DBRS Morningstar Assigns First-Time Ratings to UniCredit Bank Austria AG; Long Term Ratings at BBB (high), Stable Trend

DBRS Ratings GmbH (DBRS Morningstar) assigned first-time ratings to UniCredit Bank Austria AG (UniCredit Bank Austria, or the Bank), including Issuer Ratings at BBB (high) / R-1 (low). DBRS Morningstar also assigned ratings at BBB (high) / R-1 (low) for Long-Term and Short-Term Debt and Deposits. The trend on all ratings is Stable. UniCredit Bank Austria’s Intrinsic Assessment is BBB (high) and its Support Assessment is SA3. For a complete list of ratings, please see the table at the end of this press release.

KEY RATING CONSIDERATIONS

The IA at BBB (high) takes into account the Bank’s strong position in the Austrian market and its membership of the UniCredit Group, its modest profitability levels and a moderate level of non-performing loans (NPLs). In addition, in our view, the Bank has adequate funding and liquidity profile and a sizable cushion over the minimum capital requirements. With the SA3 support assessment, DBRS Morningstar does not expect systemic support for UniCredit Bank Austria.

UniCredit Bank Austria benefits from being part of UniCredit Group, and therefore our view is that internal support from the Group may be forthcoming if needed.

The Stable trend reflects our view that the risks to the ratings are broadly balanced.

RATING DRIVERS

An upgrade of the IA would require an improvement in the Bank’s profitability metrics, while maintaining solid balance sheet metrics. Given UniCredit Bank Austria‘s ownership by UniCredit Group, positive credit developments at UniCredit Group could also have positive rating implications for UniCredit Bank Austria.

A downgrade of the IA would likely result from a significant deterioration in the Bank’s asset quality and profitability. Negative implications for the ratings of UniCredit Bank Austria could also result from negative credit developments at the parent.

RATING RATIONALE

Franchise Combined Building Block (BB) Assessment: Good/Moderate

UniCredit Bank Austria is a leading retail and commercial banking organisation in Austria with a market share of around 13% for loans and deposits. It is also part of UniCredit Group since 2005. As of today, UniCredit Bank Austria is mostly focused on transactions with Austrian clients in the domestic market. Before UniCredit Group’s reorganization in 2016, UniCredit Bank Austria was also responsible for UniCredit’s subsidiaries in CEE. However, these activities were transferred to UniCredit SpA through a spin-off in October 2016.

With EUR 118 billion in total assets, Austria is the main market of UniCredit’s Central Europe division, representing around 13% of UniCredit SpA’s total assets at YE 2021. The Bank is well integrated within UniCredit Group which has a 99.996% interest in UniCredit Bank Austria.

As from 1 January 2022, UniCredit Bank Austria’s business model consists of three main business segments: Retail, Wealth Management & Private Banking and Corporates. The former divisions Unternehmerbank and Corporate & Investment Banking (CIB) were successfully merged to form the new Corporate division. In line with the strategic plan for 2022-2024 set out by UniCredit Group, UniCredit Bank Austria is expected to streamline its organization, improve efficiency and invest in digitalisation.

Earnings Combined Building Block (BB) Assessment: Moderate/Weak

In DBRS Morningstar’s view, the Bank has modest profitability levels. Net interest income represents the main source of income, contributing to around 46% of the total operating income, however this has decreased due to the low interest environment, while fees and commissions accounted for 37% of the total income in 2021. Cost of risk has historically been moderate while efficiency levels are modest, particularly for the retail segment. In 2021, total cost/income for Bank of Austria was reported at 62%, down from 66% in 2020.

Results in 2020 were affected by the COVID-19 pandemic, which led to lower revenues and higher provisioning costs. Results however improved in 2021. UniCredit Bank Austria reported a net profit of EUR 115 million, up from EUR 20 million in 2020, driven by lower LLPs and a pickup in revenues. Results were also impacted by extraordinary charges of around EUR 355 million, linked to the restructuring of the Austrian activities under UniCredit Group’s strategic plan for 2022-2024.

In terms of divisions, the Corporate business (including Unternehmerbank and CIB) was the main contributor to operating income and profits in 2021, while Privatkundenbank was loss making.

Risk Combined Building Block (BB) Assessment: Good/Moderate

In general, UniCredit Bank Austria’s follows UniCredit Group’s standards. It works closely with the risk control and risk management units of UniCredit Group. Risk appetite is approved by the Supervisory Board and takes place in coordination with UniCredit Group.

The Bank’s balance sheet is mostly composed of loans to customers and investments in debt securities. Lending volumes rose to EUR 67 billion in 2021 from EUR 61 billion in 2020. At the same time, total exposure to sovereign debt securities amounted to EUR 15 billion, of which around 79% were classified at fair value through other comprehensive income.

The stock of NPLs fell moderately in 2021 to EUR 2.0 billion from EUR 2.2 billion a year earlier. Declines were recorded in all segments, particularly in corporate banking. The gross NPL ratio fell to 3.0% from 3.5% in 2020, also due to the increase in volumes.

The impact from the pandemic has not resulted in a material increase in new NPL inflows, although we note a significant increase in Stage 2 loans, where risk has increased significantly since initial recognition. For the medium term, risks to UniCredit Bank Austria’s asset quality stem from the weakening of the macroeconomic environment, as a result of the persistent inflationary pressures, rising interest rates, and uncertainty related to the conflict in Ukraine, as well as from the risk of overheating of the Austrian real estate market.

Funding and Liquidity Combined Building Block (BB) Assessment: Strong/Good

In our view, the Bank has an adequate funding and liquidity position. The funding profile is based on a solid customer deposit base and solid covered bond platform, as well as ECB funding. Senior unsecured bonds are typically issued at the level of UniCredit SpA which is also the single point of entry for the Group as far as the resolution regime is concerned.

Exposure to ECB funding increased by EUR 1.55 billion in 2021 to EUR 16.95 billion through the TLTRO III program. In addition, the Bank placed an Additional Tier 1 issue with UniCredit SpA for a total consideration of EUR 0.6 billion. This was part of the strategy to strengthen UniCredit Bank Austria’s capital, as well as to comply with the Group’s internal MREL requirements. NSFR and LCR ratios were well above the minimum requirements at 128% at 171%, respectively, in 2021.

Capitalisation Combined Building Block (BB) Assessment: Good/Moderate

The Bank maintains a solid capital position. At YE 2021, UniCredit Bank Austria reported its CET1 and total capital ratio at 16.8% and 20.5% respectively. These, however, decreased sharply following the introduction of the new IRB PD model in Q3 2021 which led to a significant increase in RWAs. The impact was partially mitigated by the issuance of AT1 subscribed by the parent company.

Alongside the minimum capital requirement of 8%, UniCredit Bank Austria is subject to a capital conservation buffer of 2.5%. This is constituted of Common Equity Tier 1 capital, a 0.5% systemic risk buffer, and a 0.5% other systemically important institutions buffer. The countercyclical capital buffer for material Austrian credit exposures is at 0%. UniCredit Bank Austria is also required to maintain a 1.75% institution-specific Pillar 2 buffer.

Further details on the Scorecard Indicators and Building Block Assessments can be found at https://www.dbrsmorningstar.com/research/400156

ENVIRONMENTAL, SOCIAL, GOVERNANCE CONSIDERATIONS

There were no Environmental/ Social/ Governance factors that had a significant or relevant effect on the credit analysis

A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework can be found in the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings at https://www.dbrsmorningstar.com/research/396929/dbrs-morningstar-criteria-approach-to-environmental-social-and-governance-risk-factors-in-credit-ratings.

Notes:
All figures are in EUR unless otherwise noted.

The principal methodology is the Global Methodology for Rating Banks and Banking Organisations (23 June 2022) https://www.dbrsmorningstar.com/research/398692/global-methodology-for-rating-banks-and-banking-organisations. Other applicable methodologies include the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings (17 May 2022) https://www.dbrsmorningstar.com/research/396929/dbrs-morningstar-criteria-approach-to-environmental-social-and-governance-risk-factors-in-credit-ratings

The sources of information used for this rating include Morningstar Inc. and Company Documents, UniCredit Bank Austria Annual Reports (2016-2021), UniCredit Bank Austria (Fixed Income presentation, May 2022). DBRS Morningstar considers the information available to it for the purposes of providing this rating to be of satisfactory quality.

This rating concerns a newly rated issuer. This is the first DBRS Morningstar rating on this issuer.

With respect to FCA and ESMA regulations in the United Kingdom and European Union, respectively, this is an unsolicited credit rating. This credit rating was not initiated at the request of the issuer.

With Rated Entity or Related Third-Party Participation: YES
With Access to Internal Documents: NO
With Access to Management: NO

DBRS Morningstar does not audit the information it receives in connection with the rating process, and it does not and cannot independently verify that information in every instance.

The conditions that lead to the assignment of a Negative or Positive trend are generally resolved within a 12-month period. DBRS Morningstar's outlooks and ratings are under regular surveillance.

For further information on DBRS Morningstar historical default rates published by the European Securities and Markets Authority (ESMA) in a central repository, see: https://cerep.esma.europa.eu/cerep-web/statistics/defaults.xhtml. DBRS Morningstar understands further information on DBRS Morningstar historical default rates may be published by the Financial Conduct Authority (FCA) on its webpage: https://www.fca.org.uk/firms/credit-rating-agencies.

The sensitivity analysis of the relevant key rating assumptions can be found at: https://www.dbrsmorningstar.com/research/400157

This rating is endorsed by DBRS Ratings Limited for use in the United Kingdom.

Lead Analyst: Nicola De Caro, Senior Vice President - Global FIG
Rating Committee Chair: Elisabeth Rudman, Managing Director, Head of European FIG - Global FIG
Initial Rating Date: July 21, 2022
Last Rating Date: Not applicable as there is no last rating date.

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