October 12 (SeeNews) - Fitch Ratings said it has affirmed the Long-Term Issuer Default Rating (IDR) of Albania's ProCredit Bank Sh.a.'s at 'BB-', with a stable outlook.
Fitch has also affirmed ProCredit Bank's Viability Rating (VR) at 'b-', the global rating agency said in a statement on Tuesday.
Fitch also said in the statement:
"KEY RATING DRIVERS
PCBA's IDRs and Shareholder Support Rating (SSR) reflects Fitch's view of potential support from its sole shareholder, ProCredit Holding AG & Co. KGaA (PCH; BBB/Stable).
The bank's VR at 'b-' is one notch below its implied VR of 'b'. This reflects the bank's limited franchise and small scale, which weigh on the bank's capacity to generate solid and sustainable earnings. Its standalone credit quality also balances its below-average risk profile as underlined by its better-than-sector asset quality, against risks stemming from its operations in the Albanian developing economy.
Country Risks Constrain Support: We believe that PCH would have a high propensity to support PCBA, if needed, given its importance to the group's long-standing and established presence in south eastern Europe (SEE). Nonetheless, the extent to which potential support can be factored into PCBA's ratings is constrained by Albania's country risks, in particular transfer and convertibility. Without these constraints, the bank's Long-Term IDR would have been notched down once from the parent's 'BBB' Long-Term IDR.
Challenging Operating Environment: In our assessment of the operating environment we continue to factor in the small and cash-based economy that is dependent on the cyclical tourism and agricultural sectors, which result in narrower opportunities for banks to grow and diversify exposures. Despite large reductions of legacy problem loans, the sector's non-performing loan (NPL) ratio is still one of the highest in the region and we expect high inflation and supply shock to add moderate pressure to asset-quality in the banking sector.
Concentration Hampers Improvement Trend: In 1H22 the bank's impaired loans ratio deteriorated to 4.3% (end-2021: 3.7%) following a default of one of its larger exposures. Although the bank's asset- quality ratios are better that the sector average, existing concentrations exacerbated by the bank's small size pose some event risks. We expect its asset quality to deteriorate further in the next 12-18 months, but cost of risk should still benefit from some reversal of provisions on legacy exposures.
Return to Pre-Impairment Profits: PCBA's operating profit at 0.6% of risk-weighted assets in 1H22 was supported by the reversal of loss provisions, while its core profitability benefitted from higher revenues from widening margins and larger volumes, and improvements in cost efficiency, which led the bank's cost-to-income ratio to fall below 100%. Over the rating horizon to 2023, we expect profitability before loan impairment charges (LICs) to remain positive.
Capitalisation Supported by Parent: Net income generation since 2021 has supported the bank's capitalisation, in addition to continuous support from the parent in the form of capital and subordinated debt. The bank's common equity Tier1 (CET1) ratio of 12% at end-1H22 provided an adequate 530bp buffer over local capital requirements, but Fitch views capital buffers as only moderate for the risks stemming from the operating environment. As a mitigating factor, the bank may rely on ordinary capital support from the parent.
Reasonable Funding Base: The funding mix is dominated by customer deposits (73% of total funding at end-1H22) and supported by funding from PCH, resulting in a reasonable loans-to-deposits ratio of 118% at end-1H22. PCBA relies on retail deposits, which account for 71% of customer funding. The liquidity buffer remains just adequate, but could be supported by PCH in case of need.
RATING SENSITIVITIES
Factors that could, individually or collectively, lead to negative rating action/downgrade:
The Long-Term IDR and SSR of PCBA would be downgraded on adverse changes to Fitch's perception of country risks in Albania. The ratings could also be downgraded on a substantial decrease in the bank's strategic importance for PCH, which is primarily based on the group's commitment to the country and the region.
PCBA's VR has significant headroom given its 'b-' VR is below its implied VR of 'b'. We would downgrade the VR if the bank's capitalisation weakens materially due to continued losses without prospects for improvement. In particular we would downgrade the bank's VR if the CET1 ratio falls sustainably below 10%.
Factors that could, individually or collectively, lead to positive rating action/upgrade:
PCBA's Long-Term IDR could be upgraded as a result of diminished country risks, which we view as unlikely in the medium term.
The bank's VR could be upgraded on material improvements in its franchise and resilience in the business model. The latter may be reflected in a solid and sustained record of profitable operations over the medium term, combined with stable asset-quality ratios.
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.
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
PCBA's IDRs and SSR are driven by support from PCH.
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.