Fitch press release:

Fitch Ratings-Warsaw/London-15 December 2014: Fitch Ratings has placed Romania-based Banca Transilvania S.A.'s (BT) 'BB-' Long-term IDR and 'bb-' Viability Rating on Rating Watch Evolving (RWE). A full list of rating actions is at the end of this commentary.

The rating action follows the announcement on 10 December that BT intends to acquire Volksbank Romania (VBRO) from current shareholders, Oesterreichische Volksbanken-Aktiengesellschaft (OeVAG:51%; BBB-/RWN), Groupe BPCE (BPCE:24.5%; A/Stable), DZ Bank AG (DZ:16.36%; A+/Stable) and WGZ Bank AG (WGZ:8.14%; A+/Stable).

KEY RATING DRIVERS

The RWE reflects the potential for the acquisition to significantly alter BT's financial profile, given VBRO's material relative size (assets equal to 43% of BT's at end-2013, the latest date for which IFRS accounts are available). However, it is not possible at present to accurately assess the extent to which the transaction will be positive or negative for BT's credit profile, as financial terms and conditions have not been disclosed.

The potential for the acquisition to negatively affect BT's credit profile reflects VBRO's weaker reported financial metrics at end-2013, in terms of asset quality (34% overdue loans, driven in part by the bank's foreign currency mortgage portfolio vs. 15% at BT), funding (loans/deposits ratio of 256% vs. 76% at BT) and profitability (moderately negative pre-impairment profit vs. positive pre-impairment profit of 2.9% of average assets at BT). VBRO reported a higher Fitch core capital (FCC) ratio (19% vs. BT's 14.8%), but net overdue loans were equal to 75% of FCC (7% at BT). VBRO's financial statements also referred to potentially significant litigation risks.

At the same time, notwithstanding the weaknesses in VBRO's accounts, there is also potential for BT to be upgraded following the acquisition, given (i) the possibility that VBRO's balance sheet strengthened over 2014 and that the acquisition price may be attractive for BT; (ii) the significant increase in BT's franchise that will result from the acquisition, with possible benefits in term of scale and efficiency improvements; (iii) BT's ability to absorb some of the weaknesses in VBRO's financial profile (e.g. the combined loans/deposits ratio of the two banks at end-2013 was a still reasonable 102%; VBRO's negative pre-impairment profit was equal to just 8% of BT's positive result); and (iv) the fact that Fitch had already identified the potential for BT's ratings to be upgraded if the bank's asset quality stabilises (see 'Fitch Affirms Unicredit Tiriac Bank and Banca Transilvania', dated 20 June 2014 at www.fitchratings.com).

The affirmation of the 'B' Short-term IDR reflects Fitch's expectation that potential changes to BT's Long-term IDR upon the resolution of RWE are likely to be limited to one notch, and so would not result in any change in the Short-term IDR of 'B'.

The Support Rating and Support Rating Floor are unaffected by the rating action. Fitch expects the SR to be downgraded to '5' and the SRF to be revised to 'No Floor', reflecting the probably weakening of government support for banks in the European Union in light of further progress in addressing impediments to effective bank resolution.

RATING SENSITIVITIES: LONG-TERM IDR AND VR

Fitch expects to resolve the RWE after the transaction is completed and sufficient information on its impact on BT's credit profile is available. The parties expect the acquisition to be completed in 1H15 following receipt of regulatory approvals. Depending on the timing of completion and the availability of information, the resolution of the RWE could extend beyond the typical six-month horizon.

BT's ratings could be upgraded if the bank's financial metrics do not deteriorate materially as a result of the acquisition, and its own asset quality and capital ratios stabilise. BT could be downgraded if the acquisition has a significant negative effect on key financials metrics.

At end-2013, BT had an 8.9% share of banking sector assets with total assets of RON32.1bn. This compares with VBRO's market share of 3.8% and balance sheet of RON13.8bn. Both BT and VBRO operate a universal banking model; however, VBRO focuses primarily on residential mortgages, which accounted for roughly 70% of net loans at end-2013. These were mainly denominated in foreign currency, with lending in Swiss francs and euros accounting for 46% and 45%, respectively, of total net lending at end-2013.

OeVAG's ratings are unaffected by this transaction as the planned sale of VBRO was a known aspect of the bank's restructuring programme. OeVAG's ratings are entirely support-driven and we do not assign a Viability Rating to the bank (for more information see "Fitch Downgrades OeVAG's IDRs; Puts VB-Verbund's VR on RWP" on www.fitchratings.com).

The rating actions are as follows:

BT:
Long-term foreign currency IDR of 'BB-' placed on RWE
Short-term foreign currency IDR: affirmed at 'B'
Viability Rating: of 'bb-' placed on RWE
Support Rating: of '3'; unaffected
Support Rating Floor: of 'BB-'; unaffected