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Bank Millennium S.A. -- Moody's affirms Bank Millennium's Baa1 deposit ratings and baa3 standalone BCA, outlook stable

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Rating Action: Moody's affirms Bank Millennium's Baa1 deposit ratings and baa3 standalone BCA, outlook stableGlobal Credit Research - 27 Jan 2022Frankfurt am Main, January 27, 2022 -- Moody's Investors Service ("Moody's") has today affirmed Bank Millennium S.A.'s (BM) long and short-term bank deposit ratings at Baa1/Prime-2, both the Baseline Credit Assessment (BCA) and Adjusted BCA at baa3, the Counterparty Risk Assessment (CRA) at A3(cr)/Prime-2(cr) and the Counterparty Risk Ratings (CRR) at A3/Prime-2. Concurrently, Moody's maintains a stable outlook on BM's long-term deposit ratings.The rating affirmation reflects our expectation that the bank will be able to absorb adverse impacts from its legacy Swiss franc mortgages exposure over the next 12 to 18 months, based on the bank's strong financial flexibility, a result of above-peer efficiency and revenue generation.A full list of affected ratings can be found at the end of this press release.RATINGS RATIONALE-- RATIONALE FOR AFFIRMING THE RATINGSToday's ratings affirmation reflects Moody's assessment that BM will be able to absorb additional high litigation costs arising from its legacy Swiss franc mortgage loan book, and expenses related to the conversion of parts of these loans. In 2020, BM started offering borrowers to convert on a voluntary basis their Swiss franc mortgages into Polish zloty. With those out-of-court settlements the bank aims to reach a reduction of Swiss franc loans to below 10% of total loans by 2023, which will also lower regulatory capital requirements, and to 7% by end-2024. Up to now, BM has made considerable progress, bringing these legacy mortgages down by 17% year-on-year, to 13.6% of total loans as of September 2021, from more than 25% two and half years ago, still above the system's average of 6.8% though.The rating action also takes into account BM's strong earnings generation capacity and efficiency, providing the bank strong financial flexibility to absorb additional legal costs and are likely to support the recovery of capital buffers starting from 2023.The bank's net profitability is likely to remain strained by additional legal provisions in 2022 and 2023, although gradually declining from the 2021 level as the bank continues to accelerate the reduction of its legacy Swiss franc mortgages via voluntary settlements. At the same time, rapidly rising policy rates in Poland could meaningfully support the bank's net interest income partly offsetting legal provisioning expenses. As of September 2021, BM reported an interim net loss of PLN823 million, compared to a net profit of PLN132 million a year earlier. The bank set aside PLN1.6 billion of legal provisions because of the rising number of lawsuits of Swiss franc borrowers, and reported another PLN218 million conversion costs related to the out-of-court settlements; altogether 1.3 times the bank's interim pre-tax profit.Moody's expects a decline of BM's capital ratios in 2022 as costs related to Swiss franc mortgages, foremost litigation costs, may still exceed operational profits, unless being offset by favourable policy interest rate developments. However, the rating agency considers the weakening of capital would be limited to a level that will still be commensurate with the bank's baa3 financial profile. BM reported a capital ratio of 18.2% as of September 2021, comprising PLN2.3 billion of capital in excess over its 13.54% regulatory required minimum, available to cover potential losses.The affirmation of BM's ratings further reflects the bank's overall good asset quality with non-performing loans below the sector average and sound loss reserve coverage, balancing unseasoned credit risks due to rapid mortgage loan growth.The bank's funding and liquidity profile has improved as settlements of Swiss franc mortgages have accelerated, limiting the bank's exposure to wholesale derivative markets. Furthermore, the bank's newly established mortgage subsidiary provides access to inexpensive long-term funding supporting BM's maturity profile and its 2024 strategy which considers low-risk mortgages as one of the key core products.The affirmation of BM's deposit ratings reflects: (1) the bank's BCA of baa3; (2) Moody's assumption of a "moderate" probability of affiliate support from its parent Banco Comercial Portugues, S.A. (BCP, Baa2/Ba1 stable, ba2) which results in no uplift for BM; (3) maintaining two notches of uplift for deposit ratings from the rating agency's Advanced Loss-Given-Failure (LGF) analysis, and (4) no additional rating uplift based on our assumption of a low likelihood of government support from the Government of Poland (A2 stable).OUTLOOKThe stable outlook on BM's long-term deposit ratings reflects Moody's view that the bank's credit profile will remain broadly unchanged over the next 12-18 months. The stable outlook is also in line with that of its parent.FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGSUpward pressure on the bank's ratings over the next 12-18 months could develop from an improvement in BM's BCA, subject to continued limited operational and financial interlinks with the parent, following (1) a significant reduction in the bank's Swiss franc mortgage exposure and a favourable outcome of the foreign currency mortgage legal disputes, and (2) strongly improving net profitability leading to a recovery of capital buffers after losses incurred in the course of the legacy work-out. Any additional volume of subordinated instruments, implying higher protection for senior creditors and a lower loss given failure in resolution, could lead to an additional uplift of up to one notch for the bank's deposit ratings.BM's ratings could be downgraded because of a downgrade of its BCA following a downgrade of the parent's ba2 BCA. BM's baa3 BCA could be downgraded because of (1) a significant weakening of the bank's capitalisation beyond our expectations, and (2) a material increase in asset risk. Furthermore, a decrease in BM's volume of junior deposits and debt instruments relative to its total banking assets could reduce the two notches of rating uplift that BM's deposit ratings currently have in accordance with our Advanced LGF analysis. LIST OF AFFECTED RATINGS Issuer: Bank Millennium S.A. ..Affirmations: ....Long-term Counterparty Risk Ratings, affirmed A3....Short-term Counterparty Risk Ratings, affirmed P-2....Long-term Bank Deposits, affirmed Baa1, outlook remains Stable....Short-term Bank Deposits, affirmed P-2....Long-term Counterparty Risk Assessment, affirmed A3(cr)....Short-term Counterparty Risk Assessment, affirmed P-2(cr)....Baseline Credit Assessment, affirmed baa3....Adjusted Baseline Credit Assessment, affirmed baa3 ..Outlook Action: ....Outlook remains Stable PRINCIPAL METHODOLOGY The principal methodology used in these ratings was Banks Methodology published in July 2021 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1269625. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.REGULATORY DISCLOSURESFor further specification of Moody's key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. Moody's Rating Symbols and Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security 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.The ratings have been disclosed to the rated entity or its designated agent(s) and issued with no amendment resulting from that disclosure.These ratings are solicited. Please refer to Moody's Policy for Designating and Assigning Unsolicited Credit Ratings available on its website www.moodys.com.Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.Moody's general principles for assessing environmental, social and governance (ESG) risks in our credit analysis can be found at http://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1288235.The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the UK and is endorsed by Moody's Investors Service Limited, One Canada Square, Canary Wharf, London E14 5FA under the law applicable to credit rating agencies in the UK. 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