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Rating Action:

Moody's upgrades three Polish banks' ratings, affirms the ratings of one banking group

19 Dec 2017

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

No Related Data.
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Additional terms for Japan only: Moody's Japan K.K. ("MJKK") is a wholly-owned credit rating agency subsidiary of Moody's Group Japan G.K., which is wholly-owned by Moody's Overseas Holdings Inc., a wholly-owned subsidiary of MCO. Moody's SF Japan K.K. ("MSFJ") is a wholly-owned credit rating agency subsidiary of MJKK. MSFJ is not a Nationally Recognized Statistical Rating Organization ("NRSRO"). Therefore, credit ratings assigned by MSFJ are Non-NRSRO Credit Ratings. Non-NRSRO Credit Ratings are assigned by an entity that is not a NRSRO and, consequently, the rated obligation will not qualify for certain types of treatment under U.S. laws. MJKK and MSFJ are credit rating agencies registered with the Japan Financial Services Agency and their registration numbers are FSA Commissioner (Ratings) No. 2 and 3 respectively.

MJKK or MSFJ (as applicable) hereby disclose that most issuers of debt securities (including corporate and municipal bonds, debentures, notes and commercial paper) and preferred stock rated by MJKK or MSFJ (as applicable) have, prior to assignment of any credit rating, agreed to pay to MJKK or MSFJ (as applicable) for credit ratings opinions and services rendered by it fees ranging from JPY125,000 to approximately JPY250,000,000.

MJKK and MSFJ also maintain policies and procedures to address Japanese regulatory requirements.

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