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Fitch affirms Romanian lender BCR at 'BBB+', outlook stable

Fitch affirms Romanian lender BCR at 'BBB+', outlook stable Author: BCR, Licence: All Rights Reserved

BUCHAREST (Romania), January 17 (SeeNews) - Fitch Ratings said it has affirmed the long-term issuer default rating (IDR) of Romania's Banca Comerciala Romana (BCR) at 'BBB+' with stable outlook and viability rating (VR) at 'bb+'.

BCR's IDRs, SR and senior debt ratings reflect support from its majority owner Erste Group Bank AG, and is capped at the level of the country ceiling, two notches above Romania's 'BBB-' sovereign long-term IDR, Fitch Ratings said in a statement on Thursday evening.

Absent country risk constraints, BCR would be rated one notch below the parent. Also, the stable outlook reflects that on the Romanian sovereign IDR, Fitch addedthe rating agency noted.

Fitch also said in the statement:

"Support propensity is underpinned by BCR's and the wider CEE region's high strategic importance for the group, high level of operational and management integration of BCR within Erste and evidence of past capital, funding and liquidity support. Erste's ability to provide support is very high, given the group's strong and diversified credit profile. We do not interpret the group's intention to adopt a multiple point-of-entry resolution strategy as diminishing the ability or propensity to support BCR ahead of resolution, if needed.

The senior debt rating is in line with BCR's Long-Term IDR as we expect the benefit of support from Erste to apply to senior debt in the same manner as it applies to BCR's IDR.

In line with Fitch's applicable criteria, BCR's Short-Term IDR of 'F2' is at the lower of two options available for Long-Term IDR of 'BBB+' as the Long-Term IDR based on institutional support is constrained by the Country Ceiling.

VR

The affirmation of BCR's VR reflects its strong domestic franchise across major market segments, stable financial profile, in particular the gradually improving asset quality, reasonable performance, good capitalisation and comfortable liquidity.

BCR is the second-largest bank in Romania with an around 15% market share in total system assets, customer loans and customer deposits. Its traditional banking business model is well balanced between retail and corporate customers on both sides of the balance sheet. BCR's franchise benefits from being part of a larger banking group. The bank's risk appetite is conservative, reflecting the tightening introduced internally and by the regulators (including tightening of underwriting standards for consumer lending introduced in early 2019). Fitch's outlook for Romanian banks in 2020 remains stable, with banks well positioned to weather an expected economic slow-down. However rising fiscal and external imbalances pose a risk to medium-term economic prospects.

The bank's asset quality continued to improve in 2019, albeit at a slower pace than during 2018. Reported NPL ratio improved to 5.5% at end-1H19 and to 4.9% at end-3Q19, and was slightly better than the peer average. The improvement over 1H19 was mainly driven by an increase in gross loans, a contained inflow of new NPLs and modest write-offs and transfers to performing status. NPL coverage at end-1H19 was strong: 75% by specific reserves and over 100% by all impairment provisions. We expect further modest improvement in loan book quality over 2020.

Risks outside the loan book are contained, with a large share of cash and exposures to the central bank of Romania (about 14% of total assets at end-1H19) and a bond portfolio (29% of total assets) mostly invested in Romanian government securities.

Operating profitability/risk-weighted assets (RWA; excluding a one-off charge) further improved in 1H19 compared with 2018 benefiting from still benign operating conditions and was in line with the peer average at around 4.6%, supported by net release of impairment provisions. Pre-impairment profitability remained largely flat.

BCR booked a RON718 million provision charge in 1H19 related to litigation at its saving and mortgage bank subsidiary Banca pentru Locuinte. This was a sizable 43% of 6M19 operating income or 9% of equity and resulted in a modest net loss reported for 1H19. It will weigh on FY19 pre-tax profitability but we expect performance was good in 2H19. BCR intends to challenge the court decision and management does not expect significant additional costs related to this matter.

We believe the bank tax introduced in 2019 will not have had a material negative effect on BCR's profitability in 2019.

BCR's capitalisation is strongest among its Fitch-rated peers with a Fitch Core Capital (FCC) ratio of 19.4% at end-1H19 (2018: 21.6%), good reserve coverage of NPLs and modest concentrations in the loan book. The drop in FCC ratio was due to partial (40%) 2018 profit payout in dividends and 5% increase in RWA over 6M19. Regulatory CET1 was 19.2% compared with the Total Capital Ratio of 20.6% underpinning the good quality of BCR's regulatory capital and providing sizeable buffers over minimum regulatory requirements. The leverage ratio is moderate and has been stable over 1H19 at around 9.9%.

BCR's funding is strong, with gross loans comfortably funded by customer deposits (loans-to-deposit ratio was 71% at end-1H19). The bank's strong retail presence and leading market shares, as well as fairly granular, albeit typically short-term deposits, underpin deposit stability. In line with the self-funding strategy, the share of parental funding has further reduced to below 10% of total funding and we expect it to reduce further over the next few years.

Available liquidity buffers made up of cash net of mandatory reserves, unencumbered central bank repo-eligible securities and parent credit facility were equivalent to a high 32% of assets. Cash holdings alone comfortably covered all contractual repayments over the next 12 months.

In December 2019, BCR issued RON600 million of senior notes (equivalent to around 1.5% of end-1H19 RWA), which subject to the transposition of EU Directive 2017/2399 (regarding the insolvency hierarchy of senior debt) into Romanian law will rank as senior non-preferred and subordinated to other senior obligations, but senior to any subordinated debt of the bank. This would allow the notes to qualify for minimum requirements for own funds and eligible liabilities (MREL), to be set by the National Bank of Romania for BCR.

RATING SENSITIVITIES

IDRS, SR AND SENIOR DEBT

BCR's Long-Term IDR is mainly sensitive to the sovereign's Long-Term IDR. It is also sensitive to Fitch's assessment of country risks facing Romanian banks, which could affect BCR's ability to use parental support to service its obligations.

The IDRs and SR are also sensitive to a multi-notch downgrade of Erste or a significant decrease in BCR's strategic importance for the group, neither of which is likely, in our view.

The senior unsecured notes' rating is primarily sensitive to a change in BCR's IDR. The implementation of the insolvency hierarchy of senior debt in Romanian law is not likely to result in a change in these notes' ratings. Once the status of the notes as senior non-preferred is recognised in Romanian legislation we expect the notes to form part of the resolution buffer and Fitch will continue to rate senior non-preferred notes in line with the bank's Long-Term IDR as per our criteria. Fitch views the likelihood of default on senior non-preferred debt as the same as that of the bank.

VR

The upgrade of VR is unlikely in the medium term given constraints of the Romanian operating environment.

The VR could be downgraded if sharp economic slowdown or idiosyncratic issues lead to a marked deterioration in asset quality and capital metrics. A significant increase in BCR's risk appetite, translating into a substantial inflow of new bad debts and capital erosion, could also lead to the VR being downgraded.

PUBLIC RATINGS WITH CREDIT LINKAGE TO OTHER RATINGS

BCR's Long-Term IDR is capped by the Romanian Country Ceiling and therefore linked to the Romanian sovereign Long-Term IDR. BCR's IDRs, SR and senior debt ratings are driven by support from Erste and therefore linked to the latter's IDR."

(1 euro=4.7795 lei)

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