Fitch Affirms 2 Albanian Banks at 'B'; Revises Outlooks to Stable
KEY RATING DRIVERS AND SENSITIVITIES - PCBA's IDRS AND SUPPORT RATING
PCBA's IDRs and Support Rating are underpinned by potential support from its parent, ProCredit Holding AG & Co. KGaA (PCH, BBB/Stable). PCBA's support-driven ratings take into account its majority ownership, common branding, close integration with the parent 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. However, the extent to which support from PCH can be factored into PCBA's ratings is constrained by Fitch's assessment of Albanian country risks.
The revision of the Outlook on PCBA's IDRs to Stable from Negative reflects Fitch's revised assessment of country risks in Albania. This is based on improved prospects for fiscal consolidation and structural reform given the current government's policy priorities, the granting of EU candidate status to Albania and the country's IMF programme. It also considers the improving, albeit still low, domestic growth outlook.
PCBA's IDRs and Support Rating remain sensitive to changes to Fitch's view of country risks in Albania. A weakening in Fitch's view of the parental support available to PCBA could also result in a downgrade of the bank's ratings, although this is not expected by Fitch.
KEY RATING DRIVERS AND SENSITIVITIES - PCBA's VR
PCBA's VR reflects the still challenging operating environment, which leave the bank's performance, asset quality and potentially capitalisation vulnerable to local market shocks, and its modest franchise (around 3% share of sector assets at end-June 2014). It also considers a high level of foreign currency lending (typical for the sector), mostly to unhedged borrowers, which exposes the bank to additional credit risks in the event of a potential sharp depreciation of the local currency (not currently Fitch's base case expectation).
However, these factors are balanced by generally satisfactory asset quality that outperforms the sector average, reasonable capitalisation and the bank's centralised risk management and control framework that benefits from PCH group influence. Liquidity is also comfortable and refinancing risk limited. Furthermore, it takes into account Fitch's expectation that the bank's asset quality should start to stabilise at more acceptable levels following the clean-up of its loan book to medium-sized borrowers and a tightening of underwriting standards.
PCBA's VR could be downgraded in the event of a material worsening of the operating environment or a sharp deterioration in asset quality that puts pressure on profitability and capitalisation. Upside potential is currently limited given Albanian country risks.
KEY RATING DRIVERS AND SENSITIVITIES - BKT's IDRs AND VR
BKT'S IDRs are driven by the bank's standalone profile, as captured in its 'b' VR. The revision of the Outlook on BKT's Long-term IDRs reflects the reduced risk of a deterioration in Albania's sovereign credit profile and operating environment, which could have weighed on BKT's financial metrics.
BKT's VR reflects the still challenging operating environments in Albania and Kosovo (the latter accounting for 18% of the end-9M14 loan book), the bank's opportunistic strategy and fairly aggressive risk appetite, and significant related party operations. However, the VR also considers the bank's generally satisfactory financial metrics, the breadth of its franchise in the Albanian market (BKT is ranked first by total assets and deposits among Albanian banks) and limited non-deposit funding.
BKT's exposure to related parties was a significant USD50m, equal to 21% of Fitch core capital (FCC), at end-9M14, consisting largely of off-balance sheet items (swap transactions) with Aktifbank (BKT's sister bank in Turkey). In addition, BKT occasionally invests in securities issued by companies indirectly linked to its shareholder, the Turkish Calik group (these exposures were reduced to 7% of BKT's FCC at end-3Q14). At end-9M14 BKT also held asset-backed securities (equal to 34% of FCC) originated by Aktifbank, although Fitch understands that BKT is gradually decreasing its participation in this programme.
Fitch regards BKT's capitalisation (end-9M14: FCC ratio of 18.8%, regulatory capital adequacy of 17.3%) as only moderate given related party exposures, loan book concentrations, the 0% risk-weighting applied to Albanian government bonds (around 26% of assets) and fairly significant unreserved NPLs. The bank's regulatory capital ratios will also fall slightly due to the implementation of Basel II rules in Albania in 2015.
A high level of foreign currency lending (end-9M14: 46% of gross loans) is a source of risk, although the historical stability of the LEK/euro exchange rate has largely mitigated this so far. In addition, a large portion of the bank's lending is medium to long term and many of the largest exposures are structured with bullet repayment structures with interest payable only semi-annually or annually in some cases. Consequently, the bank is exposed to seasoning risks.
BKT's reported NPL ratio (loans included in the substandard, doubtful and loss loan categories as defined by Bank of Albania) was a high 12.6% at end-3Q14 (albeit significantly below the 25% ratio for the sector). IFRS loan loss reserves coverage of NPLs is also low, reflecting reliance on often illiquid collateral. However, regulatory reserves are higher and these are used to calculate regulatory capital adequacy; at end-9M14 regulatory NPLs net of specific NPL reserves were equal to an acceptable 20% of FCC.
BKT's securities portfolio was a substantial 43% of assets at end-3Q14, or 5x FCC. The portfolio comprises primarily Albanian government securities (end-9M14: 64% of the securities book), which form an important part of BKT's liquidity buffer as they can be repoed with the Bank of Albania. However, BKT also invests opportunistically in the bonds of a broad range of emerging European issuers, mainly from Russia and Turkey, and is active in participating in syndicated loans to banks in the region (loans and advances to banks comprised 5% of assets at end-9M14 and interbank placements a further 10%). Fitch views the credit risk of these exposures as mostly moderate relative to the risks faced by BKT on its home markets. However, the securities positions are a source of market risk.
Overall liquidity ratios are comfortable, supported by a stable deposit base (86% of total funding at end-3Q14, mainly retail). The loans/assets ratio was a low 30% at end-9M14, and the less liquid portion of the balance sheet (including some loans to banks) amounted to around half of total assets. However, foreign currency liquidity could come under pressure in a stress scenario given that approximately half of BKT's deposits are euro-denominated.
BKT's operating profitability has been consistently good, supported by low loan impairment charges. In addition, ROE has historically been strong, also in comparison to peers; it remained good in 9M14 (17.9%) despite declining.
A deterioration in the operating environment and the sovereign credit profile could result in a downgrade of BKT. A marked deterioration in asset quality or higher risks stemming from related-party transactions or increased risk appetite could also trigger a downgrade. Upside potential for the ratings is limited, given Albanian country risks.
KEY RATING DRIVERS AND SENSITIVITIES - BKT's SUPPORT RATING AND SUPPORT RATING FLOOR
BKT's '5' Support Rating reflects Fitch's view that support from BKT's owner and from the Albanian state, although possible, cannot be relied upon. The Support Rating Floor of 'No Floor' mainly reflects the sovereign's limited sovereign financial flexibility and potential constraints on its ability to provide foreign currency support to banks in case of need.
The rating actions are as follows:
BKT
Long-term foreign and local currency IDRs: affirmed at 'B', Outlooks revised to Stable from Negative
Short-term foreign and local currency IDRs: affirmed at 'B'
Viability Rating: affirmed at 'b'
Support Rating: affirmed at '5'
Support Rating Floor: affirmed at 'No Floor'
PCBA
Long-term foreign currency IDR: affirmed at 'B', Outlook revised to Stable from Negative
Long-term local currency IDR: affirmed at 'B+'; Outlook revised to Stable from Negative
Short-term foreign and local currency IDRs: affirmed at 'B'
Viability Rating: affirmed at 'b'
Support Rating: affirmed at '4'
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