RSS
Fitch Places Romanian UniCredit Bank S.A.'s VR on RWP on Announced Merger
Fitch Ratings has placed Romanian UniCredit Bank S.A.'s (UCBRO) 'bb' Viability Rating (VR) on Rating Watch Positive (RWP). The bank's Long-Term Issuer Default Rating (IDR) has been affirmed at 'BBB' with a Stable Outlook.
The rating actions follow the announcement on 24 October 2023 by UniCredit S.p.A. (UC; BBB/Stable), majority shareholder of UCBRO, that it has reached an initial agreement to merge UCBRO with Alpha Bank Romania S.A. (ABR), owned by Greek Alpha Bank S.A. (AB; BB-/Stable).
KEY RATING DRIVERS
The RWP reflects Fitch's expectation that the merger and integration with ABR would materially strengthen UCBRO's market position and business model, as well as further improving its asset quality and allowing it to maintain its solid capitalisation. Fitch expects to resolve the RWP on the completion of the merger, which may extend beyond the typical six months for Watch resolution.
According to the disclosed terms of the transaction, AB will own 9.9% of the merged entity and additionally receive up to EUR300 million in cash. The combined entity would become the third-largest bank in Romania by total assets with about a 12% market share. Regulatory and internal corporate approvals necessary for the transaction are still pending. Closing of the transaction is expected for 2024.
The rating affirmation reflects our view that the reduction of the stake held by UC in UCBRO to 90.1% resulting from the merger will not affect shareholder support available to UBR, as underlined by its Shareholder Support Rating of 'bbb'. We believe UC would have a strong propensity to support UCBRO, given the inclusion of UCBRO in UC's single-point-of-entry resolution group and considerable reputational risk for UC from a default of its Romanian subsidiary. The Stable Outlook on UCBRO's IDRs reflects that on the parent.
UCBRO's current domestic franchise is moderately weaker than that of other medium-sized Romanian peers rated by Fitch. The bank's sound capital and liquidity buffers support business-model stability, but its corporate focus results in sizeable concentrations on both sides of its balance sheet and historically lower profitability than peers', in turn affecting our business- and risk-profile assessments.
The transaction is likely to strengthen the bank's business profile through an improved market position and a more diversified business model. Both the banks' franchises are largely complementary given ABR's more retail-oriented business mix.
These, along with possible operational efficiencies, could enhance the bank's earnings profile and should further support UCBRO's improving assets quality and reduce the gap with its larger domestic peers'. The RWP also considers risks, including those related to post-merger integration or if the transaction does not proceed.
The transparency around the final financial terms of the transaction is limited. However, we do not expect downside risk to the VR due to reasonable capital buffers at UCBRO. A moderate deterioration in the common equity Tier 1 ratio could be absorbed by the current headroom of its capitalisation and leverage score and additionally mitigated by improved loan book diversification and earnings stability.
RATING SENSITIVITIES
Factors that Could, Individually or Collectively, Lead to Negative Rating Action/Downgrade
UCBRO's IDRs and SSR could be downgraded if UC's Long-Term IDR is downgraded. UCBRO's IDR and SSR could also be downgraded on an adverse change in the resolution strategy of the group with respect to UCBRO.
UCBRO's VR would likely be affirmed and removed from RWP if the merger does not proceed or if the final transaction structure is detrimental to Fitch's assessment of UCBRO's capitalisation.
UCBRO's VR could come under pressure from a rise in problem loans that is not adequately provided for and without clear prospects for improvement, in particular if the impaired loan ratio rises towards 10% on a sustained basis. Operating profitability deterioration without clear prospects for recovery, reflected in a decline of operating profit to below 1.25% of risk-weighted assets (RWAs) on a sustained basis, could also result in a VR downgrade.
Factors that Could, Individually or Collectively, Lead to Positive Rating Action/Upgrade
An upgrade of UCBRO's IDR and SSR would require an upgrade of the parent's IDRs.
A VR upgrade could follow a completion of the merger with prospects for a smooth integration process. An upgrade would also be contingent on UCBRO maintaining sound capital ratios with sizeable buffers over their regulatory minimum requirements, improvements in asset quality and profitability while maintaining healthy funding and liquidity.
VR ADJUSTMENTS
The operating environment score of 'bb+' is below the 'bbb' category implied score for Romania due to the following adjustment reason: macroeconomic stability (negative).
The asset quality score of 'bb' is above the 'b & below' category implied score due to the following adjustment reasons: collateral and reserves (positive) and non-loan exposures (positive).
PUBLIC RATINGS WITH CREDIT LINKAGE TO OTHER RATINGS
UCBRO's IDRs and SSR are driven by support from UC and therefore linked to the latter's IDRs.
ESG CONSIDERATIONS
The highest level of ESG credit relevance is a score of '3', unless otherwise disclosed in this section. A score of '3' means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. Fitch's ESG Relevance Scores are not inputs in the rating process; they are an observation on the relevance and materiality of ESG factors in the rating decision.