October 11 (SeeNews) - Fitch has affirmed the long-term issuer default ratings (IDRs) of four Romanian banks and upgraded the viability rating (VR) of Banca Comerciala Romana (BCR).
Fitch affirmed BCR and BRD Groupe Societe Generale (BRD) at BBB+, Banca Transilvania (BT) at BB, and UniCredit Bank (UCBRO) at BBB-, with stable outlooks, the ratings agency said in a statement late on Tuesday.
Fitch has also upgraded BCR's VR to bb+ from bb and affirmed the VRs of BT at bb and UCBRO at bb-, it added. BRD's support rating was affirmed at 2.
In October 2016, Fitch affirmed the long-term IDRs of the same Romanian banks with a stable outlook and also upgraded BCR's VR.
Fitch Ratings also said in the statement:
"In Fitch's view, Erste, SG and UCB will continue to have a high propensity to support their Romanian subsidiaries because Romania and the wider central and eastern European region remain strategically important for each of them. This view also considers these banks' majority ownership, the high level of operational and management integration between the banks and their parents, the track record of support to date and the limited size of the subsidiaries relative to their parent groups' assets, making any support manageable.
BCR and UCBRO are notched once from their respective parents. The Stable Outlook on BCR's Long-Term Foreign-Currency IDR, which is at the same level as Romania's Country Ceiling (BBB+), reflects the Stable Outlooks on Romania and on Erste. The Stable Outlook on UCBRO is in line with that on its parent.
BRD could be rated within one notch of its parent, although its Long-Term Foreign-Currency IDR is currently constrained by Romania's Country Ceiling. The Stable Outlook on BRD reflects that on the Romanian sovereign.
BT's IDRs are driven by its standalone creditworthiness, as expressed by its VR. The Support Rating of '5' and Support Rating Floor of 'No Floor' reflect Fitch's view that sovereign support, while possible, can no longer be relied upon for BT, as for most other commercial banks in the European Union.
VRs
The three banks' VRs reflect their generally stable credit profiles and reasonable financial performance, driven by the continued balance-sheet cleaning and moderate lending growth. The VRs also consider the banks' solid capital buffers (weaker at UCBRO, as captured by its 'bb-'VR) providing resilience in case of potential recurring pressures on asset quality and reasonable reserve coverages of existing problem loans (stronger at BCR). Funding profiles are stable at all three banks and liquidity is comfortable. In the case of UCBRO liquidity is complemented by ordinary support from the parent bank.
The banks' stocks of legacy impaired loans remain sizeable after a recent clean-up. We expect the banks to continue bad debts off-loading in 2017-2018, being encouraged by the regulatory focus on reduction of the problem assets in the banking sector. Non-performing exposures (NPE) ratio of the sector decreased to 8.3% at end-1H17 from 11.3% at end-1H16 (EBA definition, National Bank of Romania's disclosure) following recent NPL sales and work-outs.
We expect the macro trends to remain supportive for the banks' asset quality and performance in 2017-2018 with moderate credit expansion driven by households, which benefit from loosening of government's fiscal policy and higher salaries. Demand for new corporate credit is yet to recover. Inflows of new impaired loans are expected to stay moderate, helped by generally conservative risk appetites (albeit higher growth targets at BT) and stricter regulatory guidance for retail lending standards, although increasing market interest rates may pressure borrower debt servicing capacity.
Legislative risks (those linked to Swiss franc loan conversion initiative and the debt discharge law) have now abated for Romanian banks, positively contributing into their developing strategies and financial planning.
BCR
The upgrade of BCR's VR reflects a further loan book clean up and increased reserve coverage of the NPL book as well as extended record of good profitability. The risk from the bank's stock of legacy impaired loans has decreased as the bank has increased reserve coverage to a high 91% of NPLs, which compares well with peers, and means the impact of further portfolio clean-up actions on earnings and capital should be easily manageable. BCR's VR also reflects the bank's purely domestic, retail-oriented universal banking business model and its leading market shares (14% of gross loans,) despite a decrease over the last few years.
Loan quality metrics have improved significantly at end- 2016 and in 1H17 as a result of the NPL resolution strategy, which involved large portfolio sales in 2015 and 2016. Fitch expects further reduction, albeit slower, in the stock of legacy problem loans, which should bring BCR's NPLs ratio (in Fitch's classification these include IFRS impaired loans and loans past due more than 90 days but not impaired) down to mid-high single digits from 11% as of end-1H17. Further improvements should be driven by continued work-out efforts, a stabilisation in gross loans contraction and moderate inflows of new impaired loans, as the bank's risk appetite remains conservative compared with historical levels.
Operating profits have been supported by low and reversing loan impairment charges (LICs) as the bank adjusted to better recoveries than expected when it booked its large LICs in 2014. Overall, Fitch considers that earnings volatility and the risk stemming from asset quality charges has decreased. Pre-impairment profitability is under some pressure from lower interest income on a shrinking loan portfolio, lower margins following voluntary repricing of customer loans and from its large liquidity holdings, so we expect the bank to look for modest growth to stabilise its revenue base.
Similar to peers, we expect operating expenses to come under pressure from investments and higher wages. In the longer term the bank is looking to offset these through increased reliance on automated and digital distribution channels.
We view the bank's capitalisation as strong, with a Fitch Core Capital (FCC) ratio of 20% at end-1H17, particularly in view of reduced levels of unreserved impaired loans/FCC (5% at end-1H17). We expect the upcoming application of an internal ratings-based approach to calculation of credit risk risk-weighted assets (RWAs) to be manageable, although it will likely lead to an increase in RWAs and a decrease in regulatory capital ratios.
The bank has a sound funding profile, where customer deposits represent a high 83% of total funding excluding derivatives, and parent funding has decreased. Liquidity is comfortable, given large holdings of cash and unencumbered Romanian government securities, net of mandatory reserves and potential cash uses, equivalent to a high 52% of customer deposits at end-1H17.
BT
BT's VR factors in the bank's through-the-cycle profitability being more resilient than peers. Strong internal capital generation has underpinned BT's ability to grow at times when peers were deleveraging. The acquisition of Volksbank Romania's in 2015 supported revenue growth and franchise (gain in market share to 13.6% of sector assets at end-1H17, up from 9% at end-2014) with no pressure on BT's asset quality or capitalisation.
BT's pre-impairment profitability remained solid in 2016-1H17, underpinned by lower funding costs and strong fee generation. Good operational efficiency and lower impairment charges (at 9% of pre-impairment profit in 1H17; 2016: 38%) supported the bottom line results (ROAA and ROAE of 2% and 16%, respectively, in 1H17). We expect the bank's pre-impairment results to stay strong, driven by growth, while performance metrics will be sensitive to asset quality trends.
Individually impaired loans (IFRS) decreased to 10.6% of BT's loans at end-1H17 from 14.9% at end-1H16, driven by write-offs and in-house recoveries, rather than NPL sales as pursued by peers. Concentration risks are limited given the bank's profile of SME and retail lender, while FX-lending levels at 24% of total loans are below the sector average (43% at end-2016). At end-1H17, reserve coverage of individually impaired loans was reasonable at 64%. Unreserved impaired loans were moderate at around 19% of FCC.
The FCC ratio was solid of 19.6% at end-1H17 and regulatory common equity Tier 1 and Total capital ratios were 17.6% and 18.6%, respectively. The bank's capitalisation should be viewed in the context of its ambitious growth targets involving potential new acquisition of the smaller retail lender in the local market in the near term. BT intends to manage its capital ratios with comfortable buffers above the regulatory capital requirements, including the impact of potential acquisitions as well as the implementation of IFRS 9.
BT's funding profile remains stable and deposit franchise is strong (customer deposits accounted about 96% of total funding at end-1H17). BT's liquidity cushion is large, to a significant extent formed by Romanian government bonds (27% of assets at end-1H17), eligible for the refinancing with the National Bank of Romania. Net of potential cash uses and mandatory reserves, the liquidity buffer was equal to a solid 36% of customer accounts at end-1H17.
UCBRO
The affirmation of UCBRO's VR reflects our view that although asset quality has improved, UCBRO's capitalisation, with FCC of 14% and a CET 1 ratio of 12.6% at end-1H17 remains weaker than peers. This constrains the VR given a higher level of unreserved impaired loans (22% of FCC), and higher loan book concentrations, in line with UCBRO's higher share of corporate lending in its business model. However, we expect ordinary support from the main shareholder to be available to offset any minor capital shortfall relative to regulatory requirements, if needed.
UCBRO's impaired loans ratio improved to 9.7% at end-1H17 from 13.5% at end-2016, driven by the migration of a large exposure to the performing book and NPL sales. Coverage with IFRS reserves has also improved but remains moderate at 70%, reflecting a less aggressive approach to cleaning up the loan book.
UCBRO's profitability is supported by single-digit growth in gross loans, in particular in the retail segment including unsecured retail lending through a specialised subsidiary. Gross loans have grown organically and continuously despite the impact of NPL sales recognised in 2016. Loan impairment charges decreased to 33% of pre-impairment operating profit in 1H17 from 53% in 2016, but UCBRO is not benefitting from reserve releases to the same extent as its peers.
UCBRO's gross loans are increasingly funded by customer deposits, as evidenced by a decreasing customer loans to deposits ratio to 118% at end-1H17 from 134% at end-2015, which remains higher than at rated peers. At the same time, corporate deposits are more prevalent in its funding structure, although the bank's commercial efforts are directed at increasing its retail customer base, which should help it attract a higher share of more granular deposits over time.
Available liquidity consisting of cash, net of mandatory reserves and unencumbered liquid assets, net of potential short-term uses covered 24% of customer deposits at end-1H17. The bank has subsequently cancelled the emergency liquidity line it had in place from the group, but we expect ordinary liquidity support from the parent, to continue to be available, if needed.
RATING SENSITIVITIES
IDRS AND SUPPORT RATINGS
BCR's Long-Term IDRs would likely be downgraded if either Romania or Erste is downgraded, but would only be upgraded if both Romania and Erste were upgraded.
BRD's Long-Term IDRs could be upgraded in case of an upgrade of the Romanian sovereign rating. A downgrade of the Romanian sovereign rating would likely cause a downgrade of BRD's IDRs.
UCBRO's IDRs are sensitive to changes in UCB's ratings and to Fitch's assessment of the ability and propensity of UCB to provide extraordinary support.
BT's IDRs are sensitive to the same factors as those driving its VR.
VRs
Upside potential for BCR is limited given Fitch's assessment that the operating environment in Romania remains fairly volatile and vulnerable to external shocks, despite a cyclical upswing currently supporting the banks' financials.
Upside for BT could arise from the continued reduction of problem assets along with the maintained solid solvency and profitability metrics and the evidence of robust risk controls executed in the period of aggressive growth.
An upgrade of UCBRO's VR would require a strengthening of the bank's capitalisation and further reduction in problem assets while maintaining reasonable coverage of these by IFRS provisions.
The VRs of all three banks could be downgraded if the weaker operating environment or a material increase in risk appetite translate into marked deterioration in the banks' asset quality and capital metrics."
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