Fitch: Austrian banks' ratings unaffected by sovereign downgrade

Fitch Ratings says that its recent downgrade of Austria's sovereign ratings does not affect the support-driven Long-term Issuer Default Ratings (IDR) of the four systemically-relevant Austrian banks, which remain 'A'/Negative.

Fitch downgraded the Republic of Austria by one notch, to 'AA+'/Stable from 'AAA', on 13 February 2015, driven primarily by our expectation that Austria's general government debt to GDP ratio will peak at around 89% in 2015, above previous forecasts, and higher than most other 'AAA' rated sovereigns.

Fitch assigns support-driven Long-term IDRs to four systemically-relevant Austrian Banks - Erste Group Bank AG, UniCredit Bank Austria AG, Raiffeisen Bank International AG and Volksbanken-Verbund. The 'A' IDRs are based on our view that these banks would receive support from the state if needed; Fitch believes that this view is still appropriate at Austria's 'AA+'/Stable Long-term IDR level as the state maintains good financial flexibility to provide support to the largest banks that are systemically important. However, a further downgrade of Austria would likely result in a downgrade of these banks' current support-driven ratings.

The Outlooks on these banks' Long-term IDRs are Negative, and we expect to downgrade the IDRs and the Support Ratings in 1H15 and revise their Support Rating Floors downwards. The Negative Outlooks reflect our view that there is a clear intention to reduce implicit state support for banks in Austria, and in the EU more generally. This is demonstrated by a series of legislative, regulatory and policy initiatives, in particular the EU's Bank Recovery and Resolution Directive (BRRD) and the Single Resolution Mechanism (SRM) for eurozone banks.

We expect these regulatory developments ultimately to dilute the Austrian government's influence in deciding how Austrian banks are resolved. We expect this to increase the likelihood of losses for senior debt investors if the banks fail solvability assessments.

The ad-hoc legislation submitted by the Austrian government in 2Q14 to bail in some of Hypo Alpe-Adria International AG's (since renamed Heta) subordinated debt also supports our expectation that the government's willingness to support is decreasing significantly. Further state support is also unlikely for Oesterreichische Volksbanken-Aktiengesellschaft (OeVAG; B/Rating Watch Negative) once it is spun off from VB-Verbund.

At the same time, we believe that the government's changing approach to Heta's and OeVAG's support is guided by the banks' specific situations and does not in itself imply increased bail-in risk for Erste, RBI, Bank Austria and VB-Verbund (excluding OeVAG) in the short term, despite the early adoption of the bail-in tool in Austria's implementation of the BRRD into national legislation.