Fitch keeps Albania’s ProCredit Bank at BB, outlook stable

Fitch’s IDR rating is supported by the bank’s shareholder support, specifically its sole shareholder, Germany’s ProCredit Holding AG, Fitch said in a statement earlier this month. However, the banking group’s support is outweighed by the country’s risks, particularly transfer and convertibility.

Fitch also said in the statement:

Small Bank; Weak Performance: PCBNA's VR is constrained by its small scale and narrow franchise and is therefore one notch below its implied VR. The VR also balances prudent risk management and better-than-sector asset quality against weak profitability and a challenging Albanian operating environment.

Improved but Challenging Operating Environment: Fitch has revised the Albanian operating environment score to 'b+' from 'b' to reflect reduced macroeconomic risks, resilience against economic shocks and continued structural reforms in the banking sector. Nevertheless, our assessment continues to capture Albania's small economy and its dependence on cyclical sectors, such as tourism and agricultural, which limit opportunities for banks. High exposure to the sovereign, impaired loans ratios above regional peers and high euroisation also remain key structural weaknesses for banks.

Cautious Risk-Management Framework: ProCredit Group deploys its established risk governance at all subsidiaries, including PCBA, which results in prudent underwriting standards and strict risk controls. However, this should be viewed in the context of the challenging Albanian operating environment.

Improving Asset Quality: The bank's impaired loan ratio (end-2023: 2.2%) compares well with the sector average (4.7%). We expect any impaired loan inflows to be offset by ongoing write-offs and recoveries, and the impaired loans ratio to therefore remain stable at about 2.0% by end-2025.

Profitability to Weaken: The bank's operating profit increased to 1.0% to risk-weighted assets (RWAs) in 2023 (2022: 0.5%) due to the strong growth in net interest income, but also reversals in loan impairment charges (LICs). However, we expect profitability to weaken in 2024-2025 due to rising LICs, as the bank increases provisions against a growing loan book, and higher operating expenses. We forecast the operating profit/RWAs ratio to remain weak and between about 0%-0.5% in 2024-2025.

Ordinary Capital Support: PCBA's reported common equity Tier 1 (CET1) ratio of 17.8% at end-2023 remains adequate relative to the small nominal size of the bank and considering country risks. The bank's capitalisation has been supported by regular capital injections from the parent (EUR19 million in the past five years) to accommodate growth, while internal capital generation has been modest. We expect further capital support from the parent to be made available in case of need.

Reasonable Funding Base: The funding mix is dominated by customer deposits, with 82% of total funding at end-2023, and supported by funding from PCH. Growing deposits accompanied by modest loan growth resulted in a lower loans-to-deposits ratio at end-2023 (85%; end-2022: 107%). Granular retail deposits are an important component, which account for 52% of customer deposits. Liquid assets (22%) are adequate, mainly comprising central bank reserves, government bonds and cash.

RATING SENSITIVITIES

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

PCBA's IDRs and SSR would be downgraded on adverse changes to Fitch's perception of country risks in Albania. The ratings could also be downgraded on 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.

Fitch would downgrade the VR if it expected the bank to record sustained losses on a pre-impairment level, which in turn materially weakens capitalisation. In particular, Fitch would downgrade the bank's VR if the CET1 ratio falls below 10% on a sustained basis.

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

PCBA's IDRs and SSR could be upgraded as a result of diminished country risks, which we view as unlikely in the medium term.

The bank's VR could be upgraded on material improvements in its franchise and resilience in the business model. The latter could be reflected in a solid record of profitable operations over the medium term, combined with stable asset-quality ratios and an increase in capital and liquidity buffers.