Fitch affirms Kosovo’s ProCredit Bank at BB+, outlook stable

The bank's IDR and SSR balances the rating agency's view of potential support from its sole shareholder, Germany’s ProCredit Holding AG, and Kosovo’s ProCredit Bank good integration within the group, Fitch said in a statement earlier this month.

Fitch also said in the statement:

"Country Risks Constrain Support: The extent to which potential support can be factored into the bank's ratings is constrained by Fitch's view of Kosovo country risks. Nevertheless, we believe the owner's commitment to the subsidiary is sufficiently strong enough for us to rate it two notches above Kosovo's sovereign Long-Term IDR of 'BB-'.

Good Performance, High-Risk Market: PCBK's VR reflects its strong domestic franchise, expertise in SME banking and prudent risk management, as reflected in better-than-sector asset quality, and good profitability, notwithstanding high operating environment risks.

Emerging, High-Risk Economy: Our assessment of Kosovo's operating environment reflects the small size of the economy, low GDP per capita, and less developed regulatory and legal frameworks compared to regional peers. At the same time, the banking sector demonstrates reasonable asset quality, high returns and adequate capital buffers.

Prudent Risk Framework: The ProCredit group deploys its established risk governance at all subsidiaries, including PCBK, which results in prudent underwriting standards and strict risk controls. This should be seen in the context of the challenging operating environment, which could weigh on banks' opportunities to be consistently profitable.

Asset Quality to Deteriorate Moderately: PCBK's impaired loans ratio improved to 1.3% at end-2023 (end-2022: 2%) and compares well with the 2% sector average. We expect the ratio to deteriorate to about 2% by end-2025, as the bank's prudent underwriting mitigates pressure on borrowers from higher interest rates. The bank's loan loss allowance coverage of impaired loans is relatively high, providing headroom to absorb credit losses in the near term.

Recurring Reasonable Profitability: PCBK's profitability benefits from a net interest margin that is wider than peers. PCBK's operating profit/risk-weighted assets was flat in 2023 at a high 3.2%, supported by high interest rates and continued loan impairment charge (LIC) reversals. We expect the ratio to moderate, but remain reasonable, toward 2.5% by 2025 with lower interest rates and higher LICs.

CET1 Ratio to Weaken: The bank's common equity Tier 1 (CET1) ratio strengthened to 14.6% at end-2023, from 13.2% at end-2022, reflecting strong profit retention. We expect the CET1 ratio to reduce towards 12% by end-2025, due to high dividend payouts and with lending growth, a level which we consider only modest for the bank's risk profile and small nominal capital base.

Strong Deposit Franchise: The bank's funding and liquidity profile is supported by its consistently reasonable loans/deposits ratio at about 75%-80%. We expect PCBK to maintain its high market share in deposits in the medium term, while competitive pressures and migration towards interest-bearing term deposits will raise funding costs. Liquid assets (23% of assets at end-2023) is adequate

RATING SENSITIVITIES

Factors that Could, Individually or Collectively, Lead to Negative Rating Action/Downgrade

PCBK's Long-Term IDR and SSR would be downgraded on adverse changes to Fitch's perception of country risks in Kosovo, including a downgrade of the sovereign rating. The ratings could also be downgraded following a substantial decrease in the bank's strategic importance to PCH, which is primarily based on PCH's commitment to the country and the region.

A sustained deterioration in PCBK's financial profiles could lead to a downgrade of its VR. PCBK's VR could be downgraded on a marked weakening in asset-quality metrics, in particular if we expected its impaired loan ratio to increase above 5%, accompanied by a sustained weakening of core profitability and the CET1 ratio to below 12%, without prospects for a swift recovery.

Factors that Could, Individually or Collectively, Lead to Positive Rating Action/Upgrade

PCBK's Long-Term IDR and SSR could be upgraded as a result of an upgrade of Kosovo's sovereign rating.

A VR upgrade is unlikely in the near term. Over the medium term, a material improvement in the operating environment accompanied by a strengthening of PCBK's business profile and CET1 ratio could bring upside, assuming other financial profiles do not deteriorate materially."