OREANDA-NEWS. S&P Global Ratings today affirmed its 'BBB-/A-3' long - and short-term counterparty credit ratings on UniCredit SpA (Unicredit). The outlook remains stable.

At the same time, we affirmed the 'BBB+/A-2' long - and short-term counterparty credit ratings on Bank Polska Kasa Opieki S. A. (Pekao). The outlook remains negative.

The affirmations follow Unicredit's announcement that it has disposed of 10% of its controlling stake in its Polish subsidiary Pekao, reducing its shareholding to 40.1% of the bank's share capital as of July 12, 2016. The sale is one of the actions taken by Unicredit to enhance its solvency. We consider that this disposal, combined with the sale of a minority stake in controlled subsidiary FinecoBank S. p.A. (Fineco, not rated), would benefit the group's regulatory capitalization by around 20 basis points. At the same time, we now believe that Pekao's strategic importance to the rest of the group has diminished, as Unicredit's ownership has fallen below 50% and the group is undergoing a wider strategic review of its operations abroad. That said, this change has no implications for our assessment of the rating on Pekao, which is based solely on our assessment of its stand-alone creditworthiness.

On July 11, 2016, Unicredit's Board of Directors announced the launch of an in-depth review of the group's strategy, led by its recently appointed Chief Executive Officer, Jean Pierre Mustier. The bank announced that the strategic review would encompass all major areas, with the purpose of enhancing the group's capitalization, profitability, and efficiency. Unicredit also announced that the Italian operations would remain absolutely key to the group. For other strategic assets--including German and CEE subsidiaries--capital optimization, synergies, and cross selling would remain the key focus.

As part of the strategic actions aimed at enhancing group capitalization, Unicredit announced the sale of a minority stake in its Polish subsidiary, Pekao. Total proceedings of the disposal account for about €750 million. This also follows the sale of a 10% stake in Fineco, Unicredit's Italian online banking subsidiary, which accounted for about €350 million.

The combined impact of these initiatives will somewhat benefit the group's capitalization. We estimate that our pro forma risk-adjusted capital (RAC) ratio before diversification would increase by about 10-15 basis points. However, this enhancement is insufficient to change our view of the group's solvency position, which we consider remains modest and lower than that of Unicredit's large and international peers.

Following the disposal, we note that Unicredit's ownership in Pekao has fallen below 50%. Combined with the uncertainties regarding the potential future strategic decision of the group's presence in different CEE (Central and Eastern European) countries, including Poland, in our view this reduces Pekao's strategic importance to the wider group. For this reason, we no longer consider Pekao as core to the rest of the group. That said, our revised assessment of Pekao's group status to strategically important does not affect its ratings. This is because we base the ratings on Pekao on our view of its stand-alone credit profile of 'bbb+', and don't include any notches of uplift for potential parental support, given our assessment of Unicredit's group credit profile (GCP) of 'bbb-'. Although subsidiaries are generally not rated higher than our GCP for a given group, we may assign a higher rating if the subsidiary meets certain conditions that we consider to be supportive of its banking system--including being highly systemically important in a country.

We have not revised our assessment of the strategic importance of the rest of Unicredit's CEE subsidiaries, or its Turkish subsidiary, Yapi ve Kredi Bankasi A. S. This is because we don't view any of those subsidiaries as being so strongly integrated in the group or pivotal to the parent company's strategy to be considered as core. However, we will continue monitoring future strategic developments; if we were to envisage any material reduction of Unicredit's commitment to its local subsidiaries we could revise our assessment of their role in the overall group.

At the same time, we continue to consider both Unicredit AG and Unicredit Bank Austria as core subsidiaries, and believe that they are integral to the group strategy. That said, we will also closely monitor those subsidiaries' strategic importance in the coming months, as Unicredit intends to launch a new business plan by the end of 2016, potentially reviewing the perimeter of the group.

All else being equal, any revision in our view of the strategic importance of Unicredit's subsidiaries would not automatically affect their ratings. This is because the ratings on those entities are primarily based on their stand-alone creditworthiness.

The stable outlook on Unicredit mirrors that on our long-term ratings on Italy (unsolicited BBB-/Stable/A-3) since we are unlikely to rate the bank above the sovereign credit rating. This reflects our belief that Unicredit would be unlikely to pass the stress test scenario that, under our methodology, would likely accompany a hypothetical sovereign default in Italy, given the bank's Italian exposure and the parameters of the stress test. On a stand-alone basis, we expect that the potential gradual reduction of economic and industry risks for banks in Italy, where about half of its operations are concentrated, could support Unicredit's performance and potentially bring about an improvement in its SACP over the next 18-24 months. In particular, we believe that ongoing improvements in the bank's asset quality could benefit its operating performance, namely through a reduction in the cost of risk in the coming years.

We could consider a positive rating action if we were to upgrade Italy and, at the same time, we considered that either the bank's SACP had improved, or the bank issued more ALAC (additional loss-absorbing capacity)-eligible instruments than we currently anticipate and reached the minimum threshold for a one-notch uplift above the SACP.

Conversely, a downgrade of Italy would trigger a similar action on Unicredit.

The negative outlook on Pekao indicates our view that there is a one-in-three possibility of a downgrade, driven by our anticipation of the introduction of the EU Bank Recovery and Resolution Directive (BRRD) resolution framework in Poland in 2016.

We expect that the implementation of the BRRD in Poland in 2016 will likely decrease the potential for extraordinary government support for systemically important banks. We also consider that the possible introduction of a single resolution framework for cross-border banking groups, such as UniCredit SpA, within the EU could lead to an increased bail-in risk on the subsidiary in the event of a resolution of the parent.

If we did not factor in systemic support from the Polish government, we would rate Pekao above its parent UniCredit SpA only if we considered Pekao to be:

Insulated (substantially protected from adverse parental effects or intervention); or Eligible for consideration of ALAC once Poland has adopted the BRRD, and we consider it to have an effective resolution regime where Pekao is subject to a separate resolution process from its parent. The negative outlook also incorporates the possibility of a downgrade following a further negative rating action on Poland. If we lowered the long-term foreign currency rating on Poland, which now carries a negative outlook, we would likely cap the rating on Pekao at the level of the long-term foreign currency sovereign rating.

Although the operating conditions for Polish banks are becoming more demanding, we consider that Pekao holds sound enough capital levels to withstand potentially adverse developments in the economy and that its exposure to Swiss franc (CHF)-denominated mortgage loans is comparatively low.

We could revise the outlook on Pekao to stable if we consider that potential extraordinary government support for the bank's senior unsecured creditors is unchanged in practice; or if we consider Pekao to be subject to a separate resolution process from its parent and having a sufficient buffer of subordinated instruments eligible for ALAC, fully offsetting the increased bail-in risks. An outlook revision to stable would also hinge on a similar rating action on the sovereign.