DBRS Morningstar Confirms UniCredit Bank Austria AG’s Issuer Ratings at BBB (high)/R-1 (low); Stable Trend

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

KEY CREDIT RATING CONSIDERATIONS

The IA at BBB (high) takes into consideration the Bank’s strong position in the Austrian market and its ownership by the UniCredit Group, its improved profitability levels and a moderate level of non-performing loans (NPLs). In addition, in our view, the Bank has an adequate funding and liquidity profile and a sizable cushion over minimum capital requirements. The Stable trend reflects our view that the Bank’s financial strength will remain resilient despite the slowdown in the Austrian economy and rising risks in the real estate sector, particular in Commercial Real Estate (CRE).

With the SA3 support assessment, DBRS Morningstar does not incorporate into the rating any expectation of systemic support for UniCredit Bank Austria. At the same time, 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.

CREDIT RATING DRIVERS

An upgrade of the IA would require sustained improvements in the Bank’s profitability, while maintaining solid balance sheet metrics. Given UniCredit Bank Austria‘s ownership by the UniCredit Group, positive credit developments at UniCredit Group would likely 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 credit ratings of UniCredit Bank Austria would likely result from negative credit developments at the parent.

CREDIT RATING RATIONALE

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

UniCredit Bank Austria is a leading commercial and retail banking organisation in Austria. It is part of the UniCredit Group since 2005. UniCredit Bank Austria is mostly focused on transactions with Austrian clients in the domestic market. Before UniCredit Group’s reorganisation 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 114 billion in total assets as of H1 2023, Austria is the main market of UniCredit’s Central Europe division. The Bank is well integrated within UniCredit Group which has a 99.996% interest in UniCredit Bank Austria. In line with the strategic plan for 2022-2024 set out by UniCredit Group, UniCredit Bank Austria is implementing several initiatives aimed at further improving efficiency and digitalisation as well as simplify its organizational structure.

Since 1 January 2022, UniCredit Bank Austria’s business model consists of three main business segments: Retail, Wealth Management & Private Banking and Corporates. The Corporates division accounted for around two-thirds of total lending volume.

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

In H1 2023, the Bank’s profitability was boosted by higher net interest income on the back of rising interest rates. Net interest income represents the main source of income for UniCredit Bank Austria. Cost of risk has historically been moderate, while efficiency levels have recently improved driven by cost measures and higher revenues. In terms of divisions, the Corporate business remained the main contributor to the Bank’s operating income and profits.
The Bank reported a net profit of EUR 564 million in H1 2023, up from EUR 286 million in the same period of 2022 driven by higher net interest income on the back of higher margins on deposits, despite a slight reduction in fee and commission income due to lower investment fees amid increased market volatility. Operating costs showed a reduction in payroll costs due to FTE optimization and lower administrative costs, while the cost of risk for H1 2023 benefitted from write backs in both Corporate and Retail segments. For the year 2022, Bank Austria reported a net profit of EUR 823 million, up from EUR 115 million in 2021.

Risk Combined Building Block (BB) Assessment: Good

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 corporates, as well as investments in debt securities, the bulk of which were classified at fair value through other comprehensive income. As of June 2023, loans to customers accounted for roughly 59% of the Bank’s total assets. For the time being, asset quality has been largely resilient. The stock of NPLs decreased by EUR 0.1 billion to EUR 2.0 billion in H1 2023, reflected in an improvement of the gross NPL ratio to 3.1% at end-June 2023 from 3.2% at end-2022, while the coverage ratio decreased to 43.0% at end-June 2023 from 43.8% at end-2022.

For the medium term, we expect some asset quality deterioration due to higher interest rates, weakening of the macroeconomic environment, and rising risks in the real estate sector, particularly in CRE.

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

UniCredit Bank Austria’s funding profile is predominantly based on a large 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.

In H1 2023, deposits from customers represented more than half of the Bank’s liabilities and equity. Roughly 60% of these funds consisted of deposits from the Retail and Wealth Management & Private Banking divisions. In H1 2023, total deposits fell by EUR 3.7 billion (-6% compared to YE 2022). The reduction was mostly concentrated in the Corporate Division.

Capitalisation Combined Building Block (BB) Assessment: Good

The Bank maintains a solid capital position. UniCredit Bank Austria reported its CET1 and total capital ratio at end-June 2023 at 18.4% and 22.3% respectively, which was slightly higher compared to YE 2022 due to RWAs reduction.

Alongside the minimum capital requirement of 8%, UniCredit Bank Austria is subject to a systemic risk buffer (SyRB) requirement of 0.5%, as well as to a 1.75% other systemic institutions (O-SII) buffer and a 0.048% countercyclical buffer. Bank Austria is also required to maintain a 1.75% institution-specific Pillar 2 buffer to be held in the form of 56.25% of Common Equity Tier 1.

Further details on the Scorecard Indicators and Building Block Assessments can be found at https://www.dbrsmorningstar.com/research/424998.

ENVIRONMENTAL, SOCIAL, GOVERNANCE CONSIDERATIONS

There were no Environmental, Social or 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 (04 July 2023) https://www.dbrsmorningstar.com/research/416784/dbrs-morningstar-criteria:-approach-to-environmental,-social,-and-governance-risk-factors-in-credit-ratings

DBRS Morningstar notes that this Press Release was amended on January 17, 2024, to include the disclosure for endorsed ratings

Notes:
All figures are in Euros unless otherwise noted.

The principal methodology is the Global Methodology for Rating Banks and Banking Organisations (22 June 2023) https://www.dbrsmorningstar.com/research/415978/global-methodology-for-rating-banks-and-banking-organisations In addition DBRS Morningstar uses the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings https://www.dbrsmorningstar.com/research/416784/dbrs-morningstar-criteria:-approach-to-environmental,-social,-and-governance-risk-factors-in-credit-ratings in its consideration of ESG factors.

The credit rating methodologies used in the analysis of this transaction can be found at: https://www.dbrsmorningstar.com/about/methodologies.

The sources of information used for these credit ratings include Morningstar Inc. and Company Documents, UniCredit Bank Austria Annual Reports (2017-2022), UniCredit Bank Austria H1 2023 Interim Report, UniCredit Bank Austria 2022 Pillar 3 Report, ESRB. DBRS Morningstar considers the information available to it for the purposes of providing these credit ratings to be of satisfactory quality.

With respect to FCA and ESMA regulations in the United Kingdom and European Union, respectively, these are unsolicited credit ratings. These credit ratings were 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 credit 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 credit 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://registers.esma.europa.eu/cerep-publication. For further information on DBRS Morningstar historical default rates published by the Financial Conduct Authority (FCA) in a central repository, see https://data.fca.org.uk/#/ceres/craStats.

The sensitivity analysis of the relevant key credit rating assumptions can be found at: https://www.dbrsmorningstar.com/research/424999.

These credit ratings are 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 Global FIG
Initial Rating Date: July 21, 2022
Last Rating Date: December 9, 2022

For more information on this credit or on this industry, visit www.dbrsmorningstar.com.