Fitch Ratings has downgraded Getin Noble Bank S.A.'s (Getin) Long Term Issuer Default Rating (IDR) to 'CCC' from 'CCC+' and Viability Rating (VR) to 'ccc' from 'ccc+', and placed the ratings on Rating Watch Negative (RWN).

A full list of rating actions is at the end of this commentary.

The rating actions follows the bank's announcement that it has breached its total capital requirement (based on the Capital Requirements Regulation (CRR)) of 8% due to the booking of legal provisions on the Swiss franc mortgage portfolio, the increased recognition of IFRS 9 reserves in regulatory capital and the estimated contribution to the bank resolution fund, which it recognises up front for the year. The bank indicated that its total capital ratio has fallen to 7.5%. This has also resulted in a breach of the bank's legal requirement for the Tier 1 ratio of 7.02% (including a Pillar 2 buffer for Swiss franc mortgages). We estimate the bank's Tier 1 ratio has fallen to about 6.3%.

We expect to resolve the RWN once we have more clarity about the potential losses from the legal risks on the bank's Swiss franc mortgage portfolio stemming from the growing number of legal cases filed against the bank and the ruling of the Polish Supreme Court relating to these loans, and in turn, their impact on the bank's modest capital ratios, which is expected on 25 March 2021.

In accordance with Fitch's policies, the issuer appealed and provided additional information to Fitch that resulted in a rating action that is different than the original rating committee outcome.

KEY RATING DRIVERS

IDR, VR and NATIONAL RATINGS

Getin's ratings mainly reflect the bank falling deeper into breach of its capital requirements and persistent losses. Getin's failure is a real possibility because its capacity to replenish its capital is highly vulnerable to the economic fallout from the coronavirus outbreak and legal risks stemming from its foreign currency (mainly Swiss franc) retail mortgage portfolio. We believe the economic implications of the pandemic and the continued inflow of legal cases filed by borrowers create additional risks to our assessment of Getin's capitalisation, profitability and asset quality.

Getin's capital position has been weakened by persistent losses since 2017. The bank breached its total capital ratio legal requirement (including the Pillar 2 add-on related to Swiss franc mortgages) in mid-March 2020 and was already in breach of its combined buffer requirement in 2018. The latter was driven by an increase in risk weights on foreign-currency denominated mortgages to 150%, which has been further exacerbated by appreciation of the Swiss franc against the Polish zloty.

Getin plans to address its capital shortfalls mainly through improved profitability and amortisation of high capital-absorbing Swiss franc loans (resulting in a 3% reduction of risk-weighted assets annually according to the bank). We believe internal capital generation in the current environment will be challenging for Getin and realistically it will take the bank several years to restore its capital ratios above the pre-Covid-19 combined buffer requirement. However, we do not expect immediate sanctions on the bank as long as management is able to demonstrate some profitability improvements. The regulator has publicly stated that it will take a pragmatic approach to cases of temporary non-compliance driven by coronavirus-related turbulence.

Legal risks related to the Swiss franc mortgage portfolio continue rising, reflected in the increased numbers of lawsuits filed against Getin, and the increasing share of these that are being lost by the bank. The bank's legal provision coverage of the portfolio increased to about 3.4% of the outstanding Swiss franc mortgage book, after the announced PLN110 million charge, but remains below the levels recorded by other Polish banks with material Swiss franc mortgage exposures. In our view, legal provisions coupled with expected elevated loan impairment charges as asset quality risks from the pandemic materialise, will continue to weigh on the bank's profitability, making it difficult to address capital needs in the short to medium term.

The Polish Supreme Court is set to rule on issues related to lawsuits filed by Swiss franc mortgage borrowers against banks on 25 March 2021. The ruling should clarify the potential substitution of currency conversion clauses, the way the borrowers and banks should settle, in case of contract invalidity, and whether banks should be remunerated by borrowers for use of the funds, since loan origination, when a contract is cancelled. This would remove significant uncertainty about the potential magnitude of losses for banks in case of lost court cases.

The National Ratings reflect the bank's creditworthiness relative to Polish peers.

SUPPORT RATING and SUPPORT RATING FLOOR

The Support Rating Floor (SRF) of 'No Floor' and the Support Rating (SR) of '5' for Getin express Fitch's opinion that potential sovereign support for the bank cannot be relied upon.

This is underpinned by the Polish resolution legal framework, which requires senior creditors to participate in losses, if necessary, instead of a bank receiving sovereign support.

RATING SENSITIVITIES

IDRS, VR

Factors that could, individually or collectively, lead to negative rating action/downgrade:

The main trigger for a downgrade of the bank's Long-Term IDR and VR is a material and lasting widening of the capital shortfall that remains unaddressed, whether due to an increase in legal claims related to Swiss franc mortgages or other factors. In particular we would downgrade the bank if it sustainably breaches its legal Tier 1 capital requirement of 6%.

We will also downgrade Getin if the bank fails to improve its earnings to the level allowing absorption of the IFRS 9 amortisation in its regulatory capital. This could be achieved through further improved funding and operating cost efficiency, but derailed by the need to further materially provision for Swiss franc mortgages' legal risk.

If the bank becomes dependent on prolonged regulatory forbearance of an extraordinary nature, this will also lead to a downgrade of the VR, but the Long-Term IDR could be affirmed if Fitch believes the risk of a default on senior obligations has not increased materially.

Factors that could, individually or collectively, lead to positive rating action/upgrade:

Getin's ratings could be upgraded if the bank manages to restore its internal capital generation and sustainably increase its capital ratios to levels above regulatory requirements. This could also be achieved through successful securitisation of credit risk from its Swiss franc mortgage portfolio that materially improves capital ratios or a sustained improvement of profitability.

NATIONAL RATINGS

The National Ratings are sensitive to changes in the bank's Long-Term IDR.

SUPPORT RATING AND SUPPORT RATING FLOOR

An upgrade of Getin's SR and upward revision of the bank's SRF would be contingent on a positive change in the sovereign's propensity to support the bank, which we do not expect given resolution legislation in place.

BEST/WORST CASE RATING SCENARIO

International scale credit ratings of Financial Institutions and Covered Bond issuers have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of three notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of four notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from 'AAA' to 'D'. Best- and worst-case scenario credit ratings are based on historical performance. For more information about the methodology used to determine sector-specific best- and worst-case scenario credit ratings, visit [https://www.fitchratings.com/site/re/10111579]

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

Unless otherwise disclosed in this section, the highest level of ESG credit relevance is a score of '3'. This 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. For more information on Fitch's ESG Relevance Scores, visit www.fitchratings.com/esg

Rating ActionsENTITY/DEBT	RATING		PRIOR
Getin Noble Bank S.A.	LT IDR	CCC 	Downgrade		CCC+
	ST IDR	C 	Affirmed		C
	Natl LT	B(pol) 	Downgrade		B+(pol)
	Natl ST	B(pol) 	Rating Watch On		B(pol)
	Viability	ccc 	Downgrade		ccc+
	Support	5 	Affirmed		5
	Support Floor	NF 	Affirmed		NF

View additional rating details

Additional information is available on www.fitchratings.com

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