Fitch Ratings-Milan-28 October 2021:

This commentary corrects an error with respect to the rating action commentary published on 20 October 2021 and upgrades Unicredit Bank (Ireland) plc's senior preferred debt issues. The correction reflects our expectations that the notes should rank pari passu with other senior preferred debt issued by Unicredit Bank AG (BBB/Negative).

Fitch Ratings has affirmed Unicredit S.p.A.'s (Unicredit) Long-Term Issuer Default Rating (IDR) at 'BBB-' and Viability Rating (VR) at 'bbb-'. The Outlook on the Long-Term IDR is Stable.

A full list of rating actions is detailed below.

The ratings affirmation and Stable Outlook reflect stable prospects for Unicredit, which benefits from geographic diversification in economies that are rebounding, especially in its largest market of Italy, which should support improvement in operating profitability. At the same time, the asset de-risking it has achieved so far and solid capitalisation provide some headroom to absorb asset-quality pressures we expect to emerge in the coming quarters due to the pandemic.

Key Rating Drivers

IDRS, VR, DERIVATIVE COUNTERPARTY RATING (DCR) AND SENIOR DEBT

The ratings of Unicredit reflect its well-established retail and commercial banking franchise in several countries in Europe, including in more stable and higher-growth countries (Germany and Austria) than in Italy, which is counterbalanced by its large operations in and exposure to Italy (BBB-/Stable). In our view, Italy has a proportionately higher influence on Unicredit's overall credit profile, as reflected in the sensitivity of the group's overall performance to the operating environment in Italy.

Unicredit's ratings also factor in the full rundown of non-core assets by end-2021, in line with the bank's stated objectives; a gradual recovery in operating profitability; satisfactory capital buffers over regulatory minimum requirements; and a stable and well-diversified funding profile.

Our assessment of capitalisation reflects our expectation that the bank will maintain sound capital buffers above regulatory requirements. We view the 16.1% common equity Tier 1 (CET1) ratio at end-1H21 as a rating strength, after improving on end-2020, due to internal capital generation and despite a slight increase in risk-weighted assets (RWAs).

In the medium term, we expect Unicredit to operate with a somewhat lower CET1 ratio as the group optimises its capital structure. Our assessment also considers a reduced exposure to unreserved impaired loans, which was below 10% of CET1 capital at end-June 2021, and compares well internationally. Exposure to domestic government bonds, which remained stable at below 90% of CET1 capital at end-1H21, still leaves the bank vulnerable to sovereign risk, in our opinion. Our assessment of capital also reflects its well-capitalised foreign subsidiaries.

In our view, downside risks to Unicredit's asset quality have reduced due to improved macro-economic prospects and the monetary and fiscal support made available by governments to the private sector (eg. moratoriums and state-guaranteed loans), particularly in the largest economies. This, combined with the group's focus on risk discipline and active management of impaired loans resulted in contained new impaired loan inflows and should allow the full non-core assets rundown by end-2021.

At end-1H21, Unicredit's impaired loan ratio was 5.1% and we expect it to narrow to around 4.5% by year-end and remain below 5% thereafter. As a result of better-than-expected asset-quality performance and trends, we have revised upwards our asset-quality assessment score to 'bb+' from 'bb'. At end-1H21, impaired loans coverage was adequate at 76%, despite the impact of the sale of highly provisioned impaired loans during 2021.

The economic rebound of Unicredit's core markets of Italy, Germany and Austria facilitated Unicredit's performance recovery in in 1H21, due to increasing volumes in fee-driven activities and a sharp decline in loan impairment charges (LICs). We expect the more benign operating environments to continue supporting the improvement of the bank's operating profitability. This is despite likely higher LICs in 2022, owing to the expected asset-quality deterioration arising from the pandemic.

Profitability improvements should be achieved through growing revenues and stable operating costs as the bank continues to streamline its organisation and advances its digitalisation strategy. This should help bring Unicredit's four-year average operating profit/RWAs to around 1% on a sustained basis. As a result, we have revised the outlook of our profitability and earnings assessment score of 'bb+' to stable from negative.

Funding benefits from Unicredit's deposit franchise in retail and commercial banking in several countries in Europe. Its loans/customer deposits ratio has been satisfactory relative to European peers', at below 100% since end-2020, as a result of growing customer deposits and controlled loan growth. At end-June 2021, more than 50% of total funding consisted of customer deposits, which have been resilient, including during periods of market volatility. Wholesale funding, which is predominately euro-denominated, is well-diversified as the group accesses capital markets in different formats and from different issuing geographies.

The Short-Term IDR and short-term senior debt ratings of 'F3' are in line with our rating correspondence table for a 'BBB-' Long-Term IDR.

Senior preferred notes are rated in line with the bank's Long-Term IDR as we expected these to be part of the bank's resolution buffers and we do not expect more junior debt buffers to exceed 10% of RWAs on a sustained basis.

UniCredit's senior non-preferred notes (SNP) are rated one notch below the bank's Long-Term IDR. This reflects the risk of below-average recoveries arising from the use of more senior debt to meet resolution buffer requirements and the combined buffer of additional Tier 1 (AT1), Tier 2 and SNP debt being unlikely to exceed 10% of RWAs.

Unicredit's DCR is at the same level as the Long-Term IDR because in Italy derivative counterparties have no preferential legal status over other senior obligations in a resolution.

SUPPORT RATING AND SUPPORT RATING FLOOR

Unicredit's Support Rating (SR) and Support Rating Floor (SRF) reflect Fitch's view that although external support is possible it cannot be relied on. Senior creditors can no longer expect to receive full extraordinary support from the sovereign in the event that the bank becomes non-viable. The EU's Bank Recovery and Resolution Directive and the Single Resolution Mechanism for eurozone banks provide a framework for the resolution of banks that requires senior creditors to participate in losses, if necessary, ahead of a bank receiving sovereign support.

SUBSIDIARY AND AFFILIATED COMPANY

The ratings of senior preferred debt under Unicredit's EMTN programme, including the bank's funding vehicles, UniCredit Bank (Ireland) plc, and UniCredit International Bank Luxembourg SA, are equalised with that of the parent because the debt is unconditionally and irrevocably guaranteed by UniCredit, and Fitch expects the parent to honour this guarantee.

The ratings of the notes issued by Unicredit Bank (Ireland) plc under Unicredit's EMTN programme are upgraded to 'BBB+' from 'BBB' to reflect that Unicredit Bank AG will replace the original issuer as the principal debtor, as part of the proposed merger of Unicredit Bank (Ireland) into Unicredit S.p.A. and our expectation that the notes rank pari passu with other senior preferred notes issued by Unicredit Bank AG.

DEPOSIT RATING

Unicredit's Long-Term Deposit Rating is rated one-notch above the Long-Term IDR because we believe the bank has sufficient combined buffers of junior and senior debt that result in a lower probability of default on deposits relative to its Long-Term IDR. The one-notch uplift also reflects our expectation that the bank will maintain sufficient buffers, given its status as a globally systemically important bank (G-SIB) and the need to comply with total-loss absorbing capacity (TLAC) and minimum requirement for own funds and eligible liabilities (MREL).

The 'F3' Short-Term Deposit Rating of Unicredit is the baseline option for a 'BBB' Long-Term Deposit Rating, based on a 'bbb' funding and liquidity score.

SUBORDINATED DEBT AND OTHER HYBRID SECURITIES

Subordinated debt and other hybrid capital securities issued by Unicredit are notched down from the VR in accordance with Fitch's assessment of each instrument's respective non-performance and relative loss-severity risk profiles.

Unicredit's Tier 2 subordinated debt is rated one notch below the VR for loss severity to reflect below-average recovery prospects. No notching is applied for incremental non-performance risk because write-down of the notes will only occur once the point of non-viability is reached and there is no coupon flexibility before non-viability.

Unicredit's Additional Tier 1 notes are rated four notches below the VR, comprising two notches for loss severity relative to senior unsecured creditors and two notches for incremental non-performance risk. The latter reflects the instruments' fully discretionary interest payment.

Unicredit's Legacy Tier 1 notes are notched down four times from the VR, comprising two notches for loss severity for deep subordination and another two for non-performance risk as coupon deferral is constrained by look-back clauses.

RATING SENSITIVITIES

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

Positive rating action would require an upgrade of Italy, combined with operating profit/RWA stabilising above 1% with prospects to reach 1.5% on a sustained basis and further improvement in asset-quality metrics (impaired loans ratio sustainably below 4%).

Senior preferred and SNP debt ratings could also be upgraded if Unicredit is expected to meet the resolution buffer requirements of the consolidated entity with SNP and more junior instruments, or if resolution buffers represented by SNP and more junior instruments are expected to be at least 10% of RWAs on a sustained basis, neither of which is currently the case.

An upgrade of the SR and upward revision of the SRF would be contingent on a positive change in the sovereign's propensity to support the bank. In Fitch's view, this is highly unlikely, although not impossible.

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

UniCredit's ratings are likely to be downgraded if Italy's sovereign rating is downgraded. The ratings are also sensitive to an unexpected severe setback in the economic recovery in the group's core markets. A downgrade could be triggered if the CET1 ratio decreases below 13% with no discernible plans to restore this, if the four-year average impaired loans ratio increases above 6% without a clear path to reduction, or if there is prolonged earnings weakness with operating profit persistently below 1% of RWAs.

SR AND SRF

An upgrade of the SR and upward revision of the SRF would be contingent on a positive change in the sovereign's propensity to support the bank. In Fitch's view, this is highly unlikely, although not impossible.

SUBSIDIARY AND AFFILIATED COMPANIES

The ratings of the senior debt issued by UniCredit's funding vehicle, UniCredit International Bank Luxembourg SA, are sensitive to the same considerations as the senior unsecured debt issued by the parent.

The ratings of the notes issued by UBI are sensitive to the same considerations as the senior preferred debt issued by UniCredit Bank AG or a change in the status of the notes relative to our expectations.

DEPOSIT RATING

The deposit ratings are primarily sensitive to changes in the bank's IDRs, from which they are notched. The Long-Term Deposit Rating is also sensitive to a reduction in the size of the senior and junior debt buffers, although we view this unlikely in light of the bank's current and future TLAC/MREL requirements.

SUBORDINATED DEBT AND OTHER HYBRID SECURITIES

The subordinated debt's and hybrid securities' ratings are primarily sensitive to changes in the VR, from which they are notched. The ratings are also sensitive to a change in the notes' notching, which could arise if Fitch changes its assessment of their non-performance relative to the risk captured in the VR or their expected loss severity. For AT1 issues, this could reflect a change in capital management or flexibility, or an unexpected shift in regulatory buffers and requirements, for example.

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. Public Ratings with Credit Linkage to other ratings

The rating of Unicredit Bank Ireland's SP debt is linked to Unicredit Bank AG's, while Unicredit International Bank Luxembourg's is to Unicredit's.

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

UniCredit International Bank Luxembourg SA

----Senior preferred; Long Term Rating; Affirmed; BBB-

UniCredit S.p.A.; Long Term Issuer Default Rating; Affirmed; BBB-; Rating Outlook Stable

; Short Term Issuer Default Rating; Affirmed; F3

; Viability Rating; Affirmed; bbb-

; Support Rating; Affirmed; 5

; Support Rating Floor; Affirmed; NF

; Derivative Counterparty Rating; Affirmed; BBB-(dcr)

----subordinated; Long Term Rating; Affirmed; BB

----subordinated; Long Term Rating; Affirmed; B+

----long-term deposits; Long Term Rating; Affirmed; BBB

----Senior preferred; Long Term Rating; Affirmed; BBB-

----Senior non-preferred; Long Term Rating; Affirmed; BB+

----short-term deposits; Short Term Rating; Affirmed; F3

----Senior preferred; Short Term Rating; Affirmed; F3

Unicredit Bank (Ireland) p.l.c

----Senior preferred; Long Term Rating; Upgrade; BBB+

Contacts:

Primary Rating Analyst

Gianluca Romeo,

Director

+39 02 879087 201

gianluca.romeo@fitchratings.com

Fitch Ratings Ireland Limited Sede Secondaria Italiana

Via Morigi, 6 Ingresso Via Privata Maria Teresa, 8

Milan 20123

Secondary Rating Analyst

Francesca Vasciminno,

Senior Director

+39 02 879087 225

francesca.vasciminno@fitchratings.com

Committee Chairperson

Cristina Torrella Fajas,

Senior Director

+34 93 323 8405

cristina.torrellafajas@fitchratings.com

MEDIA RELATIONS: Louisa Williams, London, Tel: +44 20 3530 2452, Email: louisa.williams@thefitchgroup.com

Stefano Bravi, Milan, Tel: +39 02 879087 281, Email: stefano.bravi@fitchratings.com

Additional information is available on www.fitchratings.com

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