BUCHAREST (Romania), January 28 (SeeNews) - Fitch has revised the outlooks on Romania's Banca Comerciala Romana (BCR) and BRD-Groupe Societe Generale (BRD) to negative from stable, while affirming the banks' respective long-term issuer default ratings (IDRs) at 'BBB+'.
Fitch has also affirmed the long-term IDR of Romanian banks UniCredit Bank (UCBRO) at 'BBB-' with a negative outlook, and that of Banca Transilvania (BT) at 'BB+' with a stable outlook, it said late on Friday in a press release.
The revision of the outlooks on BCR and BRD reflects the significant probability that Fitch will in future cap the ratings of Romanian banks at one notch above the Romanian sovereign (BBB-/Stable), rather than two notches at present, the rating agency said.
"This in turn reflects the potentially greater risk of government intervention in the Romanian banking sector, in case of a sovereign default, that would negatively affect the banks' ability to service their obligations. This possible change in Fitch's view is driven by a series of recently proposed or adopted legislative measures, which could have a significant negative impact on banks, the most acute being a special tax on bank assets," Fitch said.
Fitch has also affirmed the Viability Ratings (VRs) of BCR and BT at 'bb+, and of UCBRO at 'bb', because it believes the banks' financial profiles should be reasonably resilient, at least in the short term, to a weakening of profitability driven by the aforementioned tax.
"However, over the longer term, weaker earnings and internal capital generation capacity could erode banks' headroom to absorb cyclically increasing credit charges and/or to support growth. The VRs could be downgraded if a punitively high tax is maintained indefinitely and if its impact cannot meaningfully be mitigated by the banks' adapting business strategies," Fitch concluded.
Fitch Ratings also said in the statement:
"The IDRs of BT are driven by its standalone creditworthiness, as expressed by its VR. The Support Rating of '5' and Support Rating Floor of 'No Floor' for BT reflect Fitch's view that sovereign support for senior creditors, while possible, can no longer be relied upon, as for most other commercial banks in the European Union, following the adoption of the Bank Recovery and Resolution Directive.
BCR's, BRD's and UCBRO's Long- and Short-Term IDRs and Support Ratings are based on potential support available from their respective parents - Erste Group Bank AG (Erste, A-/Stable), Societe Generale S.A. (SG; A/Stable) and UniCredit S.p.A. (UCB; BBB/Negative).
In Fitch's view, Erste, SG and UCB will continue to have a high propensity to support their Romanian subsidiaries because Romania and the wider central and eastern European region remain strategically important for each of them. This view also takes into account the subsidiary banks' majority ownership, the high level of operational and management integration between the banks and their parents, the track record of support to date and the limited size of the subsidiaries relative to their parents', making potential support manageable.
BCR's and UCBRO's IDRs are notched down once from their respective parents'. BRD could be rated within one notch of its parent, but the extent to which its Long-Term Foreign-Currency IDR can benefit from parental support is currently constrained by Fitch's assessment of transfer and convertibility risks as reflected by Romania's Country Ceiling.
The Negative Outlooks on BCR's Long-Term Local- and Foreign-Currency IDRs and on BRD's Long-Term IDR reflect the potential for Fitch to cap Romanian bank ratings at one notch above the sovereign, rather than at two notches above, as at present. The Negative Outlook on UCBRO's IDR is in line with that on its parent.
BCR, BT, UCBRO
The affirmations of the VRs of BCR, BT and UBCRO reflect the three banks' stable financial profiles, in particular their gradually improving asset quality, reasonable recent performance, good capitalisation and comfortable liquidity. The higher VRs of BCR and BT, relative to UCBRO's, primarily reflect their better profitability, slightly higher capital ratios, somewhat less concentrated loan portfolios and deeper deposit franchises.
At the same time, Fitch sees the operating environment for Romanian banks becoming increasingly difficult in light of a series of bank-unfriendly measures passed or proposed by the authorities. The potentially most severe is a bank levy linked to banks' financial assets and the value of the interbank rate ROBOR, to which most retail loans are linked.
Despite varying degrees of operating profitability (strongest at BT with a pre-tax operating return on assets of 3.1% in 9M18, moderate at BCR with 2.2% in 9M18 and weakest at UCBRO with 1.4% in 1H18) we expect the banks to be able to absorb the bank levy in 2019 and remain profitable. We estimate that at the current quarterly rate of 0.3%, the special tax could slash annualised (9M18 or 1H18) pre-tax profits by 44% (BT), 56% (BCR) and 68% (UCBRO), after adjusting for a more normalised cost of risk of 100bp of gross loans and a potential tax shield provided by the levy.
There is currently some uncertainty about how the bank levy will be implemented (in particular as regards calculation of the tax base) and whether it will be subject to political challenge in the near- or medium-term. However, if the levy remains in place in its current form over the medium term, this would severely reduce the banks' capital generation capacity and could put pressure on the VRs. The banks' capacity to mitigate some of the impact through pricing, deleveraging and other business strategies is yet to be seen.
During 9M18, all three banks' profitability has benefitted from benign credit conditions, especially for retail borrowers, from rising market interest rates and low loan impairment charges, helped by continued recoveries on written-off exposures. We do not expect similarly benign condition in 2019, but rather forecast more subdued loan growth, also reflecting macroeconomic trends, and a gradual normalisation of loan impairment charges. In addition, 2019 loan growth prospects are constrained by more stringent affordability criteria required by the National Bank of Romania, which will help ensure that retail underwriting remains reasonably conservative.
Asset quality at all three banks continued to improve in 9M18 with latest Stage 3 IFRS 9 loans ranging between 6.7% of loans (BCR at end-3Q18) and 7.6% (BT, Fitch's estimate at end-1H18 based on the consolidated 1H18 IFRS accounts) and 7.5% (BT and UCBRO, respectively, at end-1H18), and adequate coverage of non-performing loans by total loan loss allowances (highest at BCR). We expect further work-outs and a reasonably benign outlook for customer affordability to result in further modest improvements. Sales of non-performing loans are becoming increasingly unlikely in the current legal environment as they are less economical for buyers and sellers.
Capitalisation is strongest at BCR with a Fitch Core Capital (FCC) ratio of 20.5% at end-1H18 and tangible common equity leverage of 10.8%, while these are lower at BT of 16.7% and 9.8%, respectively at end-3Q18, and at UCBRO around 15.9% and 9.5%, respectively at end-1H18. BT's capitalisation has temporarily decreased following a combination of organic growth, bank acquisitions and profit distributions in 2Q18, but we expect the FCC ratio to have been restored to over 17% by end-2018 (end-2017: 20.7%). UCBRO's historically thinner capital ratios have been replenished by an equity and subordinated loan contribution from the parent and profit retention in 2018, but we expect the bank's ratios to be maintained at the lower end of peers'.
BCR's and BT's funding are strongest, with gross loans comfortably funded by customer deposits (loans-to-deposit ratios were 71% and 65% respectively at end-1H18). The two banks' strong retail presence and leading market shares, as well as fairly granular, albeit typically short-term deposits, underpin deposit stability. UCBRO's loans/deposits ratio of 105% at end-1H18 remains higher than other rated peers', reflecting weaker deposit funding of at non-bank subsidiaries and reliance on parent funding for foreign currency lending. At the same time, corporate deposits are more prevalent in the bank's funding structure, although commercial efforts are being directed at increasing the retail customer base.
Available liquidity buffers made up of cash net of mandatory reserves, unencumbered central bank repo-eligible securities and parent credit facilities (where applicable) were equivalent to a high 37%, 36% and 35% of assets at BCR, UCBRO and BT, respectively. Although UCBRO has cancelled the emergency liquidity line it had in place from the parent we expect ordinary liquidity support from the parent to continue to be available, if needed.
IDRS AND SUPPORT RATINGS
BCR's and BRD's IDRs are mainly sensitive to a revision in Fitch's assessment of country risks facing Romanian banks. If the proposed punitive measures such as the bank tax are implemented as planned and remain in place beyond the short term, or if additional unconventional measures, causing bank losses and weakening banks' solvency are enacted, we would likely cap the banks' IDRs at one notch above the sovereign IDR and downgrade the banks' IDRs accordingly.
UCBRO's IDRs are mainly sensitive to its parent's ability (as reflected in the parent's Long-Term IDR) and propensity to provide support if needed.
BT's IDRs are sensitive to the same factors that drive the bank's VR.
The VRs of all three banks could be downgraded if the bank levy or other measures undermine performance to the extent that this results in a material weakening of their solvency. VRs could also be downgraded if the expected economic slowdown or a material increase in risk appetite translates into marked deterioration in the banks' asset quality and capital metrics.
Upside for Romanian banks' VRs is limited given the impact of the bank levy and the slowdown in growth. The VR of UCBRO could be upgraded in line with BCR's and BT's if its financial metrics gradually converge towards those of its peers and if the bank deepens its lending and deposit franchises."