BANK HANDLOWY W WARSZAWIE S.A.
Fitch Ratings has affirmed
A full list of rating actions is detailed below.
Key Rating Drivers
Shareholder Support Drives IDRs: Handlowy's IDRs and Shareholder Support Rating (SSR) are driven by potential support from the bank's majority owner, Citigroup Inc. (Citigroup; A/Stable). The Stable Outlook on the Long-Term IDR mirrors that on the parent's rating. The National Ratings are at the higher end of the scale given strong potential support from the parent.
Handlowy's VR is the highest among Polish banks'. It balances a low-risk business model, solid capital and liquidity buffers by regional standards and consistent risk appetite reflected in small credit losses through the cycle against the bank's moderate franchise and operations in an inherently riskier and more volatile emerging market. The RWN reflects limited transparency over the scope and timeframe of its exit from the retail business and uncertainty over its impact on the bank's business and financial profiles. Fitch expects that the resolution of the RWN may take longer than six months, outside of its normal Rating Watch horizon.
Very High Shareholder Support: We believe that Citigroup has a very high propensity to provide support given the strategic importance of the Polish market for Citigroup and considerable reputational risk from a default of its Polish subsidiary, even though Handlowy is not named as a material legal entity in Citigroup's resolution plan. Accordingly, Handlowy's Long-Term IDR is notched down once from the parent's Long-Term IDR.
Intervention Risk Drives Operating Environment: The 'bbb' operating environment score on Polish banks reflects the willingness of the authorities to intervene in the banking sector and impose large additional costs on banks. Mortgage credit holidays that might be prolonged for another year follow a sizeable bank tax and substantial provisions banks make for legal risks relating to Swiss franc-denominated mortgage loans.
Sustainable Business Profile: The bank's business model has been largely resilient to various shocks through the economic cycle and is underpinned by its established - although small - franchise, broad service offering to its targeted customer base, sound financial profile and cautious risk appetite.
Sound Risk Profile: The bank's risk management framework is supported by Citigroup's sound risk governance. Prudent risk controls are underlined in limited variability in the bank's financial metrics, particularly asset quality and capitalisation.
Asset Quality Aligned with Sovereign: Handlowy's asset quality reflects the bank's conservative underwriting, diversified loan portfolio by product, and established relationships with commercial customers, but it is also closely aligned with the Polish sovereign's creditworthiness due to large holdings of sovereign and central bank securities.
The impaired loans ratio (3%-4% in the past three years) remains below the sector average and we expect limited weakening over the next two years resulting from the slowdown of the Polish economy.
Superior Operating Performance: Handlowy's operating profit/risk-weighted assets strongly benefits from currently higher interest rates, in particular in its securities portfolio. The ratio was among the highest of its peer group in 1H23, and we expect it to remain robust at around 7%-8% over the next two years, with moderate pressures from weaker loan growth and investments prospects, and growing operating expenses.
Solid Capital Buffers: Capitalisation is sound and provides sizeable loss-absorption capacity. We expect the bank's common equity Tier 1 (CET1) ratio of 20.3% at end-1H23 to further increase to meet the recently introduced Total Loss Absorption Capacity (TLAC) requirement set at 20.8%. We believe capitalisation will remain comfortable in the long term and above that of domestic peers, although it is currently unclear how the exit from retail business will affect it.
Strong Funding and Liquidity: Handlowy's stable deposit-based funding, low loans/deposits ratio and abundant liquidity are a rating strength. Funding needs are low with customer loans at only 28% of the bank's total assets at end-1H23 (excluding reverse-repo transactions). Its portfolio of high-quality debt securities (mostly rated A- and above) represented over 40% of total assets and reflects the bank's conservative liquidity management.
Rating Sensitivities
Factors that Could, Individually or Collectively, Lead to Negative Rating Action/Downgrade
The Long-Term IDR of Handlowy will be downgraded if we believe parental support to have weakened. A support revision could be triggered by a downgrade of Citigroup's Long-Term IDR or a reassessment of the propensity of the parent to provide support, for example if the subsidiary's strategic importance is diminished.
The VR will be downgraded if Fitch concludes that the sale of the retail business negatively affects Handlowy's business and financial profiles, which could be manifested in a reduction of its sizable liquidity buffers and/or increased borrower concentrations relative to the post-exit capital base. This could in turn mean the bank's standalone assessment is no longer better than peers' or above the operating environment score.
The VR could be downgraded if our assessment of the operating environment is revised downward or if considerable pressures on asset quality, capitalisation and profitability erode the bank's financial profile.
The National Ratings are sensitive to negative changes to the bank's Long-Term IDR.
Factors that Could, Individually or Collectively, Lead to Positive Rating Action/Upgrade
The bank's Long-Term IDR could be upgraded if Citigroup's Long-Term IDR is upgraded or if there is a supportive revision of the resolution strategy of the group with respect to Handlowy.
An affirmation of the VR and removal from RWN could result from only modest negative impact on the bank's business and financial profiles from the exit of the retail business or if the transaction is cancelled.
Given the level of the VR and the RWN, Fitch does not expect an upgrade in the immediate future. The reassessment of the operating environment score to at least 'bbb+' would be a prerequisite for an upgrade, and should be combined with the bank maintaining its key financial metrics at least at current levels.
The National Ratings are sensitive to positive changes to the bank's Long-Term IDR.
VR ADJUSTMENTS
The business profile score of 'bbb' is above the 'bb' category implied score because of the following adjustment reason: business model (positive).
The capitalisation and leverage score of 'bbb+' is below the 'a' category implied score because of the following adjustment reason: risk profile and business model (negative).
REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING
The principal sources of information used in the analysis are described in the Applicable Criteria.
Public Ratings with Credit Linkage to other ratings
Handlowy's IDRs and SSR are linked to Citigroup's IDRs.
ESG Considerations
Handlowy has an ESG Relevance Score for Management Strategy of '4'. This reflects our view of elevated government intervention risk in the Polish banking sector, which negatively affects the banks' operating environment and their ability to define and execute on their strategies. This has a negative impact on the bank's credit profile and is relevant to the ratings, in combination with other factors.
Unless otherwise disclosed in this section, the highest level of ESG credit relevance is a score of '3'. This means ESG issues are credit-neutral or have only a minimal credit impact on the entities, either due to their nature or the way in which they are being managed by the entities. Fitch ESG Relevance Scores are not inputs in the rating process; they are an observation of the materiality and relevance of ESG factors in the rating decision. For more information on Fitch's ESG Relevance Scores, visit www.fitchratings.com/esg
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