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Fitch Rates Poland's Euro Bank 'A-'; Outlook Negative

April 22, 2015
Fitch Ratings has assigned Euro Bank S.A. (Eurobank) a Long-term Issuer Default Rating (IDR) of 'A-', National Long-term Rating of 'AA-', Support Rating (SR) of '1' and Viability Rating (VR) of 'bb-'. The Long-term IDR is on Negative Outlook and the National Long-term Rating has a Stable Outlook. A full list of rating actions is at the end of this rating action commentary.

Eurobank's IDRs, National Ratings and SR reflect Fitch's view that there is an extremely high probability that the bank would be supported, if required, by its 99.5% owner, Societe Generale (SG, A/Negative/a-). Fitch views Eurobank as a strategically important subsidiary to SG, therefore, its Long-term IDR is notched down once from the parent. This is based on SG's strategic focus on the central and eastern Europe region and its proven commitment to the Polish market. The latter has been highlighted by SG's substantial funding provision to Eurobank and close operational oversight over the subsidiary. The potential cost of support would be easily manageable for SG in light of Eurobank's very small size (0.2% of SG's total assets at end-2014).

The Negative Outlook on Eurobank's Long-term IDR mirrors that on SG's Long-term IDR.

Eurobank is ultimately owned by SG through its 100% subsidiary Societe Generale Consumer Finance, which holds a 99.52% stake in the bank.

Eurobank's IDRs, National Ratings and SR are sensitive to the parent's ability and/or willingness to support the bank. Fitch considers it highly unlikely that SG's propensity to support Eurobank will change in the foreseeable future.

SG's support ability is expressed by its ratings. Fitch expects to downgrade ratings driven by sovereign support by mid-2015 and, as a result, SG's Long-Term IDR is likely to be downgraded by one notch to the level of its VR (for more details see 'Fitch Affirms Societe Generale at 'A'; Outlook Negative' at This would likely lead to a downgrade of Eurobank's Long-term IDR to 'BBB+' from 'A-' and of its Support Rating to '2' from '1'. This is based on the assumption that SG's VR will remain stable (Fitch's base case).

The Stable Outlook on Eurobank's National Long-Term Rating reflects Fitch's view that it would not be affected by the expected downgrade of the bank's Long-term IDR.

Eurobank's VR reflects mainly its small size, market franchise limited to retail customers and business model, which is less diversified than banks that are also active in the corporate segment. It also incorporates the bank's significant (50%) concentration on higher-risk unsecured consumer loans, which translates into fairly high non-performing loans (NPLs). However, the VR is underpinned by the bank's adequate capital buffers, moderate planned loan book expansion and comfortable funding and liquidity position, which benefits from parental facilities.

Eurobank is a small retail bank based in Poland, which at end-2014 accounted for 1.0% and 0.6% of banking sector total loans and deposits, respectively. The bank provides simple lending and deposit products to private individuals, with a strong focus on cash and mortgage loans (4.9% and 1.4% market shares at end-2014, respectively, according to the bank) and current accounts (5.0%).

Eurobank's NPL ratio is higher than the sector average, reflecting a significant share of unsecured consumer loans (mostly cash loans) in total gross loans (50% at end-2014, down from 72% at end-2012). This is notwithstanding the thorough loan book cleaning that the bank carried out mostly in 2012-2013. In the medium term, the bank's asset quality could moderately benefit from the amortisation of the legacy portfolio, improved underwriting standards and increased local currency mortgage lending. Eurobank has substantially curbed its risk appetite since 2010 after several years of aggressive cash lending, which fuelled high credit losses.

At end-2014, NPLs represented 10.0% of the bank's total gross loans, compared with the sector average of 8%. Consumer loans accounted for 75% of all NPLs, followed by Swiss franc mortgages (14%). The NPL ratio dropped from a very high 25% at end-2011 mostly due to sizeable loan write-offs and sales, but also better quality of the new loan production. Reasonable coverage of NPLs by specific reserves (74% for consumer loans, 52% for Swiss franc mortgages) and a well-functioning internal collection system mitigate the risk of credit losses.

The bank's portfolio of Swiss franc mortgages will likely continue to deteriorate, although the total exposure is relatively moderate (14% of total gross loans at end-2014). The portfolio is highly vulnerable to a sharp and prolonged weakening of the Polish zloty, an increase in the market reference rate (LIBOR) and unemployment. At present, we do not expect immediate pressure on asset quality. However, the weaker zloty drags on collateralisation and inflates the already high loan-to-value ratios. The related refinancing risks are low because all Swiss franc loans are fully funded by the parent.

Fitch views the bank's capitalisation as only adequate given its exposure to consumer loans and Swiss franc mortgages, and the fairly high NPL ratio. However, the bank's capital position is supported by reasonable coverage of NPLs by reserves, dynamic but not excessive loan book expansion and robust internal capital generation. Total NPLs net of impairment reserves represented a moderate 24% of the bank's Fitch core capital at end-2014. The regulatory CAR and CET1 ratios equalled 14.2% and 11%, respectively.

In 2015, Eurobank's performance will be affected, similarly to other domestic banks, by reduced market interest rates and interchange fees and higher deposit insurance contributions. Material investments planned by the bank will weigh on the results, but in the mediumterm they should increase the bank's profit generation capacity. Margin pressure could be partly mitigated by loan portfolio growth and less so by increased fees. The supportive economic environment bodes well for the cost of risk, assuming no further material zloty depreciation.

In 2014, Eurobank's profitability was supported by strong margins (5.7%) and dynamic loan growth (8.9% yoy), but non-interest expense represented a material 60% of operating revenue due to the bank's limited scale. The bank's high reliance on consumer lending for profit generation weighs on its profitability profile. However, risk costs decreased substantially to a moderate 1.0% of average gross loans at end-2014, having peaked at 9% in 2010.

Eurobank's funding and liquidity profile is a relative rating strength and is underpinned by sizeable long-term credit lines from SG and deposits sourced solely from private individuals. At end-2014, funding from SG and customer deposits accounted for 54% and 43% of Eurobank's total funding, respectively. Borrowings from the parent are in the same currency as the assets financed, ie Swiss francs and Polish zloty.

The customer deposit base is very granular, but it could be fairly price sensitive given a considerable 46% share of term deposits and the bank's weak deposit franchise. However, liquid assets (PLN4.2bn) covered a high 76% of total customer deposits at end-2014. They comprised cash, current bank accounts and unpledged securities available for repo (PLN1.2bn) and the unutilised portion of SG's committed credit lines (PLN2.9bn).

An upgrade of the VR would primarily require a material strengthening of Eurobank's market franchise, but also a longer track record of solid profitability (in the low interest rate environment) without compromising on asset quality. Downward pressure on the VR could come from loan quality deterioration or increased risk appetite, which would weaken the bank's capital position.

The rating actions are as follows:

Long-term IDR assigned at 'A-'; Outlook Negative
Short-term IDR assigned at 'F2'
National Long-term Rating assigned at 'AA-(pol)'; Outlook Stable
National Short-term Rating assigned at 'F1+'
Support Rating assigned at '1'
Viability Rating assigned at 'bb-'
Company — Euro Bank
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    Euro Bank S.A.
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