May 29 (SeeNews) - Fitch Ratings said it has upgraded the long-term issuer default rating (IDR) of Romania's Banca Transilvania (BT) to 'BB+' from 'BB'.
Fitch has also affirmed the long-term IDRs of Banca Comerciala Romana (BCR) and BRD-Groupe Societe Generale (BRD) at 'BBB+' and of UniCredit Bank (UCBRO) at 'BBB-'. The outlooks are stable, Fitch said in a statement on Friday.
Fitch has also upgraded the Viability Ratings (VRs) of BT to 'bb+' from 'bb' and of UCBRO to 'bb' from 'bb-'. BCR's VR has been affirmed at 'bb+'.
The agency also said in the statement:
"KEY RATING DRIVERS
IDRS, SUPPORT RATINGS
The IDRs of BT are driven by its standalone creditworthiness, as expressed by its VR. The upgrade of the Long-Term IDR of the bank reflects the upgrade of 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 SpA (UCB; BBB/Stable).
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 these 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'. The Stable Outlook on BCR's Long-Term Foreign-Currency IDR, which is at the level of Romania's Country Ceiling (BBB+), reflects the Stable Outlooks on Romania and on Erste. The Stable Outlook on UCBRO's IDR is in line with that on its parent.
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 Stable Outlook on BRD reflects that on the Romanian sovereign.
VRs
The upgrades of BT's and UCBRO's VRs and affirmation of BCR's VR reflect a supportive domestic operating environment driving an improvement in the banks' credit profiles and reasonable financial performance.
The upgrade of BT's VR factors in the bank's decreased levels of problem exposures, driven by write-offs, and a track record of solid profitability helping to offset potential capital pressures resulting from aggressive growth (including recent acquisitions) and normalised levels of impairment charges. The upgrade further reflects Fitch's view that the recent acquisition and subsequent merger with Bancpost will reinforce BT's franchise in core customer segments and bring scale benefits. Fitch expects that the transaction will have no major impact on BT's asset quality and funding profile. Negative impact on capitalisation is likely to be limited and temporary.
UCBRO's strengthened capitalisation, also in light of the lower levels of problem assets, was the main factor driving the upgrade of the bank's VR. It should help relieve pressures from upcoming increases in regulatory requirements through the phasing-in and introduction of new CET1 buffers and from the planned implementation of advanced internal ratings-based approach for certain portfolios.
The VRs of all three banks also reflect their solid capital buffers and reasonable reserve coverages of existing problem loans (stronger at BCR). Funding profiles are stable at all three banks and liquidity is comfortable.
BCR
BCR's VR reflects the bank's strong capitalisation and funding and liquidity profiles, which help mitigate risks from the bank's remaining stock of legacy non-performing assets. The bank's retail-oriented universal banking business model and leading market shares (14% of gross loans,) are a rating strength, but the bank's domestic focus makes BCR susceptible to the operating environment. This makes an upgrade unlikely.
The risk from the bank's stock of legacy impaired loans has decreased over the years as the bank has decreased its non-performing loan (NPL) ratio to 8% and increased total IFRS reserve coverage to a high 94% of NPLs at end-2017. Fitch includes impaired loans exposure and more than 90 days past due but not impaired as NPLs. In 1Q18 the IFRS 9 NPL ratio (Stage 3 and POCI loans) dropped to 7.7%. We expect further reduction in the NPL ratio towards 5%, over the next two years driven by further in-house work-outs and moderate inflows of new NPLs, and a return to gross loans growth.
Operating profits have been supported by low loan impairment charges (LICs), which Fitch expects will gradually normalise at a higher level than the 9bp of gross loans and 3% of pre-impairment operating profit incurred in 2017. BCR's operating income is under pressure from lower margins following voluntary repricing of customer loans and from large liquidity holdings, so we expect the bank to target moderate growth to boost its revenue base. Efficiency remains a weakness compared with other banks in the sector, and is likely to remain under pressure from rising wages and investments in technology. In the longer term the bank is looking to offset these through increased automation and digitalisation.
We view the bank's capitalisation as strong, with a Fitch Core Capital (FCC) ratio of 20% at end-2017, though some downward pressure is expected from a planned switch to an internal ratings-based approach to calculating risk-weighted assets (RWA). Its end-2017 FCC ratio included the full 2017 profit, 40% of which will be distributed to the parent after several years of forfeiting dividends in order to strengthen the bank's capitalisation. In the longer term we expect regulatory capitalisation to be managed with a view to maintaining the CET1 ratio comfortably above all requirements, which are fairly high given an O-SII buffer of 1% and an additional expected systemic risk buffer of 1% from June 2018.
The bank has a sound funding profile, where customer deposits represent a high 86% of total funding excluding derivatives, and reliance on parent funding has decreased. Liquidity is comfortable with holdings of cash and unencumbered Romanian government securities, net of mandatory reserves and potential cash uses equivalent to a high 36% of customer deposits at end-1Q18.
BT
BT's VR factors in the bank's strong franchise in the domestic market, helped by acquisitions, and a record of through-the-cycle profitability that is more resilient than peers'. Strong internal capital generation and reasonable asset quality have underpinned BT's ability to grow at times when peers were deleveraging. Strong capital generation is also expected to counterbalance temporary capital pressures arising from the planned consolidation in 2018 of the recently acquired smaller Romanian retail lender Bancpost. The latter could contribute around 18% of combined assets, while adding around 3% to BT's current 13.9% share in sector assets. Bancpost's predominately retail lending and funding profile fits well with BT's business model. The acquisition will reinforce BT's franchise in the core retail business segment (52% and 62% of BT's loans and deposits at end-2017).
BT's pre-impairment profitability remained solid in 2017-1Q18, underpinned by lower funding costs and strong fee generation. Good operational efficiency and lower LICs supported the bottom line results (return on average assets (ROAA) and equity (ROAE) of 2.6% and 21.7%, respectively, in 1Q18). We expect the bank's pre-impairment results to remain strong, benefitting from greater economies of scale as a result of Bancpost's consolidation, while performance metrics will be sensitive to asset quality trends. We estimate that on a combined basis, operating profit (taking into account budgeted LICs, capturing potential IFRS 9 effects) could be equal to a solid 3% of forecast RWAs in 2018.
Impaired loans (as defined by IFRS standard) decreased to 8.2% of BT's loans at end-2017 from 10.7% at end-2016, driven by write-offs and in-house recoveries, rather than NPL sales as pursued by peers. At end-2017, coverage of impaired loans by total reserves was reasonable at 71%. Bancpost's reported impaired loans were 7.1% of end-2017 loans, with moderate 47% coverage by reserves. We estimate that on a combined basis, asset quality metrics would be similar to those of BT, while the bank is targeting further reduction in problem assets with a regulatory non-performing exposure ratio (NPE, EBA definition) closer to 5% by end-2018 from 6.4% at end-1Q18. Concentration risks remain limited given the bank's profile of SME and retail lender, while FX lending will only marginally increase to 24% of total loans on a combined basis (vs. 21% pre-acquisition and the sector average of 37% at end-2017). Unreserved impaired loans were moderate at around 12% of FCC adjusted for expected dividend (15% on a combined basis).
The FCC ratio was solid at 17.4% at end-1Q18 and regulatory CET1 and total capital ratios were 17.3% and 18.2%, respectively (all net of expected dividends and excluding 1Q18 profit). The planned consolidation of Bancpost, which will result in a 17% increase in RWAs from end-1Q18, will, according to Fitch's estimate, temporary decrease FCC by 3pp to 15.3% and CET1 ratio by 2pp to 15.1% (excluding 2018 profits). The expected profit in 2018 should help to restore solvency ratios to the current levels, although it will depend on the bank's growth targets and capital distribution plans. BT intends to manage its capital ratios with comfortable buffers above growing regulatory capital requirements (which include the introduction of additional systemic risk buffer at 1% of RWAs from end-June 2018), but also considering the potential impact of the implementation of IFRS9 accounting standards (not yet finalised).
BT's funding profile remains stable and the bank's deposit franchise is strong (customer deposits accounted for about 93% of total funding at end-1Q18). BT's liquidity cushion is large, comprising a significant amount of Romanian government bonds (31% of assets at end-1Q18), which are eligible for the refinancing with the National Bank of Romania. Net of potential cash uses and mandatory reserves, the liquidity buffer was equal to a solid 46% of customer accounts.
UCBRO
We expect the bank's FCC ratio to increase by 1pp-2pp from 13.4% at end-2017 following the capital increase completed in 1Q18, which has in part been offset by the impact of higher risk-weightings for EUR-denominated sovereign and national bank exposures, and by transition to IFRS9 effective as of the start of 2018. Even at this higher level, capitalisation remains at the lower end of peers', particularly in view of higher unreserved impaired loans. Our assessment, however, factors in available ordinary support, if needed, from the parent, as demonstrated by the reinvestment of dividends and recent capital injection.
Asset quality has improved over the last years, in line with the sector, with the bank's impaired loans ratio improving to 8.3% at end-2017 from 13.5% at end-2016 (including 90 days past due but not impaired), driven partly by the curing of a large non-performing exposure. Coverage with IFRS reserves has also improved to a moderate 75%.
Profitability is supported by gross loans growth, across all segments, but particularly in unsecured retail lending (up 25%) through a specialised subsidiary, in line with UCBRO's strategy to increase the weight of this business in its mix. Impairment charges for loans and off- balance sheet credit commitments continue to absorb a significant share of UCBRO's pre-impairment profit (45% in 2017 according to Fitch's calculation), reflecting a less aggressive approach to cleaning up the loan book than some of the peers over the last few years.
UCBRO's gross loans are increasingly funded by customer deposits, as evidenced by a decreasing customer loans-to-deposits ratio, to 105% at end-2017 from 116% at end-2016, which nonetheless remains higher than at rated peers. At the same time, corporate deposits are more prevalent in the bank's funding structure, although the bank's commercial efforts are directed at increasing the retail customer base, which should help the bank attract a higher share of more granular deposits over time. Available liquidity consisting of cash (including high mandatory reserves), unencumbered liquid assets and available credit lines covered 54% of customer deposits at end-2017. Although the bank has cancelled the emergency liquidity line it had in place from the group, we expect ordinary liquidity support from the parent, to continue to be available, if needed.
RATING SENSITIVITIES
IDRS, NATIONAL RATINGS AND SENIOR DEBT
BCR's and UCBRO's IDRs are mainly sensitive to the ability and propensity of their parent banks to provide support if needed. BCR's Long-Term IDR could only be upgraded if both Romania and Erste are upgraded; conversely, they would be downgraded if either Romania or Erste is downgraded.
BRD's Long-Term IDRs are mainly sensitive to changes to the Romanian Country Ceiling. A one-notch change in the SG's ratings would likely have no impact on BRD's IDR.
BT's IDRs are sensitive to the same factors that drive the bank's VR.
VR
Upside for Romanian banks' VRs above the 'bb' category is limited given Fitch's assessment that the operating environment in Romania remains fairly volatile and vulnerable to external shocks, despite a cyclical upswing currently supporting the banks' financials.
A further upgrade of UCBRO's VR would require further reduction in problem assets and improved profitability, while maintaining adequate capitalisation and liquidity and a moderate risk appetite.
The VRs of all three banks could be downgraded if the weaker operating environment or a material increase in risk appetite translates into marked deterioration in the banks' asset quality and capital metrics."
(1 euro=4.6397 lei)
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