Fitch Downgrades Bank Ochrony Srodowiska to 'BB' on Support Revision; Outlook Remains Negative
May 19, 2015
Fitch Ratings has downgraded Poland-based Bank Ochrony Srodowiska's (BOS) Long-term Issuer Default Rating (IDR) and senior debt ratings to 'BB' from 'BBB', and its National Long-term Rating to 'BBB(pol)' from 'A(pol)'. The Outlooks remain Negative. The Viability Rating (VR) has been affirmed at 'bb'.
A full list of rating actions is available at the end of this rating action commentary.
The rating actions are in conjunction with Fitch's review of sovereign support for banks globally, which the agency announced in March 2014. In line with its expectations announced in March last year and communicated regularly since then, Fitch believes legislative, regulatory and policy initiatives have substantially reduced the likelihood of sovereign support for US, Swiss and European Union commercial banks.
BOS is indirectly state-owned through the bank's 56.6% shareholder, the state-owned National Fund for Environment Protection and Water Management (the fund). Fitch believes that the state would endeavour to act pre-emptively to avoid BOS breaching regulatory capital adequacy requirements. However, in Fitch's opinion, the combination of Bank Recovery and Resolution Directive (BRRD) and EU state aid considerations has reduced the overall probability of extraordinary sovereign support being provided to BOS.
BRRD does not prevent public owners from providing capital to banks such as BOS. However, BRRD will give the Polish resolution authorities a far broader suite of powers and tools to take resolution action on BOS, if necessary or appropriate, compared with standard insolvency laws. This could facilitate some form of creditor burden-sharing, for example. It may also make it hard to recapitalise BOS without burden-sharing in the event of a very large failure.
In addition, extraordinary support for BOS would need to meet EU state aid rules, including the private investor test. Fitch believes it would be difficult for a capital increase directly from the state or by the fund to be made without triggering state aid and bail-in considerations, if the private shareholders (mostly dispersed and listed on the Warsaw Stock Exchange) demonstrate that they are unwilling to support the bank. Fitch also believes that the direct capital injection from the state or the fund may not be able to exceed the total stake jointly held in the bank by all state-owned entities.
As a result, Fitch believes that, in line with our Support Rating (SR) definition of '4', there is a limited probability of extraordinary support for BOS from the Polish sovereign. We have, therefore, downgraded its SR to '4' from '2' and revised its Support Rating Floor (SRF) to 'B' from 'BBB'.
As a result of the revision to the SRF, the Long-term IDR is now driven by BOS's standalone creditworthiness, which is expressed as the VR. The Negative Outlook reflects Fitch's opinion that the balance of risks on the VR and hence the IDRs is tilted to the downside mainly due to rising single-name loan book concentrations and worsening asset quality, which are putting pressure on the bank's capitalisation.
KEY RATING DRIVERS - IDRS, NATIONAL RATINGS, VR AND SENIOR DEBT
BOS's VR of 'bb' is driven by its weak market franchise and acceptable, albeit weakening, asset quality. It also reflects the bank's only adequate capitalisation - in view of considerable single-name loan concentrations and low reserve coverage of impaired loans - and weak profitability. Fitch has also considered the bank's significant reliance on fairly price-sensitive retail term and corporate customer deposits and wholesale debt markets.
At the same time, the VR is underpinned by the bank's sound liquidity position and rather moderate overall risk appetite, as evidenced by moderate loan growth and material concentration in the low-risk public finance sector.
RATING SENSITIVITIES - IDRS, NATIONAL RATINGS, VR AND SENIOR DEBT
The IDRs and National Ratings are sensitive to changes in the bank's VR.
Pressure on BOS's capitalisation from continued loan quality deterioration and rising single-name concentrations would likely result in a downgrade of BOS's VR. Any significant and long-lasting pressure on the bank's funding costs, further undermining profitability, could also lead to a downgrade. Upside potential for the VR is limited due to BOS's weak franchise and considerable credit risk concentrations.
KEY RATING DRIVERS AND SENSITIVITIES - SUPPORT RATING AND SUPPORT RATING FLOOR
The downgrade of BOS's SR to '4' and the revision of its SRF to 'B' follow the revision of Fitch's assessment of the probability of extraordinary support, if needed, from the Polish sovereign (A-/Stable). Fitch believes that in the event of severe stress, there would be significant uncertainties about the adequacy of support being made available because of potential limitations arising from BRRD and EU state-aid rules.
In Fitch's view, the EU's BRRD is now sufficiently progressed to provide a framework for resolving banks that is likely to require senior creditors participating in losses, if necessary, instead of or ahead of a bank receiving sovereign support. In the EU, BRRD has been effective in member states since 1 January 2015, including minimum loss absorption requirements before resolution financing or alternative financing (eg, government stabilisation funds) can be used. As in other EU countries, in Poland full implementation of BRRD will be required by 1 January 2016.
BOS's SR of '4' and SRF of 'B' reflect Fitch's opinion that some potential, albeit limited, still remains for the sovereign to provide extraordinary support to BOS, without triggering state-aid considerations or, from January 2016, the need for bail-in of senior creditors. This view is based on the state ownership of BOS (although only indirect) and the bank's important role in financing the country's environmental protection projects. Fitch has also considered BOS's limited systemic importance, dominant share of commercial lending in the credit portfolio and rather narrow policy role.
Any upgrade to the SR and upward revision to the SRF would be contingent on a positive change in the sovereign's propensity to support BOS or our assessment that potential impediments to support are being reduced. While not impossible, this is highly unlikely in Fitch's view. BOS's SR and SRF could also be downgraded and revised to 'No Floor', respectively, if the fund's stake in the bank falls below 50%, which Fitch considers unlikely.
KEY RATING DRIVERS AND SENSITIVITIES - SUBORDINATED DEBT
The rating of BOS's subordinated debt is notched down once from the bank's VR for loss severity and mapped to the Polish National Rating Scale. It has, therefore, been affirmed due to the affirmation of the VR. The subordinated debt rating is primarily sensitive to any change in the VR.
The rating actions are as follows:
Long-term IDR: downgraded to 'BB' from 'BBB', Outlook Negative
Short-term IDR: downgraded to 'B' from 'F3'
National Long-term Rating: downgraded to 'BBB(pol)' from 'A(pol)', Outlook Negative
National Short-term Rating: downgraded to 'F3(pol)' from 'F1(pol)'
Viability Rating: affirmed at 'bb'
Support Rating: downgraded to '4' from '2'
Support Rating Floor: revised to 'B' from 'BBB'
PLN2bn senior unsecured bond programme: downgraded to 'BBB(pol)' from 'A(pol)'
PLN2bn senior unsecured bond programme: downgraded to 'F3(pol)' from 'F1(pol)'
PLN83m subordinated debt: affirmed at 'BBB-(pol)'
EUR250m long-term senior unsecured eurobonds issued by BOS Finance AB: downgraded to 'BB' from 'BBB'
Company — Bank Ochrony Srodowiska
Full nameBank Ochrony Srodowiska SA (BOS SA)