(The following statement was released by the rating agency)
Oct 10 - Fitch Ratings has affirmed OP-Pohjola Group'sLong-term Issuer Default Rating (IDR) at 'A+', Short-term IDR at 'F1', andViability Rating (VR) at 'a+'. The Outlook on the Long-term IDR is Stable. Afull list of rating actions is at the end of this rating action commentary.
RATING ACTION RATIONALE
The affirmation reflects OP-Pohjola's strong Finnish franchise, solid assetquality, resilient profitability and strong capitalisation. It also factors ininsurance risk, OP-Pohjola's relatively small equity size compared withsimilarly rated peers, and concentration in a single, relatively smallgeographic market. Pohjola Bank's ratings are aligned with those of OP-Pohjola,as it is part of the group's cross-support mechanism.
RATING DRIVERS AND SENSITIVITIES - IDRS AND SENIOR DEBT
The Stable Outlook reflects Fitch expectation that OP-Pohjola will maintain itsstrong asset quality while sustaining its resilient profitability. As a resultof the contingent risk of capital needs that the insurance businesses pose tothe group's moderately sized capital base, and the high level of the ratings,upside potential for its ratings is limited. Downward pressure on the group'sratings would most likely result from any significant capital needs in theinsurance business, or unforeseen events, materially affecting groupcapitalisation.
Fitch expects profitability will remain solid, benefiting from increased loanand deposit volumes. Insurance makes a moderate contribution to group profitsbut affects comprehensive income through significant fair-value adjustments inthe investment portfolios, which Fitch believes will remain volatile in 2012 and2013. However, given the long-term view of the investments, Fitch expects thisvolatility will be offset in the long term.
OP-Pohjola's regulatory capital ratios are good and leverage is moderate. ItsFitch core capital ratio (11.2% at end-June 2012) is strong, despite beingrelatively conservatively stated - deducting sizeable investments in itsinsurance subsidiaries. However, the absolute amount of capital is moderate forits rating, which limits its resilience to unforeseen events.
Asset quality has been resilient throughout the crisis. While Fitch does notdiscount the possibility that further loans will become impaired in 2013, theagency expects these to be easily manageable for OP-Pohjola. Non-performingloans remained low and net impaired loans/equity was minimal at 5% at end-June2012.
Funding and liquidity are well managed by OP-Pohjola. Customer deposits fundaround three-quarters of the loan portfolio with the remainder made up of seniordebt, including covered bonds. While this funding structure makes OP-Pohjolareliant on open and efficient capital markets, the related risk is partlymitigated by the relatively small amount it has to issue, and the fact thatOP-Pohjola offers diversification to investors in euro-denominated assets.
RATING DRIVERS AND SENSITIVITIES - SUPPORT RATING AND SUPPORT RATING FLOOR
OP-Pohjola's Support Rating and Support Rating Floor reflect Fitch's expectationthat there would be an extremely high probability that support would beforthcoming from the Finnish authorities if required. This is driven byOP-Pohjola's importance within the Finnish financial sector, with aroundone-third of deposits at end-June 2012.
The Support Rating and Support Rating Floor are sensitive to any potentialchange in Fitch's assumptions about the propensity or ability of Finnishauthorities to provide timely support to the bank.
SUBORDINATED DEBT AND OTHER HYBRID SECURITIES
Subordinated debt and other hybrid capital issued by Pohjola Bank are allnotched down from OP-Pohjola's VR, given that Fitch does not assign a VR to thesubsidiary. The ratings are in accordance with Fitch's assessment of eachinstrument's respective non-performance and relative loss severity riskprofiles, which vary considerably. Their ratings are primarily sensitive to anychange in OP-Pohjola's VR.
SUSBIDIARY AND AFFILIATED COMPANY RATING DRIVERS AND SENSITIVITIES
Given the cross-support mechanism between Pohjola Bank and the OP-Pohjola group,Pohjola Bank's debt ratings are aligned with OP-Pohjola's, and its ratings aresensitive to the same factors that might drive a change in OP-Pohjola's IDR.Fitch does not assign Pohjola Bank a VR.
The rating actions are as follows: OP-Pohjola Long-term IDR: affirmed at 'A+'; Outlook Stable Short-term IDR: affirmed at 'F1' Viability Rating: affirmed at 'a+' Support Rating: affirmed at '1' Support Rating Floor: affirmed at 'A' Pohjola Bank Long-term IDR: affirmed at 'A+'; Outlook Stable Short-term IDR: affirmed at 'F1' Support Rating: affirmed at '1' Support Rating Floor: affirmed at 'A' Long-term senior debt: affirmed at 'A+' Short-term senior debt: affirmed at 'F1' Subordinated debt: affirmed at 'A' Lower Tier 2 instruments: affirmed at 'A' Upper Tier 2 instruments: affirmed at 'BBB+'