Rating Action: Moody's affirms Bank Pekao's deposit ratings at A2, keeps outlook stable
Global Credit Research - 07 Jan 2021
Rating action follows the bank's acquisition of certain assets and liabilities of Idea Bank S.A. following its resolution
Limassol, January 07, 2021 -- Moody's Investors Service ("Moody's") has today affirmed the A2 long term and P-1 short term bank deposit ratings of Bank Polska Kasa Opieki S.A. (Pekao) and maintained the stable outlook on the long term deposit ratings. Concurrently the rating agency downgraded the bank's Baseline Credit Assessment (BCA) and Adjusted BCA to baa2 from baa1 and its long term Counterparty Risk Ratings (CRR) to A2 from A1. Pekao's long term Counterparty Risk Assessment (CRA) was also downgraded to A2(cr) from A1(cr). The short term CRRs and CRA were affirmed at P-1 and P-1(cr) respectively.
The rating action follows Pekao's announcement  concerning the acquisition of certain assets and liabilities of the small troubled Polish lender Idea Bank S.A (Idea) as part of Idea's resolution under the legal framework of the BGF Act. While the transaction has a very limited impact on Pekao's credit profile, the rating agency concluded that the anticipated evolution of the bank's financial fundamentals and performance is now more appropriately reflected in a one-notch lower BCA. At the same time Pekao's A2 long-term deposit ratings were affirmed owing to rating uplift from the application of Moody's Advanced Loss Given Failure (LGF) analysis and a moderate likelihood of support from the government of Poland (A2 stable) in case of need.
A full list of affected ratings can be found at the end of this press release.
The downgrade of Pekao's BCA reflects the agency's expectation that the bank's financial metrics, mainly its capitalization, will broadly remain at current levels which, with a 15.2% Tangible Common Equity (TCE) to Risk Weighted Assets (RWA) as of September 2020, are more commensurate with a baa2 BCA. The BCA downgrade also considers the modest financial impact the transaction will have on Pekao as well as the limited benefit for Bank Pekao's franchise and the integration risk the transaction carries.
Following the acquisition, Pekao's total assets will increase by around 6% and its total loan book by around 3%. Although, around two thirds of the acquired loans are leasing receivables which will be run down, the remaining loans acquired, around PLN3.9 billion, constitute loans to micro and small and medium sized enterprises growing Pekao's SME loan book, which has gained focus in recent years, by around 50% and nearly doubling its client base in this segment. The liabilities the bank will assume constitute almost entirely deposits and the Bank Guarantee Fund (BGF), Poland's resolution authority, will provide a subsidy of PLN193 million as liabilities exceed the assumed assets by this amount.
The decline in Pekao's capitalisation owing to the transaction will be contained at around 20 basis points and is mainly driven by the higher operational risk resulting from the transaction. A credit guarantee undertaken by the BGF will almost fully eliminate the growth in Pekao's RWAs.
Pekao will also be faced with a slight deterioration in its asset quality metrics with the ratio of non-performing loans to gross loans deteriorating to around 6% according to the bank, from 5.7% as of September 2020. However the loss guarantee protects Pekao from an increase in loan loss provisions stemming from these exposures.
Pekao anticipates modest synergies out of the transaction over the next ten years summing to a net present value of around PLN300 million (net of integration costs), around 9% of Pekao's strong pre-provision income for the first nine months of 2020 which accounted for 2.4% of its reported RWAs.
The rating agency does not anticipate significant changes in the strong deposit based funding structure of Pekao, and acknowledges the bank's significant liquidity buffer with around 30% liquid assets to tangible banking assets as of September 2020 that enable Pekao to sustain any potential outflows, although Moody's does not anticipate such a scenario.
THE DEPOSIT RATINGS, CRRs AND CRA
Bank Pekao's A2 long-term deposit ratings continue to incorporate two notches of rating uplift following the application of Moody's Advanced LGF Analysis as the assets and liabilities taken over do not significantly change Pekao's liabilities waterfall. The A2 deposit ratings now also benefit from one notch of uplift, from zero previously, following Moody's unchanged assumption of a moderate likelihood of government support in case of need.
However, the one notch of uplift owing to government support does not flow through to the bank's CRRs and CRA since following the application of the Advanced LGF, Pekao's CRRs and CRA are already positioned at the same level as the A2 rating of the Polish government and cannot be lifted higher.
The stable outlook reflects the rating agency's expectation that the bank will successfully execute this transaction within the set timelines, while maintaining its financial metrics broadly at current levels.
FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS
Pekao Bank's long-term deposit ratings could be upgraded following: (1) improvements in capital and asset quality while maintaining its strong profitability which will result in an upgrade of its BCA and (2) increased volumes of subordinated debt cushioning depositors and resulting in a higher uplift following the application of Moody's Advanced LGF.
The bank's ratings could be downgraded following: (1) significant weakening in its capital buffers or further deterioration in asset quality resulting in a downgrade of its BCA, or (2) owing to a lower uplift following the application of Moody's advanced LGF, or (3) owing to a lower assumption of the likelihood of government support in case of need or a weakening in the credit profile of Poland (A2 stable).
LIST OF AFFECTED RATINGS
..Issuer: Bank Polska Kasa Opieki S.A.
....Adjusted Baseline Credit Assessment, Downgraded to baa2 from baa1
....Baseline Credit Assessment, Downgraded to baa2 from baa1
....Long-term Counterparty Risk Assessment, Downgraded to A2(cr) from A1(cr)
....Long-term Counterparty Risk Ratings, Downgraded to A2 from A1
....Short-term Counterparty Risk Assessment, Affirmed P-1(cr)
....Short-term Counterparty Risk Ratings, Affirmed P-1
....Short-term Bank Deposit Ratings, Affirmed P-1
....Long-term Bank Deposit Ratings, Affirmed A2, Outlook Remains Stable
Outlook Action: ....Outlook, Remains Stable PRINCIPAL METHODOLOGY
The principal methodology used in these ratings was Banks Methodology published in November 2019 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1147865. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.
For 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 unsolicited.
a.With Rated Entity or Related Third Party Participation: YES
b.With Access to Internal Documents: YES
c.With Access to Management: YES
For additional information, 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 https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1243406.
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. Further information on the UK endorsement status and on the Moody's office that issued the credit rating is available on www.moodys.com.
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.
Melina Skouridou, CFA Asst Vice President - Analyst Financial Institutions Group Moody's Investors Service Cyprus Ltd. Porto Bello Building 1, Siafi Street, 3042 Limassol PO Box 53205 Limassol CY 3301 Cyprus 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 Cyprus Ltd. Porto Bello Building 1, Siafi Street, 3042 Limassol PO Box 53205 Limassol CY 3301 Cyprus JOURNALISTS: 44 20 7772 5456 Client Service: 44 20 7772 5454
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