OREANDA-NEWS. Fitch Ratings has affirmed Alior Bank SA's Long-term Issuer Default Rating (IDR) at 'BB' and Viability Rating (VR) at 'bb'. The Outlook on the Long-term IDR is Stable. A full list of rating actions is at the end of this commentary.

The affirmation follows the bank's announcement on 1 April 2016 that it will acquire part of Bank BPH, 87.2% owned by GE Capital. As a result of the transaction, Alior's consolidated assets are likely to increase by about 30%.

KEY RATING DRIVERS
VR, IDRS AND NATIONAL RATINGS
The affirmation reflects Fitch's base case expectation that the impact of the transaction on Alior's credit profile will be broadly neutral. In the agency's view, the bank's capital ratios, business profile and funding mix are unlikely to significantly change. Asset quality may somewhat improve, while profitability is likely to be initially negatively affected.

Alior will acquire BPH Core, which comprises BPH's balance sheet excluding residential mortgages (predominantly in Swiss francs), funding from GE Capital, subordinated debt and assets and liabilities related to the asset management unit. Alior plans to acquire about PLN8.5bn loans and PLN12bn customer deposits, both dominated by retail customers (about 60% share), which is similar to Alior's current loan and deposit structure. Management has told Fitch that Alior is fully ring-fenced from any risk related to assets outside of BPH Core, including foreign currency denominated mortgages.

The acquisition fits well into Alior's strategy, based largely on fast credit expansion in higher-margin loan products. The combined bank would become the ninth-largest Polish bank by total assets (Alior is currently ranked 13th) and the second-largest consumer lender. Alior's management plans to conclude the transaction by end-2016, with the operational merger to be completed in 1H17.

Fitch's view of the likely neutral impact on Alior's credit profile largely reflects the substantial planned capital increase to finance the transaction. The bank plans to raise PLN2.2bn (about 60% of Alior's end-2015 equity) in 2Q16. About PLN1.5bn relates to the acquisition (including a PLN1,225m consideration for GE Capital's stake) with the remainder earmarked for cushioning current capital pressure and funding further lending growth. The largest shareholder (PZU, state-owned insurer) publicly announced its commitment to participate in the capital increase up to its current stake of about 25%. The remaining 75% is secured by a standby underwriting agreement with three banks. Management expects a 10.75% CET 1 ratio in the combined bank, compared with 9.7% reported at end-2015.

BPH's performance has been hampered by high operating expenses, as a result of which its pre-tax profit in 2015 (net of PLN1.1bn one-offs) was close to zero. Alior believes it can reduce BPH Core's cost base by 45%, but the initial impact of the transaction on profitability will be negative due to high integration costs, to be recognised mainly in 2017.

Asset quality at the combined bank may somewhat improve due to BPH's ratio of loan impairment charges to average gross loans and delinquency rates being lower than Alior's. Alior's gross loans split (about 60% to retail) is likely to be relatively unchanged by the transaction. However, the pro-forma share of unsecured gross retail loans in total loans could reach about 44%, compared with 36% reported by Alior at end-2015. The funding structure is also likely to remain relatively unaffected. At end-2015, the pro-forma gross loans/ customer deposits indicator for combined banks was about 100% compared with Alior's reported ratio of 105%.

Fitch affirmed Alior's ratings on 29 February 2016 (see 'Fitch Takes Various Rating Actions on Polish Banks' at www.fitchratings.com). Alior's ratings reflect the bank's rapid credit expansion, relatively high appetite for credit risk, weak capitalisation and fast inflow of new impaired loans. At end-2015, the impaired loans ratio was 9.3%, or 10.7% including PLN510m impaired loans written off in 2015. Alior's credit risk profile is also driven by the bank's strategic focus on unsecured retail lending, some concentration in riskier industries (such as wind farms and the construction sector) and only moderate coverage of impaired loans by loan loss reserves.

The VR also takes into account Alior's conservative funding strategy based predominantly on retail deposits, adequate liquidity position and a net interest margin higher than the market average, which should somewhat cushion the impact of the bank levy.

SUPPORT RATING AND SUPPORT RATING FLOOR
The Support Rating Floor of 'No Floor' and Support Rating of '5' express Fitch's opinion that potential sovereign support of Alior cannot be relied upon. This is underpinned by the EU's Bank Recovery and Resolution Directive (BRRD), which provides a framework for resolving banks that are likely to require senior creditors participating in losses, if necessary, instead of or ahead of a bank receiving sovereign support.

RATING SENSITIVITIES
Fitch does not anticipate positive rating action in the near term. An upgrade of Alior's ratings would likely require stronger capitalisation, a moderation of growth rates, stable asset quality and a longer track record of solid profitability in an environment of low interest rates and the bank tax.

Downward pressure on the ratings could arise from a material deviation from Alior's planned post-acquisition capital adequacy, lending or funding mix, significant delays in achieving the announced cost synergies, or if unexpected operational and integration risks arise that are material to Alior's financial performance. The bank's ratings could also come under pressure in case of considerably weaker internal capital generation or material deterioration in asset quality combined with a less favourable operating environment.

The rating actions are as follows:

Long-term foreign currency IDR: affirmed at 'BB', Stable Outlook
Short-term foreign currency IDR: affirmed at 'B'
National Long-term Rating: affirmed at 'BBB+(pol)', Stable Outlook
National Short-term Rating: affirmed at 'F2(pol)'
Viability Rating: affirmed at 'bb'
Support Rating: affirmed at '5'
Support Rating Floor: affirmed at 'No Floor'