The bank's Shareholder Support Rating (SSR) was affirmed at 'bbb-' and its Viability Rating (VR) was affirmed at 'bb-', the global rating agency said in a statement on Friday.
The ratings agency also said in the statement:
Shareholder Support Drives IDRs: PCBNM's IDRs are driven by its SSR, which reflects Fitch's view of potential support from the bank's sole shareholder, ProCredit Holding AG (PCH; BBB/Stable). PCBNM's SSR is one notch below PCH's Long-Term IDR, reflecting our view that it is strategically important to PCH and an important part of its well-established presence in south-east Europe. PCBNM's Long-Term IDR is in line with North Macedonia's Country Ceiling, reflecting only moderate country risks on the SSR. The Stable Outlook on PCBNM's Long-Term IDR reflects that on both the sovereign rating and PCH's IDR.
Moderate Franchise; SME Focus: PCBNM's VR balances its moderate domestic franchise, expertise in SME banking and prudent risk management, and better-than-sector-average asset quality with North Macedonian operating environment risks.
Stable Operating Environment: North Macedonia's operating environment reflects its small economy with some volatility in real GDP growth and stability of the local currency supported by a long-standing exchange rate peg to the euro. Fitch expects growth to strengthen to 2.9% in 2024, with private consumption remaining the main driver. We expect the banking sector to continue to perform well, but for profitability to decline slightly as interest rates are likely to fall later this year.
Prudent Risk-Management Framework: ProCredit group deploys its established risk governance at all subsidiaries, including PCBNM, which results in prudent underwriting standards and strict risk controls.
Stable Asset Quality: PCBNM's impaired loans ratio (end-2023:2%) compares well with domestic peers and other PCH subsidiaries. We expect the impaired loans ratio to remain below 2.5% by end-2025 given the bank's prudent underwriting and moderate exposure to vulnerable sectors.
Improving Profitability: The improvement in PCBNM's operating profit/risk-weighted assets (RWAs) to 2.2% in 2023 (2022: 1.1%) was mainly driven by higher net interest income despite increased operating expenses. We expect the ratio to moderate to about 2% over the next 18 months due to higher operating expenses and slightly lower margins, although sustained structural profitability above the historical average would be positive for our assessment.
Adequate Capitalisation: PCBNM's common equity Tier 1 (CET1) ratio of 13.3% at end-2023 was supported by stronger internal capital generation, which offsets moderate RWA growth. We expect a broadly stable CET1 ratio in 2024-2025, supported by profit retention and potential ordinary support from PCH to meet higher regulatory requirements.
Adequate Liquidity: The bank's loans/deposits ratio dropped to just below 90% at end-2023 (97% at end-2022), reflecting deposit growth and reduced reliance on intragroup funding. Customer deposits (end-2023: about 80% of total funding) is supplemented by international financial institution funding, which is earmarked for various SME development projects. Liquidity is adequate, comprising cash, central bank reserves and assets, and central government assets (17% of assets; 37% when also including interbank assets).
RATING SENSITIVITIES
Factors that Could, Individually or Collectively, Lead to Negative Rating Action/Downgrade
PCBNM's IDR and SSR would be downgraded if North Macedonia's Country Ceiling was downgraded or PCH's Long-Term IDR was downgraded. PCBNM's support-driven ratings would also be downgraded on a substantial weakening in our assessment of PCH's propensity to provide support, in case of need, including in the bank's strategic importance for PCH, which is primarily based on the group's commitment to the country and the region.
PCBNM'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 loan impairment charges significantly accelerating to above our expectations, and the CET1 ratio falling below 12% on a sustained basis.
Factors that Could, Individually or Collectively, Lead to Positive Rating Action/Upgrade
PCBNM's IDR and SSR could be upgraded if both the parent's IDR and North Macedonia's Country Ceiling were upgraded, although we consider this unlikely in the near term given the Stable Outlooks on both PCH's and the sovereign's IDRs.
An upgrade of PCBNM's VR would require an improvement in its operating environment, accompanied by sustained good asset quality, structural improvement to profitability and adequate capital and liquidity buffers.
OTHER DEBT AND ISSUER RATINGS: KEY RATING DRIVERS
PCBNM's short-Term IDRs is the only option mapping to their respective Long-Term IDRs. PCBNM's Long-Term Foreign- and Local-Currency IDRs (xgs) are at the level of the bank's VR, and they are also underpinned by support from PCH. The Short-Term IDRs (xgs) are mapped to their respective Long-Term Currency IDRs (xgs).
OTHER DEBT AND ISSUER RATINGS: RATING SENSITIVITIES
PCBNM's short-Term IDRs are sensitive to changes in their respective Long-Term IDRs. PCBNM's Long-Term IDRs (xgs) ratings are primarily sensitive to changes to the bank's VR. However, they would only be downgraded if we simultaneously expected a weakening in the parent bank's ability or propensity to provide support, which could stem from a downgrade of the parent's Long-Term IDRs (xgs).
An upgrade of the Long-Term (xgs) ratings would require an upgrade of the parent bank's Long-Term IDR (xgs), provided Fitch's view on parent bank's ability and propensity to provide support was unchanged.
PCBNM's Short-Term IDRs (xgs) rating are primarily sensitive to changes in their respective Long-Term IDRs (xgs).
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
PCBNM's IDRs and SSR are driven by support from PCH.
The highest level of ESG credit relevance is a score of '3', unless otherwise disclosed in this section. A score of '3' 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. Fitch's ESG Relevance Scores are not inputs in the rating process; they are an observation on the relevance and materiality of ESG factors in the rating decision. For more information on Fitch's ESG Relevance Scores, visit https://www.fitchratings.com/topics/esg/products#esg-relevance-scores."
