OREANDA-NEWS. Fitch Ratings has affirmed Austria-based Meinl Bank AG's Long-term Issuer Default Rating (IDR) at 'B-' and Viability Rating (VR) at 'b-' and removed them from Rating Watch Negative (RWN), where they were placed on 12 August 2015. The Outlook on the Long-term IDR is Stable.

A full list of rating actions is at the end of this commentary.

KEY RATING DRIVERS - IDRs and VR
Meinl Bank's Long-term IDR is driven by its standalone creditworthiness as expressed by its VR. Our assessment of the bank's management and strategy has a high influence on the VR and remains a major rating constraint. We view corporate governance as very weak, notably in light of the high complexity and limited transparency of the control, ownership and group structure, and our view of weaknesses in the checks and balances that are in place. High related-party lending in comparison to the bank's equity is an additional rating risk.

The VR also reflects the limited stability and diversification of the bank's narrow and opportunistic business model and the absence of meaningful franchise in its business segments comprising corporate and investment banking, asset management and sales and trading.

The bank's newly appointed management board will have to continue to remedy the shortcomings identified in 2015 by the Austrian Financial Market Authority (FMA) in the bank's management practices, organisation, procedures and internal controls. The new management will also need to continue to restore the bank's reputation and stabilise its performance to stop the capital erosion arising from years of litigation costs. The new management team will also need to demonstrate its ability to maintain and develop a sustainable client base.

Despite these challenges, the rating actions reflect our view that the management change and its commitment to and progress in implementing corrective actions remove an immediate risk for the bank's viability from regulatory intervention. The Stable Outlook also reflects our expectation that the management transition will not alter clients' confidence to an extent that could jeopardise the bank's ability to generate sufficient new business.

High legal, operational and reputational risks are inherent to the bank's niche franchise. The latter has relied thus far on opportunistic transactions with many clients based in high-risk jurisdictions and often driven by regulatory arbitrage considerations, giving rise to litigation risk. We believe that a transition to a more traditional and conservative type of wealth management business would take years and with uncertain chances of success.

The weak operating profitability arising from fluctuating business volumes and burdened by high litigation cost has continuously eroded the bank's capitalisation in the past few years. We believe that capitalisation is particularly vulnerable to ongoing tax investigations related to past transactions with a former subsidiary, Meinl European Land (MEL, now Atrium European Real Estate Limited, BBB/Stable). An unfavourable outcome of these investigations could result in a tax liability equivalent to a multiple of the bank's equity. This could threaten the bank's viability, despite guarantees provided by the owner.

The investigations related to MEL also continue to expose the bank's modest capitalisation to high legal and operational costs and risks. Despite continued settlement progress, it remains exposed to high claims (including a class action) from MEL's numerous former investors.

The volume of problem loans is manageable but we view the bank's risk appetite and loan concentration as high. Moreover, its equity investments in largely illiquid special-purpose vehicles bear significant valuation risk. Deposits are also highly concentrated, which is only partly mitigated by the fact that some of them are pledged for secured lending.

SUPPORT RATING AND SUPPORT RATING FLOOR
The affirmation of the Support Rating at '5' and Support Rating Floor at 'No Floor' reflects our view that the bank is not systemically important, and that the EU's Bank Recovery and Resolution Directive (BRRD) and Single Resolution Mechanism (SRM) provide a framework for resolving banks that is likely to impose losses on senior creditors, if necessary, instead of or ahead of a bank receiving sovereign support.

RATING SENSITIVITIES
IDRs and VR
The ratings are primarily sensitive to the further developments of litigation and tax investigations. A downgrade is most likely if future related costs continue to deplete the modest capitalisation by significantly exceeding the existing provisions unless the bank manages to restore solid capital generation.

An upgrade would be contingent upon a material improvement of the bank's corporate governance practices. It would also be dependent upon restoring stable profits from a more sustainable business model. An upgrade would further require significant progress in resolving the MEL-related litigation.

SUPPORT RATING AND SUPPORT RATING FLOOR
Any upgrade of the Support Rating and upward revision of the Support Rating Floor would be contingent on a positive change in the sovereign's propensity to provide support to the bank. This is highly unlikely, in our view.

Meinl Bank AG
Long-term IDR: affirmed at 'B-', removed from RWN , Outlook Stable
Short-term IDR: affirmed at 'B', removed from RWN
Viability Rating: affirmed at 'b-', removed from RWN
Support Rating: affirmed at '5'
Support Rating Floor: affirmed at 'No Floor'