October 12 (SeeNews) - Fitch Ratings said on Wednesday it has affirmed North Macedonian ProCredit Bank AD Skopje's (PCBNM) Long-Term Issuer Default Rating (IDR) at 'BBB-'.
The bank's Viability Rating (VR) was affirmed at 'bb-', the global rating agency said in a statement.
The negative outlook on the Long-Term IDR reflects that of the North Macedonia's sovereign rating, Fitch noted.
The ratings agency also said in the statement:
KEY RATING DRIVERS
PCBNM'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 'bb-' VR balances our view of PCBNM's solid domestic franchise, its expertise on the SME sector and its sound risk appetite resulting in above-sector-average asset quality in its market, against risks stemming from its operations in an emerging market.
Shareholder Support Drives IDRs: PCBNM is strategically important to PCH and remains an important part of the group's long-standing and well-established presence in south-eastern Europe (SEE). This is reflected in PCBNM's IDR being one notch below the parent's. Fitch's assessment of the parent's ability to support remains influenced by North Macedonia's Country Ceiling of 'BBB-'. The Negative Outlook therefore reflects that on the sovereign rating.
Stable Operating Environment: North Macedonia banks' stable operating environment is underpinned by the sector's generally stable credit metrics despite some volatility in GDP. At the same time, our assessment of the operating environment captures North Macedonia's small economy, high unemployment and a legal framework that lags EU emerging markets'.
Resilient Asset Quality: At end-1H22, the bank's impaired loans were 1.7% of gross loans, in line with its end-2019 level. It is one of the strongest among Procredit sister banks and compares well with other domestic banks by asset quality.
Fitch expects a slight deterioration in asset quality metrics in 2022 and 2023, but for it to remain manageable with an impaired loan ratio below 2.5%. This considers the bank's prudent risk management to ascertain a customer's financial flexibility, but also moderate exposure to vulnerable sectors.
Earnings Improvement: PCBNM's operating profitability remains modest by international standards with an average operating profit at 1.1% of risk-weighted assets (RWAs) in the last four years. Profitability improvement in 1H22 was driven by recoveries in loan allowances and higher revenues that more than offset an increase in operating expenses.
Adequate Capitalisation: The bank's regulatory common equity Tier1 (CET1) and total capital ratios of 10.9% and 15.7%, respectively, at end-1H22 were sustained by retained earnings, while RWAs grew 2% in 1H22. Buffers for CET1 and total capital were above minimum regulatory requirements at 290bp and 120bp, respectively, and we view this headroom as only adequate relative to peers'. We expect capital ratios to increase to meet increased local regulatory requirements. Our assessment of the bank's capitalisation also considers access to ordinary capital support from PCH, if needed.
Healthy Funding Mix: The bank's funding is dominated by customer deposits (75% of total funding at end-1H22). It is also supported by funding from PCH and long-term loans from international financial institutions (IFIs), earmarked for SME development projects, resulting in a loans/deposits ratio of 115% at end-1H22. Liquidity buffers were reasonable and regulatory liquidity ratios remained comfortably above their minimum requirements at end-1H22.
RATING SENSITIVITIES
Factors that could, individually or collectively, lead to negative rating action/downgrade:
The Long-Term IDR and SSR of PCBNM would be downgraded if North Macedonia's Country Ceiling is revised lower. The ratings could also be downgraded if PCH's Long-Term IDR is downgraded, or if Fitch perceives a decrease in the bank's strategic importance for the group, which is primarily based on the group's commitment to the country and the region.
The VR of PCBNM may be downgraded if on a marked weakening in asset-quality metrics, in particular if its Stage 3 ratio increases above 5%, accompanied by significant acceleration in loan impairment charges above our expectations that would maintain the bank's CET1 ratio sustainably below 12%.
Factors that could, individually or collectively, lead to positive rating action/upgrade:
PCBNM's Long-Term IDR and SSR could be upgraded if both the parent's IDRs are upgraded and the Country Ceiling is revised higher. Fitch considers an upgrade of PCBNM as unlikely given the Negative Outlook on the sovereign rating and the Stable Outlook on PCH's Long-Term IDR.
An upgrade of PCBNM's VR would probably require an improvement in its operating environment. Moderate upside for the VR may also stem from a strengthening of the bank's franchise and financial profile, in particular if profitability improves, with operating profit sustainably above 1.25% of RWAs, and if capitalisation is significantly strengthened.
VR ADJUSTMENTS
The capitalisation & leverage score of 'bb-' is above the 'b&below' category implied score due to the following adjustment reason: capital flexibility and ordinary support (positive).
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
PCBNM's IDRs and SSR are driven by support from PCH.