KEY RATING DRIVERS – IDRS AND SUPPORT RATING
The affirmation of the IDRs and Support Rating reflects Fitch’s opinion that there is an extremely high probability that Bank Slaski would be supported, if required, by its 75% shareholder, Dutch ING Bank NV (A+/Negative). Fitch believes that Bank Slaski is a strategically important subsidiary for its parent. The Negative Outlook on the bank’s Long-Term IDR reflects that on ING Bank NV.
RATING SENSITIVITIES – IDRS AND SUPPORT RATINGS
Bank Slaski’s IDRs would be downgraded if there was a downgrade of the parent. ING Bank NV's 'A+' Long-term IDR is driven by potential support from the Dutch authorities. In Fitch's view, there is a clear intention to ultimately reduce state support for systemically important banks in Europe. This has been demonstrated by a series of policy and regulatory initiatives at the European Union level aimed at curbing systemic risk posed by the banking industry. This might result in Fitch revising parent banks’ Support Rating Floors (SRF) downwards, although the timing and degree of any change would depend on jurisdiction-specific developments.
If Fitch changes its view about the propensity of the Dutch authorities to provide support to ING Bank NV, this would lead to downward pressure on its IDRs, Support Rating and SRFs feeding through to Bank Slaski’s IDRs. However, any downgrades would most likely be limited to one notch because of ING Bank NV's VR of 'a'.
Fitch detailed its current thinking about sovereign support for banks in two special reports ('The Evolving Dynamics of Support for Banks' and 'Bank Support: Likely Rating Paths', both dated 11 September 2013) and the subsequent update (Sovereign Support for Banks Update on Position Outlined In 3Q13, dated 10 December 2013). Fitch has stated that in cases where sovereign support is seen as weakening, any rating actions will most likely be preceded by Outlook revisions to IDRs, potentially as soon as 1Q14.
KEY RATING DRIVERS – VR
The affirmation of Bank Slaski’s ‘bbb+’ VR reflects its strong standalone credit profile. The bank’s VR is underpinned by its ample liquidity, stable funding base, healthy internal capital generation and robust asset quality. Coupled with the improving operating environment in Poland, these rating strengths sufficiently cushion against risks related to the bank’s appetite to grow faster than the sector.
At end-3Q13 Bank Slaski was a universal bank ranked fifth by total assets (almost 6% market share) and had a particularly strong position in retail savings (about 8% market share). The bank wants to increase its economies of scale to offset pressure on earnings stemming from the low interest rate environment in Poland, which is likely to remain unchanged in the foreseeable future. Bank Slaski wants to maintain its universal banking business model and plans further substantial growth.
Bank Slaski’s funding structure is a considerable rating strength. At end-3Q13, almost 90% of funding came from customer deposits, of which 66% comprised mostly stable and granular household savings. The loan/deposit ratio improved to a comfortable 73% at end-3Q13 (end-2012: 78%), after almost 15% growth in customer deposits in 9M13. The bank’s low refinancing risk reflects Bank Slaski’s large buffer of liquid assets (mostly sovereign risk debt securities), which equalled 35% of total assets at end-3Q13.
In Fitch's opinion, the bank's relatively conservative lending standards and high loss-absorption capacity should contain risks related to the planned credit growth. However, the inflow of bad debts will increase as the loan book seasons. The bank’s loan book has grown about 20% annually in 2010, 2011 and 2012 (much higher than sector average), but the impaired loans ratio of 4.4% and end-3Q13 was one of the lowest among the largest banks in Poland. The coverage of impaired loans by specific reserves stood at 60%, which in Fitch’s opinion is sufficient in light of the bank’s credit risk profile. Unreserved impaired loans equalled 9M13 operating profit or almost 11% of Fitch core capital.
At end-3Q13, Bank Slaski’s Fitch core capital ratio of 18.9% was one of the strongest in the region. However, the ratio benefits from the full implementation (as of 30 June 2013) of the advanced internal ratings-based method for the calculation of capital requirements for the non-retail portfolio. We estimate that the Fitch core capital ratio based on capital requirements calculated according to the standardised method would be about 15%.
Bank Slaski’s performance should remain strong in 2014, but improving operating profit will be challenging. The bank is likely to incur somewhat higher (albeit manageable) costs of risk, and generate lower trading revenue, but the bank’s focus on lending growth bodes well for net interest income.
RATING SENSITIVITIES –VR
A significant weakening of underwriting standards coupled with deterioration in asset quality (following Bank Slaski’s fast credit expansion) or a marked and prolonged downturn in the Polish economy would put pressure on the bank's VR. However, Fitch does not regard these scenarios as likely at present. An upgrade of Bank Slaski’s VR is unlikely in the short to medium term because of the bank's growth ambitions.
The rating actions are as follows:
Long-term foreign currency IDR: affirmed at 'A'; Outlook Negative
Short-term foreign currency IDR: affirmed at 'F1'
Viability Rating: affirmed at 'bbb+'
Support Rating: affirmed at '1'