidity base. In terms of the deposit and senior unsecured debt ratings, a downward movement is likely in the event of a downgrade of the bank's BCA, and/or a lower notching from Moody's Advanced LGF analysis. Additionally, a weakening of the sovereign rating of Poland would likely result in a decline in the government support embedded in PKO BP's deposit ratings.

-- PKO Bank Hipoteczny S.A.

The affirmation of PKO BH's Baa1/P-2 issuer ratings follows the affirmation of the senior unsecured rating of its parent, PKO BP, which Moody's uses as an anchor point for the ratings of the subsidiary. PKO BH's ratings are positioned one notch below the rating of its parent, which reflects: (1) full ownership by PKO PB, as well as its strategic fit and high operational integration within the group; and (2) PKO BP's commitment to maintaining the capital and liquidity of its subsidiary at satisfactory levels, meeting all regulatory requirements.

The stable outlook on the ratings of PKO BH reflects the stable outlook on the senior unsecured debt rating of PKO BP.

WHAT COULD MOVE THE RATINGS UP/DOWN

Given its status as a highly integrated subsidiary, PKO BH's issuer ratings could experience positive pressure as a result of an upgrade in the senior unsecured debt rating of PKO BP, or in the case that the parent extends a full and irrevocable guarantee over the liabilities of its subsidiary.

Similarly, a downgrade of PKO BP's senior unsecured debt rating would result in a similar action on the issuer ratings of PKO BH. We could also downgrade the ratings of PKO BH if the relationship between the subsidiary and its parent changes to an extent that would materially reduce the level of integration between the two.

LIST OF AFFECTED RATINGS

Issuer: Powszechna Kasa Oszczednosci Bank Polski S.A.

..Affirmations:

.LT Bank Deposits (Foreign Currency and Domestic Currency), affirmed A2, outlook changed to Negative from Stable

.ST Bank Deposits (Foreign Currency and Domestic Currency), affirmed P-1

.Senior Unsecured Debt (Foreign), affirmed A3, with Stable outlook

.Senior Unsecured MTN Program (Foreign), affirmed (P)A3

.Other Short Term Debt Program (Foreign), affirmed (P)P-2

.Baseline Credit Assessment, affirmed baa2

.Adjusted Baseline Credit Assessment, affirmed baa2

.Counterparty Risk Assessment, affirmed A2(cr)/P-1(cr)

..Outlook Actions:

.Outlook, changed to Negative (multiple) from Stable

Issuer: PKO Bank Hipoteczny S.A.

.LT Issuer rating (Foreign Currency and Domestic Currency), affirmed Baa1 with Stable outlook

.ST Issuer rating (Foreign Currency and Domestic Currency), affirmed P-2

.Counterparty Risk Assessment, affirmed A3(cr)/P-2(cr)

..Outlook Actions:

.Outlook, remains Stable

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.

Simone Zampa
VP - Senior Credit Officer
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 the A2 deposit ratings of Powszechna Kasa Oszczednosci Bank Polski S.A.; outlook negative
No Related Data.
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