OREANDA-NEWS. Fitch Ratings has affirmed ProCredit Bank Macedonia's (PCBM) Long-Term foreign currency and local currency Issuer Default Ratings (IDRs) at 'BBB-' with a Stable Outlook and its Viability Rating (VR) at 'b+'. A full list of rating actions is at the end of this rating action commentary.

KEY RATING DRIVERS - IDRS AND SUPPORT RATING
PCBM's IDRs and Support Rating are driven by potential support from its parent, ProCredit Holding AG & Co. KGaA (PCH, BBB/Stable). The support considerations take into account the majority ownership, common branding, close parental integration and a track record of timely capital and liquidity support to group banks from PCH. PCH's ratings are based on Fitch's view of the support it could expect to receive from its core international financial institution (IFI) shareholders when needed. The PCH group is subject to consolidated supervision by BaFin.

RATING SENSITIVITIES - IDRS AND SUPPORT RATING
PCBM's IDRs are at the level of Macedonia's Country Ceiling (BBB-). The IDR and Support Rating would therefore be sensitive to a downgrade of the Country Ceiling. An upgrade of the Macedonian Country Ceiling would not trigger an upgrade of PCBM's IDRs given the one-notch difference between the bank's and PCH's own support-driven IDRs.

A downgrade of PCH's ratings or a weakening in Fitch's view of the parental support available to the bank would also result in a downgrade of its IDRs and Support Rating, although neither is expected by Fitch.

KEY RATING DRIVERS - VR
PCBM's VR reflects its moderate franchise (around 4.5% share of sector assets at end-June 2014) and limited size, resulting from its focus on lending to small- and medium-sized businesses and entrepreneurs. It also considers the challenging operating environment, which leaves its performance, asset quality and capitalisation vulnerable to local market shocks.

A high level of foreign currency lending (typical for the sector, equal to around 60% of the loan portfolio at end-June 2014), mostly to unhedged borrowers, is also ratings negative, exposing the bank to additional credit risks in the event of a potential sharp depreciation of the local currency. However, this is not Fitch's base case expectation and the agency notes the historical stability of the currency peg. In light of the operating environment and the high level of predominantly euro-denominated loans, Fitch considers the bank's capitalisation to be only moderate.

These factors are balanced by PCBM's robust track record of asset quality that typically outperforms the sector average. Reserves coverage of existing overdue loans is also strong and together with reasonable internal generation capacity helps support PCBM's otherwise moderate capital position. In addition, Fitch expects the recently implemented cost efficiency and optimisation measures to support the bank's medium-term performance in the context of a tighter margin environment. The VR also considers the support of the group's good centralised risk management and control framework and comfortable liquidity.

RATING SENSITIVITIES - VR
The bank's VR could be downgraded in the event of a material worsening of the operating environment and a sharp deterioration in asset quality that puts pressure on profitability and capitalisation. An upgrade is unlikely in the medium term as it would require PCBM demonstrating a more established franchise and increased scale, while maintaining a proven track record of sound asset quality, comfortable liquidity and stable capitalisation.

The rating actions are as follows:

Long-term foreign currency IDR affirmed at 'BBB-'; Outlook Stable
Short-term foreign currency IDR affirmed at 'F3'
Long-term local currency IDR affirmed at 'BBB-'; Outlook Stable
Short-term local currency IDR affirmed at 'F3'
Viability Rating: affirmed at 'b+'
Support Rating: affirmed at '2'