Investing.com -- Moody’s Ratings has upgraded the junior senior unsecured debt ratings and junior senior unsecured MTN programme ratings of Powszechna Kasa Oszczednosci Bank Polski S.A. (PKO BP (NYSE: BP )) to Baa2 and (P)Baa2 respectively, up from Baa3 and (P)Baa3. The credit rating agency has also affirmed all other ratings and assessments of the bank, including its long- and short-term deposit ratings, senior unsecured debt rating, Baseline Credit Assessment (BCA) and Adjusted BCA, along with other short-term ratings and Counterparty Risk Ratings (CRR).

In tandem, Moody’s affirmed all ratings and assessments of PKO Bank Hipoteczny S.A. (PKO BH), a fully owned mortgage bank subsidiary of PKO BP. These include its long- and short-term issuer ratings, Counterparty Risk Ratings (CRR), and Counterparty Risk (CR) Assessments. The outlooks on PKO BP’s long-term deposit and senior unsecured debt ratings, as well as the outlook on PKO BH’s long-term issuer ratings, remain stable.

The affirmation of PKO BP’s baa2 BCA acknowledges the bank’s robust financial fundamentals, such as strong asset risk metrics, robust capital buffers, improved profitability, increased provisioning buffers against legal risks related to Swiss-franc mortgages, and a stable, predominantly deposit-based funding profile.

The upgrade of PKO BP’s junior senior unsecured debt ratings to Baa2 from Baa3 is due to the affirmation of the bank’s baa2 BCA and the expectation that PKO BP will issue increased volumes of debt, including more junior ranking debt instruments as part of its medium-term issuance plan. This is necessary to remain compliant with its Minimum Own Funds and Eligible liabilities requirement, following a reduction in the bank’s excess common equity due to an increase in PKO BP’s regulatory minimum capital requirements.

The affirmation of PKO BH’s issuer ratings, CRRs and CR Assessments is based on the unchanged view that PKO BP will treat the liabilities of its mortgage bank equally to its own and will not prioritize the repayment of its own liabilities over those of the mortgage bank. This view is driven by the high levels of operational integration between the mortgage bank and its parent, PKO BP’s commitment to ensure that the mortgage bank’s liquidity and capital are always at adequate levels, and the high reputational risk to the parent bank if it were to allow the mortgage bank to fail.

The stable outlooks on PKO BP’s long-term deposit and senior unsecured debt ratings, and PKO BH’s long-term issuer ratings, reflect the potential upward pressure on its creditworthiness resulting from sustaining its strong solvency position over the next 12 to 18 months.

An upgrade of PKO BP’s long-term deposit and senior unsecured ratings could be prompted by an upgrade of its BCA, along with an increase in the uplift from Moody’s Advanced LGF analysis, due to the issuance of larger volumes of debt than currently anticipated. The bank’s BCA could be upgraded if PKO BP sustains its strong financial fundamentals, particularly its good asset quality, strong profitability, and robust capitalization metrics, while also continuing to adequately manage the legal risks it faces.

PKO BP’s ratings could be downgraded in the event of a downgrade of its BCA that could result from a material decline in the bank’s capitalization, a significantly weaker asset quality, or a deterioration in its funding and liquidity profile. PKO BH’s ratings could be downgraded if the corresponding ratings of its parent bank are downgraded.

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