Greater clarity on foreign-currency mortgage conversion legislation underpins rating action
London, 19 December 2017 -- Moody's Investors Service has today upgraded the ratings of mBank S.A.,
Bank Millennium S.A. and Bank BGZ BNP Paribas S.A.
It also affirmed the ratings of Powszechna Kasa Oszczednosci Bank Polski
S.A. and its domestic mortgage lender subsidiary,
PKO Bank Hipoteczny S.A.
The rating action is driven by greater clarity on the legislative proposal
regarding foreign currency mortgages at Polish banks, and Moody's
assessment that the costs associated with the draft legislation will be
manageable for the banks.
"The costs of the proposed legislation to banks will be manageable
and will be phased in over multiple quarters," said Arif Bekiroglu,
an Associate Vice President at Moody's. "The legislation
is likely to be implemented without compromising banks' solvency,
and are being made at a time of continuing strong economic growth in Poland."
Earlier draft bills that proposed a forced conversion of Swiss franc mortgage
loans into Polish zloty are unlikely to be implemented in Moody's
opinion. These bills would have resulted in excessive costs to
banks and undermined overall financial stability.
The following banks' ratings are affected by today's actions:
- mBank S.A.'s long-term local and foreign-currency
deposit ratings were upgraded to Baa1 from Baa2, its long-term
Counterparty Risk Assessment (CRA) was upgraded to A3(cr) from Baa1(cr),
its baseline credit assessment (BCA) was upgraded to ba1 from ba2;
its adjusted BCA was upgraded to baa3 from ba1; the outlook on the
long-term deposit ratings is changed to positive from stable.
The bank's short-term Prime-2 deposit ratings and
Prime-2(cr) CRA are affirmed.
- Bank Millennium S.A.'s long-term and short-term
local and foreign-currency deposit ratings were upgraded to Baa3/Prime-3
from Ba1/Not Prime, the long-term and short-term CRA
were upgraded to Baa2(cr)/Prime-2(cr) from Baa3(cr)/Prime-3(cr),
the BCA and adjusted BCA were upgraded to ba2 from ba3; the outlook
on the long-term deposit ratings is stable.
- Bank BGZ BNP Paribas S.A.'s long-term
local and foreign-currency deposit ratings were upgraded to Baa1
from Baa2. At the same time, Prime-2 short-term
local and foreign-currency deposit ratings; A3(cr)/Prime-2(cr)
long-term and short-term CRA; the ba2 BCA and baa3
adjusted BCA were affirmed; the outlook on the long-term deposit
ratings is stable.
- Powszechna Kasa Oszczednosci Bank Polski S.A.'s
A2/Prime-1 long-term and short-term local and foreign-currency
deposit ratings; A2(cr)/Prime-1(cr) long-term and short-term
CRA; A3 long-term senior unsecured debt and (P)A3/(P)Prime-2
long-term and short-term local and foreign-currency
medium term note program ratings were affirmed. Additionally,
the BCA and adjusted BCA were affirmed at baa2; the outlook on the
long-term deposit and senior unsecured debt ratings is stable.
- PKO Bank Hipoteczny S.A.'s Baa1/Prime-2
long-term and short-term local and foreign-currency
issuer ratings and A3(cr)/Prime-2(cr) long-term and short-term
CRA were affirmed; the outlook on the long-term issuer ratings
is stable.
The full list of the affected ratings can be found at the end of this
press release.
RATINGS RATIONALE
(1) GREATER CLARITY ON LEGISLATIVE PROPOSAL ON CONVERSION OF FOREIGN-CURRENCY
MORTGAGES AND STRONG ECONOMIC GROWTH UNDERPINS RATING ACTION
A draft bill in the Polish parliament, which Moody's believes
is now the most likely legislation to be implemented, proposes establishing
a relief fund for Polish borrowers who have taken out mortgages in foreign
currencies (FX), in particular in Swiss francs. The proposal
calls for banks to contribute 0.5% of their total foreign
currency-mortgage exposures to the fund every quarter. The
proposal, which might yet be softened as it moves through the legislative
process, underlines the regulator's intention to provide a
transparent framework to reduce the risks of foreign currency mortgages,
at a cost that is significantly less onerous for banks than in previously
proposed bills. The previously proposed bills that envisioned a
much higher financial burden on banks are on hold, or have been
discontinued. Under the current draft bill, Moody's
believes that Polish banks will be able to absorb the extra costs without
compromising their credit growth and stability.
The proposal comes at a time of robust economic growth in Poland.
Moody's forecasts real GDP growth of 3.5% in 2018
and 3.2% in 2019, following current solid growth of
about 4.3% in 2017. The benign economic environment
will continue to provide Polish banks with new lending and revenue opportunities
and keep loan-provisioning costs at bay, thus helping banks
digest the additional expense of the mortgage relief fund.
The rating action captures Moody's sensitivity studies which assess
the impact on profits and capital of the most impacted banks. Besides
the cost of the proposed FX-mortgage relief fund, the rating
agency's analysis also incorporates (a) the decline of Tier 1 capital
ratios of the banks on 1st of December, following a 50% increase
in FX-mortgages' risk weights to 150% under standard
approach of risk weighted assets (RWA) calculation, and (b) Moody's
expectation of some potential increase in RWAs for foreign currency mortgages
under internal ratings-based (IRB) approaches applicable to mBank
and Bank Millennium, due to a likely introduction by Polish regulators
of a loss-given-default floor. The adverse impact
of the RWA increase will gradually decline as these FX-mortgages
are converted into local currency, providing capital relief due
their lower RWAs at 35% or 75% under the standard approach
depending on the type of appraisal used for the underlying property.
(2) BANK-SPECIFIC CONSIDERATIONS
- mBank S.A.
The one-notch upgrade of mBank's long-term deposit
ratings was driven by: (1) the one notch upgrade of the bank's BCA
to ba1 from ba2; (2) the rating agency's unchanged high affiliate
support assumption from its parent, Commerzbank AG (LT Deposits
A2 positive, ST Deposits Prime-1; BCA baa3), resulting
in a one-notch rating uplift and a higher adjusted BCA of baa3
from ba1 previously; and (3) maintaining two notches of rating uplift
from Moody's Advanced Loss Given Failure (LGF) analysis.
The upgrade of the bank's BCA reflects the resilience of mBank's
solvency metrics to the anticipated impact of the proposed FX mortgage
conversion measures. mBank's capitalisation improved in the
first nine months of 2017, with the Common Equity Tier 1 (CET1)
ratio of 17.8%, up from 17.3% at year-end
2016. Moody's expects that a potential increase in RWAs for
FX-mortgages under IRB approach for banks, including,
mBank, will not materially diminish the robust capital adequacy
of mBank.
The bank's non-performing loans (NPL) ratio was little changed
in the first nine months of 2017 and stood at 5.2%,
better than the average 6.3% for the Polish banking sector.
mBank's exposure to Swiss Franc mortgages is still sizeable despite gradually
declining to 18.2% of total loans as of September 2017 from
22.6% in December 2016. Despite the low margins on
foreign-currency mortgages and the introduction of a bank levy
from 2017, mBank has managed to maintain stable profitability,
with its net income averaging about 0.76% of tangible assets
for the past two years. Moody's believes that mBank will
maintain satisfactory profitability even after the contributions to the
proposed FX-mortgage relief fund. The bank's overall
liquidity profile is adequately supported by mostly domestic deposit funding.
It has, however, a high reliance on derivatives to finance
FX-mortgages.
The positive outlook on mBank's long-term deposit rating reflects
a combination of (a) Moody's expectation of further improvements in the
bank's credit profile over the next 12 to 18 months, owing to continued
reduction in tail risks as FX-mortgages continue to decline;
and (b) the positive outlook on the parent bank's ratings.
- Bank Millennium S.A.
The one-notch upgrade of Bank Millennium's long-term deposit
ratings was driven by: (1) the one notch upgrade of the bank's BCA
and adjusted BCA to ba2 from ba3; (2) maintaining the current two-notches
rating uplift for deposit ratings from Moody's Advanced LGF analysis;
and (3) no rating uplift from government support.
The one notch upgrade of Bank Millennium's BCA reflects its resilience
to the expected impact of the upcoming FX mortgage conversion measures
but also the rating agency's considerations about correlation risk
between subsidiaries and their weaker parent banks which constrains Bank
Millenium's BCA at this time. The bank displays strong capitalization
with a CET1 ratio of 20.51% and CET1 over total assets leverage
ratio at 9.46% and could accommodate a potential increase
in RWA under the IRB approach on FX-mortgages. Its good
profit generation, with net income of 0.95% of tangible
assets enables Bank Millenium to absorb the contributions to the proposed
FX-mortgage relief fund and maintain a sound bottom line.
Although gradually declining, FX mortgages still amount to 30%
of the bank's gross loans, the highest proportion amongst
its peers, as of Q3-2017. Bank Millenium's overall
liquidity profile is sound, supported by primarily domestic deposits
funding and a high derivatives reliance to finance FX-mortgages.
Furthermore, we consider that subsidiaries are likely to be affected
by the weaker credit profile of their parent. As a result,
the three-notch difference between the BCA's of Bank Millennium
and its parent Banco Comercial Portugues, S.A. (BCP:
LT Deposits B1, stable, ST Deposits Not Prime; BCA b2),
is underpinned by the limited operational inter-linkages,
full funding independence from the parent, and close regulatory
supervision by the Polish Financial Supervision Authority. However,
this also acts as a constraint on Bank Millennium's BCA going forward.
The stable outlook on Bank Millennium's long-term deposit ratings
reflects Moody's expectation of no material changes in the bank's credit
profile over the next 12 to 18 months and is in line with the stable outlook
on BCP's ratings.
- Bank BGZ BNP Paribas S.A. (BGZ BNPP)
The one-notch upgrade of BGZ BNPP's long-term deposit ratings
was driven by: (1) the affirmation of the bank's BCA, (2)
affirmation of the bank's adjusted BCA that incorporates two notches
of uplift from our assumption of high parental support from BNP Paribas
(LT Deposits Aa3 stable, ST Deposits Prime-1, BCA baa1),
(3) increase to two-notches from one-notch the rating uplift
for deposit ratings from Moody's Advanced LGF analysis; and (4) no
rating uplift from government support.
The increase in the uplift provided from Moody's Advanced LGF analysis
to two notches from one is supported by the growth of BGZ BNPP's deposit
base and reduction in inter-group funding. This resulted
in a relatively higher share of bail-in able junior deposits in
the banks' liability structure, implying a lower loss-given-failure
in resolution the depositors.
The affirmation of BGZ BNPP's BCA reflects the improving solvency of the
bank, supported by moderate asset quality with non-performing
to gross loans ratio of 7.1% and manageable exposure to
FX-mortgages which amount to approximately 10% of its gross
loans (largely in line with the system average, as of Q3 2017),
allowing the bank to absorb the additional capital impact and cost associated
with the proposed FX mortgage conversion measures. However,
BGZ BNPP's capitalisation with a CET1 ratio of 10.66%
and leverage ratio at 8.2%, remains relatively lean
and is improving at only modest pace. The bank has strengthened
net income of 0.61% of tangible assets, annualised
based on Q3-2017 figures, compared with just 6 basis points
reported a year earlier. The core profitability improvement is
sustainable in the rating agency's view as it was achieved on the
back of the absorption of merger costs and increased synergies and cost
cuttings, and timely to support the absorption of cost related to
the contributions to the proposed FX-mortgage relief fund.
The bank's overall liquidity profile is strong, supported
by primarily domestic deposits funding and moderate market funding reliance.
The stable outlook on BGZ BNPP's long-term deposit ratings reflects
Moody's expectation of no material changes in the bank's credit profile
over the next 12 to 18 months and is in line with the stable outlook on
BNP Paribas.
- Powszechna Kasa Oszczednosci Bank Polski S.A (PKO-BP)
The affirmation of PKO BP's ratings is driven by: (1) affirmation
of the bank's BCA and adjusted BCA; (2) maintaining the current
two-notches rating uplift for deposit and one notch rating uplift
for senior unsecured ratings from Moody's Advanced LGF analysis;
and (3) one notch rating uplift from government support on senior ratings.
The affirmation of PKO BP's BCA reflects the bank's resilience to
the expected impact of the upcoming FX mortgage conversion measures on
the back of strong solvency and satisfactory asset quality with moderate
exposure to FX-mortgages at approximately 12% of its gross
loans. It has strong capital, with a CET1 ratio of 16.77%
and leverage at 10.95%. Combined with good profit
generation, with net income at 1.05% of tangible assets,
this will provide a comfortable loss absorption cushion against the bank's
exposure to FX-mortgages and potential cost to the FX-mortgage
relief fund. The bank's overall liquidity profile is strong,
supported by primarily domestic deposit funding and increasing covered-bond
reliance.
The stable outlook on PKO-BP's long-term deposit ratings
reflects Moody's expectation of no material changes in the bank's credit
profile over the next 12 to 18 months and is in line with the stable outlook
on Poland (A2, stable).
- PKO Bank Hipoteczny S.A.
The affirmation of the PKO BH's issuer ratings follows the affirmation
of PKO BP's ratings. PKO BH's ratings are positioned
one notch below the senior unsecured debt rating of its parent,
PKO BP. This reflects (1) PKO BP's full ownership of PKO BH,
as well as its strategic fit and high operational integration within the
group; and (2) PKO BP's commitment to maintain the capital and liquidity
of its subsidiary at satisfactory levels, meeting all regulatory
requirements. The bank has no exposure to FX mortgages and will
therefore not be directly impacted by the upcoming legislations regarding
FX-mortgages.
The stable outlook on PKO-BH's long-term issuer ratings
is in line with that of PKO BP's and reflects Moody's expectation
of no material changes in the bank's credit profile over the next 12 to
18 months.
-- WHAT COULD MOVE THE RATINGS UP/DOWN
A material reduction in the banks' foreign currency-mortgage
exposure, without a significant adverse cost could provide positive
pressure on the banks' ratings. An adverse policy proposal
on foreign currency mortgages that will result in the banks bearing a
higher-than-anticipated burden in our sensitivity studies
would result in negative rating implications.
A improvement, or deterioration, in the country's Macro Profile,
and/or in individual banks' standalone financial metrics or their majority
shareholder banks' may have positive or negative rating implications.
A change in the banks' liability structures may change the uplift provided
by Moody's Advanced LGF analysis and lead to a higher or lower notching
from the banks' adjusted BCAs, thereby affecting deposit ratings.
A change in the sovereign rating of Poland could result in a change in
the government support embedded into PKO BP's senior ratings.
LIST OF AFFECTED RATINGS
Issuer: mBank S.A.
Upgrades:
....LT Bank Deposits, Upgraded to Baa1
from Baa2, Outlook Changed To Positive From Stable
....Adjusted Baseline Credit Assessment,
Upgraded to baa3 from ba1
....Baseline Credit Assessment, Upgraded
to ba1 from ba2
....LT Counterparty Risk Assessment,
Upgraded to A3(cr) from Baa1(cr)
Affirmations:
....ST Bank Deposits, Affirmed P-2
....ST Counterparty Risk Assessment,
Affirmed P-2(cr)
Outlook Actions:
....Outlook, Changed To Positive From
Stable
Issuer: Bank Millennium S.A.
Upgrades:
....LT Bank Deposits, Upgraded to Baa3
from Ba1, Outlook Remains Stable
....ST Bank Deposits, Upgraded to P-3
from NP
....Adjusted Baseline Credit Assessment,
Upgraded to ba2 from ba3
....Baseline Credit Assessment, Upgraded
to ba2 from ba3
....LT Counterparty Risk Assessment,
Upgraded to Baa2(cr) from Baa3(cr)
....ST Counterparty Risk Assessment,
Upgraded to P-2(cr) from P-3(cr)
Outlook Actions:
....Outlook, Remains Stable
Issuer: Bank BGZ BNP Paribas S.A.
Upgrades:
....LT Bank Deposits, Upgraded to Baa1
from Baa2, Outlook Remains Stable
Affirmations:
....ST Bank Deposits, Affirmed P-2
....Adjusted Baseline Credit Assessment,
Affirmed baa3
....Baseline Credit Assessment, Affirmed
ba2
....LT Counterparty Risk Assessment,
Affirmed A3(cr)
....ST Counterparty Risk Assessment,
Affirmed P-2(cr)
Outlook Actions:
....Outlook, Remains Stable
Issuer: Powszechna Kasa Oszczednosci Bank Polski S.A.
Affirmations:
....LT Bank Deposits, Affirmed A2,
Outlook Remains Stable
....ST Bank Deposits, Affirmed P-1
....Senior Unsecured Regular Bond/Debenture,
Affirmed A3, Outlook Remains Stable
....Senior Unsecured MTN Program, Affirmed
(P)A3
....Other Short Term Program, Affirmed
(P)P-2
....Adjusted Baseline Credit Assessment,
Affirmed baa2
....Baseline Credit Assessment, Affirmed
baa2
....LT Counterparty Risk Assessment,
Affirmed A2(cr)
....ST Counterparty Risk Assessment,
Affirmed P-1(cr)
Outlook Actions:
....Outlook, Remains Stable
Issuer: PKO Bank Hipoteczny S.A.
Affirmations:
....LT Issuer Rating, Affirmed Baa1,
Outlook Remains Stable
....ST Issuer Rating, Affirmed P-2
....LT Counterparty Risk Assessment,
Affirmed A3(cr)
....ST Counterparty Risk Assessment,
Affirmed P-2(cr)
Outlook Actions:
....Outlook, Remains Stable
PRINCIPAL METHODOLOGY
The principal methodology used in these ratings was Banks published in
September 2017. 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.
Items color coded in purple in this Press Release relate to unsolicited ratings for a rated entity which is non-participating.
The below contact information is provided for information purposes only.
Please see the ratings tab of the issuer page at www.moodys.com,
for each of the ratings covered, Moody's disclosures on the
lead rating analyst and the Moody's legal entity that has issued
the ratings.
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
Client Service: 44 20 7772 5454
Carola Schuler
MD - Banking
Financial Institutions Group
JOURNALISTS: 44 20 7772 5456
Client Service: 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
Client Service: 44 20 7772 5454
