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BUCHAREST (Romania), August 10 (SeeNews) - Moody's said it has upgraded the long-term local and foreign-currency deposit ratings of Romania's top lender Banca Comerciala Romana (BCR), part of Austria's Erste Group, to Baa3/Prime-3 from Ba1/Not Prime.
At the same time, the ratings agency has upgraded the bank's baseline credit assessment (BCA) to b1 from b2, its adjusted BCA to ba2 from ba3 and its long-term and short-term Counterparty Risk Assessment (CRA) to Baa2(cr)/Prime-2(cr) from Baa3(cr)/Prime-3(cr).
The outlook on BCR's local-currency deposit rating remains positive, whilst on the foreign-currency deposit rating it is changed to stable from positive, Moody's said in a statement late on Wednesday.
Moody's last rated BCR in September 2016, when it has changed the outlook on the bank to positive from stable and affirmed BCR's Ba1 long-term local and foreign-currency deposit ratings and its Baa3(cr) Counterparty Risk Assessment (CRA).
At the beginning of August, Austria's Erste Group said the net profit of BCR halved to 305 million euro ($361 million) in the first six months of 2017, compared to 636 million euro in the same period of last year.
The decline was mainly due to the base effect resulting from the recording of consistent revenues from the sale of holdings and reps in the balance sheet in the first half of 2016 and of risk provisions generated by recoveries from non-performing loans in the first half of 2015.
Moody's also said in the statement:
RATIONALE FOR UPGRADING BCR's STANDALONE BASELINE CREDIT ASSESSMENT
The upgrade of BCR's BCA to b1 from b2 reflects ongoing improvements in the bank's asset quality, profitability, capital adequacy and funding structure. The bank's non-performing loans (NPL) ratio has declined to 11.8% in December 2016 from 20.2% as of December 2015 owing to the sale and write-off of problem loans, restructuring procedures and increased recoveries as economic conditions improve. The bank's NPL coverage ratio has improved in the past few years and stood at a comfortable level of 85.3% as of December 2016. According to the bank's H1 2017 results update, NPLs ratio was 11%, whilst NPL coverage was 92.1% as of June 2017.
In H1 2017 the bank reported a decrease in net income to RON305 million, down by 52% year-on-year and translating to a return on assets (ROA, annualised) of 1.33%. The decline was mostly due to the non-recurrence of last year's significant release of impairment provisions and one-off gains from the sale of the shares in Visa Europe. Recovering profitability and reduced risk exposures due to balance sheet deleveraging in the past six years have led to better capital adequacy with a Tier 1 ratio (including retained earnings for the year) of 18.64% as of December 2016, up from 16.04% as of December 2015. The aforementioned deleveraging has resulted in a more balanced funding structure of the bank as the gross loan-to-deposit ratio gradually declined to 74% as of year-end 2016 from 101% as of year-end 2014.
Despite the considerable strengthening of BCR's risk profile, the rating agency has taken into account the temporary nature of some of these improvements. Moody's expects that BCR's earnings will moderate at lower, albeit good levels when credit costs normalise at higher levels as the bank's recently extended loans season. In addition, according to Erste Group, BCR will transition to Internal ratings-based (IRB) approach from standardised approach for capital adequacy calculation, which will lead to higher level of risk-weighted assets and therefore lower capital ratios. Consequently, the one-notch upgrade of BCR's BCA reflects the balance between the recent improvements and the rating agency's forward looking view on the bank's credit profile.
RATIONALE FOR UPGRADING THE DEPOSIT RATINGS
According to Moody's, the upgrade of BCR's deposit ratings was driven by: (1) the upgrade of the bank's BCA to b1 from b2; (2) the rating agency's unchanged high affiliate support assumption from its parent, Austria's Erste Group Bank AG (Erste; LT Bank Deposits A3 positive; BCA baa2), resulting in a two-notch rating uplift and a higher adjusted BCA of ba2 from ba3 previously; (3) higher rating uplift from Moody's Advanced Loss Given Failure (LGF) analysis of two notches from one notch previously; and (4) no rating uplift (one notch of uplift previously) from unchanged assumptions of a moderate probability of government support.
The one notch increase in the uplift from Moody's Advanced LGF analysis is driven by the change of the rating agency's assumption on the proportion of the bank's deposits considered as junior, comprising institutional and corporate deposits. As such, Moody's has applied a 26% proportion of junior deposits, which is the standard assumption based on the EU average of deposits outside of deposit guarantee schemes, an increase from the previously applied 20%. The higher level of junior deposits implies a larger volume of bail-inable obligations and therefore a "very low" loss given failure.
Moody's continues to assume a moderate probability of government support for BCR's deposits in the event of its failure, owing to its position as the largest commercial bank in the country. Nevertheless, the government support no longer results in an additional notching uplift (previously one notch of uplift) at Romania's (Baa3 stable) current rating level.
RATIONALE FOR DIVERGING OUTLOOKS ON THE DEPOSIT RATINGS
The positive outlook on BCR's long-term local-currency deposit rating reflects Moody's expectation of further improvements in the bank's credit profile over the next 12-18 months owing to continued reduction in problem loans and maintaining adequate capitalisation. The bank's long-term foreign-currency deposit rating is at the level of the foreign-currency deposit ceiling for Romania and will be constrained at that level if the local-currency deposit rating is upgraded.
RATIONALE FOR UPGRADING THE CRA
The upgrade of BCR's CRA to Baa2(cr)/Prime-2(cr) from Baa3(cr)/Prime-3(cr) was driven by: (1) the upgrade of the bank's BCA; (2) maintaining the two-notch uplift from parental support; and (3) maintaining the three-notch uplift from Moody's LGF analysis. Moody's continues to assume a moderate probability of government support for BCR's CRA in the event of its failure. Nevertheless, the government support does not results in an additional notching uplift as the Baa2(cr) CRA is higher than the government's Baa3 rating and will therefore be constrained at this level going forward.
WHAT COULD MOVE THE RATINGS UP/DOWN
An upgrade of BCR's local-currency deposit ratings could be prompted by either (a) an upgrade of its BCA, or (b) higher affiliate support uplift owing to higher parental support assumptions, or (c) an increase in uplift resulting from Moody's LGF analysis. The bank's Baa3 long-term foreign-currency deposit rating is at the level of the foreign-currency deposit ceiling for Romania and will be constrained at that level if the local-currency deposit rating is upgraded. BCR's BCA could be upgraded in the event of a further material improvement in asset quality while maintaining its adequate capitalisation and profitability.
A downward pressure on BCR's deposit ratings could arise due to a downgrade of its BCA and/or a reduction in rating uplift as a result of Moody's LGF analysis. BCR's BCA could be downgraded in case of a material erosion of the bank's capital from high loan loss provisions and/or declining revenues."