(The following statement was released by the rating agency)
Oct 10 - Fitch Ratings has affirmed OP-Pohjola Group's Long-term Issuer Default Rating (IDR) at 'A+', Short-term IDR at 'F1', and Viability Rating (VR) at 'a+'. The Outlook on the Long-term IDR is Stable. A full 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 asset quality, resilient profitability and strong capitalisation. It also factors in insurance risk, OP-Pohjola's relatively small equity size compared with similarly rated peers, and concentration in a single, relatively small geographic 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 its strong asset quality while sustaining its resilient profitability. As a result of the contingent risk of capital needs that the insurance businesses pose to the 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's ratings would most likely result from any significant capital needs in the insurance business, or unforeseen events, materially affecting group capitalisation.
Fitch expects profitability will remain solid, benefiting from increased loan and deposit volumes. Insurance makes a moderate contribution to group profits but affects comprehensive income through significant fair-value adjustments in the investment portfolios, which Fitch believes will remain volatile in 2012 and 2013. However, given the long-term view of the investments, Fitch expects this volatility will be offset in the long term.
OP-Pohjola's regulatory capital ratios are good and leverage is moderate. Its Fitch core capital ratio (11.2% at end-June 2012) is strong, despite being relatively conservatively stated - deducting sizeable investments in its insurance subsidiaries. However, the absolute amount of capital is moderate for its rating, which limits its resilience to unforeseen events.
Asset quality has been resilient throughout the crisis. While Fitch does not discount the possibility that further loans will become impaired in 2013, the agency expects these to be easily manageable for OP-Pohjola. Non-performing loans remained low and net impaired loans/equity was minimal at 5% at end-June 2012.
Funding and liquidity are well managed by OP-Pohjola. Customer deposits fund around three-quarters of the loan portfolio with the remainder made up of senior debt, including covered bonds. While this funding structure makes OP-Pohjola reliant on open and efficient capital markets, the related risk is partly mitigated by the relatively small amount it has to issue, and the fact that OP-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 expectation that there would be an extremely high probability that support would be forthcoming from the Finnish authorities if required. This is driven by OP-Pohjola's importance within the Finnish financial sector, with around one-third of deposits at end-June 2012.
The Support Rating and Support Rating Floor are sensitive to any potential change in Fitch's assumptions about the propensity or ability of Finnish authorities to provide timely support to the bank.
SUBORDINATED DEBT AND OTHER HYBRID SECURITIES
Subordinated debt and other hybrid capital issued by Pohjola Bank are all notched down from OP-Pohjola's VR, given that Fitch does not assign a VR to the subsidiary. The ratings are in accordance with Fitch's assessment of each instrument's respective non-performance and relative loss severity risk profiles, which vary considerably. Their ratings are primarily sensitive to any change 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 are sensitive 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+'