ALIOR BANK S.A.
Fitch Ratings has revised the Outlook on
Fitch has also revised the Outlook on the bank's National Long-Term Rating to Positive from Stable and affirmed the rating at 'BBB+(pol)'. A full list of rating actions is below.
The Positive Outlook on the Long-Term IDR reflects continuing improvements in Alior's financial profile. This includes in particular a meaningful strengthening of the bank's capital buffers, which together with improved internal capital generation and recently improved asset quality, increase the bank's capacity to absorb potential unexpected credit losses from its higher-risk business model. The Positive Outlook on the National Long-Term Rating reflects that on the Long-Term IDR.
Key Rating Drivers
Standalone Creditworthiness Drives Ratings: Alior's ratings reflect its moderate franchise and a business model that is characterised by higher risk appetite and lower earnings diversification than higher-rated peers, which make it more vulnerable to adverse changes in business and economic conditions and interest rate levels. The ratings also consider Alior's above-average, albeit reduced, level of impaired loans, strengthened capital buffers and typically stable funding and liquidity profile.
Intervention Risk Drives Operating Environment: The 'bbb' operating environment score for Polish banks reflects the willingness of the authorities to intervene in the banking sector and impose large additional costs on banks. Mortgage credit holidays, which might be prolonged for another year, follow a sizeable bank tax and substantial provisions banks have made for legal risks relating to Swiss franc-denominated mortgage loans.
Moderate Domestic Franchise: Alior is a second-tier bank in
Higher Risk Appetite than Peers: Alior's strategic focus on unsecured consumer lending and micro/SME segments has been reflected in its loan impairment charges (LICs) relative to average gross loans being considerably higher than the sector average. However, we expect the bank's tightened underwriting, greater focus on secured lending and moderation of growth to have a positive impact on its risk profile and LICs in the longer term.
Above Average Impaired Loans: Alior's impaired loans ratio has reduced further in 2023, although it remains materially higher than most Fitch-rated Polish banks. We expect that its impaired loans ratio will stabilise around 8% in the medium term. This is based on continued reduction of legacy bad debts, improved underwriting standards and contained negative effects of a challenging macroeconomic environment on loan book performance.
High Rates Support Profitability: In the medium term, Alior's profitability will continue to benefit from relatively high market interest rates, supporting its above-average margins and mitigating LICs that are higher than peers. The latter are likely to stabilise at lower than historical levels, which should improve the bank's sustainable profit generation. We expect the bank's operating profit/risk-weighted assets (RWA) ratio to moderately weaken in 2024 but to stay solid at around 4%, which would be well above Alior's past performance.
Moderate Capitalisation, Reduced Vulnerability: Solid internal capital generation and a reduced burden from unreserved impaired loans have strengthened Alior's capitalisation, making it less vulnerable to shocks than in the past. We forecast that the bank will maintain adequate capital buffers in the medium term, with a common equity Tier 1 (CET1) ratio that we expect to remain above 16% by end-2025. This is despite the likely resumption of moderate dividend payments and a potential negative impact from RWA inflation from the implementation of Basel III endgame rules.
Stable Funding and Liquidity: Alior's funding and liquidity benefit strongly from its stable and granular customer deposit base, which represents most of its non-equity funding sources. Alior's cost of deposits is close to the industry average and its large deposit share from individuals and insured deposits further support our assessment. We expect the gross loans/deposits ratio to remain below 100% in the medium term. The need to comply with the resolution buffer requirements will likely lead to a moderate increase in wholesale funding. The bank's liquidity is well-managed and supported by an adequate stock of high-quality liquid assets relative to deposits and total assets.
Rating Sensitivities
Factors that Could, Individually or Collectively, Lead to Negative Rating Action/Downgrade
Alior's VR and IDRs have significant headroom. Fitch could revise the Outlook on the Long-Term IDR back to Stable if it expects capital buffers to reduce due to excessive loan growth or profit distribution that would materially exceeds the agency's projections. The ratings could be downgraded on a substantial and prolonged deterioration of asset quality (impaired loans ratio above 15%) that would put significant pressure on the bank's profitability and capitalisation without clear prospects for recovery.
Factors that Could, Individually or Collectively, Lead to Positive Rating Action/Upgrade
Alior's VR and Long-Term IDR would be upgraded if the bank maintains adequate capital buffers such as a CET1 ratio not lower than around 16%, while it continues to operate with a more conservative risk profile than in the past. In this case, maintaining an impaired loans ratio comfortably below 10% and operating profit/RWAs above 1.5% would be pre-requisite for an upgrade.
OTHER DEBT AND ISSUER RATINGS: KEY RATING DRIVERS
The 'B' Short-Term IDR is the only option corresponding to the 'BB' Long-Term IDR. The 'BBB+(pol)'/'F1(pol)' National Ratings reflect Alior's creditworthiness relative to Polish peers. Its Short-Term National Rating of 'F1(pol)' is the higher of the two options that map to a 'BBB+(pol)' Long-Term Rating, reflecting Alior's 'bbb-' funding and liquidity score relative to Polish peers.
Alior's Government Support Rating (GSR) of 'No Support' expresses Fitch's opinion that potential sovereign support for the bank cannot be relied on. This is underpinned by the Polish resolution legal framework, which requires senior creditors to participate in losses, if necessary, instead or ahead of a bank receiving sovereign support.
OTHER DEBT AND ISSUER RATINGS: RATING SENSITIVITIES
The National Ratings are sensitive to changes to the bank's Long-Term IDR, and its credit profile relative to Polish peers.
Alior's Short-Term IDR is primarily sensitive to the Long-Term IDR but would be upgraded only if Alior's Long-Term IDR was upgraded by more than one notch, which is unlikely.
Domestic resolution legislation limits the potential for positive rating action on the bank's GSR. Fitch could assign Alior a Shareholder Support Rating if it viewed at least a limited probability of support from
VR ADJUSTMENTS
The business profile score of 'bb' is below the 'bbb' implied category score for Alior, due to the following adjustment reasons: business model (negative) and market position (negative).
The asset quality score of 'bb-' is above the 'b' implied category score for Alior, due to the following adjustment reasons: historical and future metrics (positive).
The capitalization and leverage score of 'bb+' is below the 'bbb' implied category score for Alior, due to the following adjustment reasons: 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.
ESG Considerations
Alior has an ESG Relevance Score of '4' for Management Strategy, due to heightened execution risk of its business plan given high management turnover in the bank. The score also incorporates our view of heightened government intervention risk in the Polish banking sector, which affects the banks' operating environment and their ability to define and execute on their strategies. These are not key rating drivers but have a negative impact on the bank's credit profile and are relevant to the ratings in conjunction with other factors.
The highest level of ESG credit relevance is a score of '3', unless otherwise disclosed in this section. A score of '3' means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. Fitch's ESG Relevance Scores are not inputs in the rating process; they are an observation on the relevance and materiality of ESG factors in the rating decision. For more information on Fitch's ESG Relevance Scores, visit https://www.fitchratings.com/topics/esg/products#esg-relevance-scores.
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