BUCHAREST (Romania), April 27 (SeeNews) – Fitch Ratings has affirmed Romania's Garanti Bank (GBR) and ProCredit Bank (PCB Romania) long-term issuer default rating (IDR) at ‘BBB-’ with stable outlooks.
Fitch has also upgraded GBR's Viability Rating (VR) to 'bb-' and affirmed PCB Romania's VR at 'b+'.
"The upgrade of GBR's VR reflects an overall improvement in the bank's risk profile, driven by a reduction in the stock of impaired loans on balance sheet, higher regulatory capitalisation and improvements in risk controls undertaken as part of the alignment with the ultimate parent's processes and risk appetite framework," the credit ratings agency said in a press release late on Thursday.
PCB Romania's IDRs and Support Rating are driven by the high probability of support it can expect to receive from its parent, ProCredit Holding AG & Co. KGaA (PCH, BBB/Stable), Fitch added.
The rating agency also said:
"KEY RATING DRIVERS
IDRS, SUPPORT RATINGS
GBR's IDRs and Support Rating are driven by our expectation that there is a high probability that extraordinary support would be forthcoming from its ultimate parent Banco Bilbao Vizcaya Argentaria (BBVA; A-/Stable). This view considers the ownership link, reputational considerations and GBR's small size in relation to BBVA (below 1% of BBVA's consolidated assets). However, GBR's strategic importance to the overall BBVA franchise and Romania's role in the wider BBVA group are limited. As a result, we notch GBR's Long-Term IDR three times down from BBVA's.
GBR is directly fully-owned by Turkiye Garanti Bankasi S.A. (TGB; BBB-/Stable). TGB's ratings in turn, are driven by support from its controlling shareholder BBVA. We believe that BBVA would not support GBR over and above the support it would likely provide for TGB, so GBR's IDRs are effectively capped by TGB's IDRs.
We view GBR as a strategically important subsidiary of TGB and without the three-notch 'floor' to its Long-Term IDR from BBVA, we would otherwise have notched it down once from TGB 's Long-Term IDR. This reflects our view that BBVA is unlikely to oppose support flowing through TGB to GBR if needed in a scenario where TGB itself is relying on BBVA to service its debt. However, the probability of support from BBVA being used to support GBR is marginally lower than the probability of support being used by TGB to service its own debt.
PCB Romania's IDRs and Support Rating are driven by the high probability of support it can expect to receive from its parent, ProCredit Holding AG & Co. KGaA (PCH, BBB/Stable). PCB Romania is notched down once from PCH based on the full ownership, the strategic importance of south-eastern Europe to PCH, the implication of the bank's default for the parent, the strong integration with the parent and track record of capital and liquidity support. The Stable Outlook reflects that on the parent. At end-2017, PCB Romania accounted for about 5% of PCH's consolidated assets.
VRs
GBR
GBR's asset quality has continued to improve, as evidenced by the decrease in the European Banking Authority (EBA) non-performing loans (NPL) ratio to 5.6% at end-2017 (end-2016: 9.1%), below the sector average of 6.4%. The reduction in NPLs through write-offs and sales was additionally helped by the cyclical upswing of the economy. We expect further modest improvements in asset quality in 2018 despite some pressure on borrower affordability from rising interest rates.
GBR's CET1 ratio of 16% and Fitch Core Capital (FCC) ratio of 16.4% are slightly lower than larger peers, but in excess of regulatory total capital requirements, including buffers. The bank benefited from a capital injection by the parent (EUR22.3 million) in 2016, as well as other measures aimed at offsetting the impact of a loss on its capital ratios, and in 2017 returned to capital build through profits. Fitch expects capitalisation to remain adequate, given reasonable encumbrance by unreserved impaired loans of 16% of FCC capital at end-2017.
GBR's profits have been volatile, reflecting mainly the impact of high loan impairment charges (LICs) in the last years on a small absolute pre-impairment operating profit. In 2017, LICs were extraordinarily low (in line with peers), and profitability surprised on the upside (return on average equity of 11%, and on average assets of 1.4%), including the impact of one-off gains on bond sales. However operating profitability remains modest and we think that improvements are subject to loan balance growth.
The bank's funding profile has improved over the last years as it has grown customer deposits funding. However GBR's small deposit franchise, as demonstrated by a very small retail deposit market share of below 1%, limits the bank's pricing power. GBR's liquidity position is adequate with cash, balances with the central bank (excluding mandatory reserves), unpledged government securities eligible for repo and the unused liquidity line from the parent equivalent to 28% of total assets and 37% of customer deposits. GBR's liquidity coverage ratio at end-2017 was 183%.
PCB
PCB Romania's VR of 'b+' considers the bank's limited franchise and scale, translating into a high cost base, constraining the internal capital generation capacity. The bank's profitability decreased significantly in 2017 driven by a shrinking asset base, resulting from exit strategy in the smallest SME segments, not yet matched by the new business volumes and cost savings. The bottom line has been supported by the positive impact from decreased impairments related to this strategy, while the bank's net interest margins continued to decrease to about 5% in 2017 (2016: 6.3%) with the cost-to-income ratio surging above 100% .
Impaired loans further improved, reaching 5.4% of gross loans at end-2017 (2016: 7.5%), below the sector average of about 6.4%, and were based on a more conservative definition of IFRS impairment, which apart from qualitative triggers includes a 30 days past due trigger (rather than the more commonly used 90 days). The coverage remained at a reasonable level of about 65%, reflecting conservative treatment of collateral valuation, as most of the portfolio is secured.
PCB Romania's capitalisation has improved, driven by conversion of subordinated debt to equity (FCC of 20.7% at end-2017; end-2016 16.1%). Fitch views the capitalisation of PCB Romania as adequate given its record of good asset quality through the cycle, low level of unreserved impaired loans relative to FCC (at about 10%) and despite its small nominal size. However, current capitalisation levels need to be viewed in the context of PCB's growth targets and weak profitability, leading to a likely modest capitalisation erosion over the medium term.
The bank's funding profile has remained generally stable despite some loss of client base from the smallest SME segments that has not yet been fully compensated with new target client deposits. High loans-to-deposits ratio of 146% at end-2017 reflects the bank's established access to stable funding from parent group and IFIs (about 30% of total assets). The liquidity cushion was equal to a comfortable 40% of customer accounts, while liquidity could also be supported by the parent, in case of need.
RATING SENSITIVITIES
IDRS, NATIONAL RATINGS AND SENIOR DEBT
GBR's support-driven ratings are sensitive to changes in BBVA's ratings or in Fitch's view of BBVA's commitment to Romania. A one-notch downgrade of BBVA's Long-Term IDR would trigger a downgrade of GBR's IDRs and Support Rating. This is because without the current three-notch 'floor' to GBR's Long-Term IDR from BBVA, we would otherwise have notched it down once from TGB's IDR.
An upgrade of BBVA's Long-Term IDR would have no impact on GBR's ratings as they would be capped by TGB's Long-Term IDR, which in turn is capped by Turkey's Country Ceiling (BBB-).
A downgrade of TGB 's IDRs would trigger a downgrade of GBR's IDRs and Support Rating. A one-notch upgrade of TGB's Long-Term IDR would most likely have no impact on GBR's IDRs.
PCBR's IDRs and Support Rating are sensitive to changes in PCH's ratings or in Fitch's view of the strategic importance of the subsidiary or the wider CEE region to PCH.
VR
An upgrade of the banks' VRs would require a strengthening of their market franchises and a track record of profitable growth (both banks) and improved operating efficiency (PCB Romania), while maintaining adequate asset quality and capital metrics. The VRs could be downgraded if a marked deterioration in asset quality metrics, also as a result of the material increase in risk appetite, results in capital erosion."
(1 euro=4.6618 lei)
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