Morningstar DBRS Revises Trend on UniCredit Bank Austria AG to Positive, Confirms BBB (high) Long-Term Issuer Rating

DBRS Ratings GmbH (Morningstar DBRS) confirmed the credit ratings of UniCredit Bank Austria AG (Bank Austria, or the Bank), including the Long-Term Issuer Rating at BBB (high) and the Short-Term Issuer Rating at R-1 (low). The trend on the long-term credit ratings was changed to Positive from Stable. Morningstar DBRS has also maintained the Intrinsic Assessment (IA) at BBB (high) and the Support Assessment at SA3. For a complete list of credit ratings, please see the table at the end of this press release.

KEY CREDIT RATING CONSIDERATIONS

The trend change to Positive reflects the Bank’s improved profitability in 2023 supported by higher net interest income and stronger efficiency levels despite higher credit provisions. The IA at BBB (high) takes into consideration the Bank’s strong market position in Austria, its ownership by the UniCredit Group, as well as its adequate liquidity profile and solid capital buffers. In addition, the credit ratings take into account Bank Austria’s moderate, albeit increasing level of non-performing loans (NPLs) amid the slowdown in the Austrian economy and challenges in the real estate sector.

With the SA3 support assessment, Morningstar DBRS does not incorporate into the rating any expectation of systemic support for Bank Austria. At the same time, the Bank benefits from being part of UniCredit Group, and therefore our view is that internal support from the Group may be forthcoming if needed.

The Bank's IA is positioned below the Intrinsic Assessment Range (IAR) reflecting the risks for asset quality and profitability stemming from the Bank’s large exposure to the Commercial Real Estate (CRE) sector.

CREDIT RATING DRIVERS

An upgrade of the IA would require Bank Austria to maintain sustained profitability levels, solid asset quality profile and solid capital buffers. Given Bank Austria‘s ownership by the UniCredit Group, positive credit developments at UniCredit Group could have positive implications for the credit ratings of Bank Austria.

A downgrade of the IA would likely result from a significant deterioration in the Bank’s asset quality. Given Bank Austria‘s ownership by the UniCredit Group, negative credit developments at the parent could have negative implications for the credit ratings of Bank Austria .

CREDIT RATING RATIONALE

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

Part of the UniCredit Group since 2005, Bank Austria is a leading commercial and retail banking organisation in Austria. Before UniCredit Group’s reorganisation in 2016, 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 102.7 billion in total assets as of end-2023, Austria is the main market of UniCredit’s Central Europe division. The Bank is well integrated within UniCredit Group.

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

In 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 Bank Austria. The Bank maintains good efficiency levels and low, albeit rising cost of risk. In 2023, the Bank reported higher profits across all its business segments: Retail, Wealth Management & Private Banking and Corporates.

In 2023, Bank Austria reported consolidated net attributable income of EUR 1,120 million, up by 36% from EUR 823 million in 2022, mainly due to higher revenues. Net Interest Income (NII) increased by 57% YOY on the back of improved margins, supported by rising interest rates. Net fee and commission income remained fairly stable YOY.

Under UniCredit Group’s strategic plan (‘UniCredit Unlocked’), Bank Austria continued to take measures to streamline its operations and improve efficiency levels. Further workforce reduction supported the decline in operating costs, despite inflationary pressures. However, on a consolidated level, total costs increased due to integration costs.

Cost of risk has historically been moderate, however, loan loss provisions (LLPs) rose to EUR 43 million in 2023 from EUR 24 million the prior year, reflecting the implementation of updated Loss Given Default (LGD) models and the establishment of overlays for risks in CRE.

Risk Combined Building Block (BB) Assessment: Good

As expected, Bank Austria’s asset quality deteriorated moderately in 2023 mainly as result of the challenge in the real estate sector, particularly in CRE. The stock of NPLs increased by EUR 93 million YOY to EUR 2,254 million at end-2023 mainly driven by inflows from large CRE exposures in Q4 2023. In addition, the Bank’s gross customer loans declined reflecting the more challenging economic environment in Austria. The gross NPE ratio (as reported) increased to 3.4% at end-2023, up 0.2 p.p. YOY. At the same time, the NPL coverage ratio decreased to 38.4% from 43.8% in 2022 as no significant provisions for new NPLs were needed due to high collateralisation levels.

The Bank’s balance sheet is mostly composed of loans to retail and corporate customers, as well as investments in debt securities, the bulk of which were classified at fair value through other comprehensive income. As of end-2023, loans to customers accounted for roughly 64% of the Bank’s total assets.

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

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

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 UniCredit Group as far as the resolution regime is concerned.

In 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 2023, total customer deposits fell by EUR 3.2 billion (-5% compared to end-2022). The reduction was mostly concentrated in the Corporate Division. At end-2023, the Bank held EUR 1.55 billion in TLTRO III, following the repayment of EUR 5.4 billion in June 2023.

Capitalisation Combined Building Block (BB) Assessment: Good

The Bank maintains a solid capital position. Bank Austria reported its CET1 and total capital ratio at end-2023 at 19.3% and 23.3% respectively, up from 17.4% and 21.1% in 2022 mainly driven by RWAs reduction due to model adjustments.

Alongside the minimum capital requirement of 8%, 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/431608.

ENVIRONMENTAL, SOCIAL, AND GOVERNANCE CONSIDERATIONS

Given the ownership by UniCredit Group, credit rating actions on the Republic of Italy could have an impact on this credit rating. ESG factors that have a significant or relevant effect on the credit analysis of the Republic of Italy are discussed separately at https://www.dbrsmorningstar.com/issuers/17689.

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

A description of how Morningstar DBRS considers ESG factors within the Morningstar DBRS analytical framework can be found in the Morningstar DBRS Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings (23 January 2024), https://dbrs.morningstar.com/research/427030/morningstar-dbrs-criteria:-approach-to-environmental,-social,-and-governance-risk-factors-in-credit-ratings.

Morningstar DBRS notes that this press release was amended on 25 April 2024 to incorporate the disclosure for endorsed ratings and office details of the lead analyst.

Notes:
All figures are in Euros unless otherwise noted.

The principal methodology is the Global Methodology for Rating Banks and Banking Organisations (15 April 2024) https://dbrs.morningstar.com/research/431155/global-methodology-for-rating-banks-and-banking-organisations. In addition Morningstar DBRS uses the Morningstar DBRS Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings (23 January 2024) https://dbrs.morningstar.com/research/427030/morningstar-dbrs-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://dbrs.morningstar.com/about/methodologies.

The sources of information used for these credit ratings include Morningstar Inc. and Company Documents, UniCredit Bank Austria Annual Reports (2018-2023), UniCredit Bank Austria (Fixed Income presentation, March 2024), UniCredit Bank Austria Pillar 3 Report. Morningstar DBRS 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

Morningstar DBRS 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. Morningstar DBRS's outlooks and credit ratings are under regular surveillance.

For further information on Morningstar DBRS 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 Morningstar DBRS 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/431607.

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

Lead Analyst: Nicola De Caro, Senior Vice President, Sector Lead - European Financial Institution Ratings
Rating Committee Chair: Elisabeth Rudman, Managing Director - Global Financial Institution Ratings
Initial Rating Date: July 21, 2022
Last Rating Date: December 6, 2023

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