OREANDA-NEWS. Fitch Ratings has affirmed ProCredit Holding AG & Co. KGaA's (PCH) Long-term Issuer Default Rating (IDR) at 'BBB' with Stable Outlook. The agency has also affirmed the IDRs of three subsidiary banks in Bosnia, Serbia and Kosovo.

At the same time, the agency upgraded the Viability Rating (VR) of ProCredit Bank ad Beograd (Serbia; PCBS) to 'b+' from 'b'. A full list of rating actions is available at the end of this rating action commentary.

PCH's IDRs and Support Rating are driven by Fitch's view of the potential support it can expect to receive from its core international financial institution (IFI) shareholders (end-2014: combined stake of 37.2%). The long-term and strategic commitment of these shareholders is highlighted by their role within PCH's structure.

The IDRs and Support Ratings of ProCredit Bank d.d. Sarajevo (PCBiH), PCBS and ProCredit Bank (Kosovo) (PCBK) reflect the likelihood of support from their parent, PCH. The support considerations include the 100% ownership, the strategic importance of south eastern Europe to PCH, strong integration within the parent and a track record of capital and liquidity support.

KEY RATING DRIVERS

PCH'S IDRS AND SUPPORT RATING
Fitch's view of support for PCH is based on the group's ownership structure, and the role of its core shareholders, and the important and successful track record of PCH in fulfilling its mission of responsible banking to small businesses in emerging markets. This mission is in keeping with the developmental mandates of its core shareholders. In Fitch's view, PCH's restructuring, involving an exit from certain countries will not significantly weaken its overall developmental mission.

PCH's VR
PCH's 'bb-' VR reflects the group's exposure to difficult emerging market environments, and the credit risks inherent in SME lending. As a result, Fitch regards group capitalisation (Fitch Core Capital (FCC) of 10.2% at end-2014) as only moderate. High double leverage ratio at the holding company level is also a rating-negative.

However, the weaknesses are balanced by strong corporate governance and risk management across the group, underpinned by supervision by the German Banking Regulator (BaFin) of the consolidated PCH group, and by solid management. The group has built a track record of strong asset quality through the cycle, and its performance has been resilient: pressure on revenues from tightening net interest margins is being offset by efficiency gains and reasonable loan impairment charges.

Revenues for the group are well-diversified across individual ProCredit banks (present in 19 emerging market countries at end-1Q15); however, at end-1Q15, 61% of total group operating income was from seven banks in south eastern Europe. Fitch understands from management that PCH's exit from certain countries in 2015 will have a minor impact on the group's profile, given that these subsidiaries were not key contributors to group assets (about 12% of total group assets at end-2014) or earnings. Liquidity is well-managed across the group, and adequate reserves are held to cover unexpected worst-case liquidity needs from subsidiary banks.

PCBiH, PCBS, PCBK - IDRs AND SUPPORT RATINGS
The IDRs and Support ratings of PCBiH, PCBS and PCBK are driven by potential support from its parent, PCH. However, the extent to which such support can be factored into the ratings is constrained by Fitch's assessment of risks relating to their respective countries. PCBS's Long-term foreign currency IDR is constrained by Serbia's Country Ceiling of 'B+', while PCBIH's and PCBK's Long-term foreign-currency IDRs reflect Fitch's assessment of country risks in Bosnia and Kosovo, respectively. The one-notch uplift of PCBS's Local Currency IDR above both the Country Ceiling and the one-notch uplift of PCBiH's Local Currency IDR the bank's Foreign Currency IDR reflect a lower probability of restrictions being placed on servicing of local currency obligations in case of systemic stress.

PCBiH, PCBS, PCBK - VR
The upgrade of PCBS's VR reflects the bank's track record of reasonable asset quality through the cycle compared with the sector average in Serbia, and adequate capitalisation, particularly in light of sound reserves coverage of impaired loans. However, the bank operates in an operating environment that continues to be difficult, and remains a small bank with a limited franchise in Serbia (2.5% of total banking sector assets at end-2014). The bank reported IFRS impaired loans at end-2014 of 2.9% at end-2014, and a high FCC ratio of 16.2%.

The VR of PCBK reflects high risks from the operating environment, making its performance vulnerable to potential domestic market shocks. PCBK is the largest bank in Kosovo, and its large franchise affords it the benefit of economies of scale. Internal capital generation at PCBK has been stable through the cycle, and has supported capital ratios at solid levels (FCC of 17.3% at end-2014) despite regular dividend payments to PCH.

PCBiH's VR reflects the bank's constrained revenue generation capacity, due to its small scale and its franchise limitations. Fitch views the bank's FCC of 11.2% at end-2014 as modest, given the bank's weak internal capital generation capacity and a difficult operating environment. The bank is dependent on regular capital support from PCH.

All the subsidiary banks' VRs benefit from PCH's participation, in terms of strong corporate governance and risk management frameworks, and from track records of asset quality which have outperformed their respective domestic banking sectors.

PCH - TRUST PREFERRED SECURITIES
The rating of PCH's TPS is notched down from the IDR, reflecting Fitch's opinion that potential support from PCH's shareholders also helps reduce the non-performance of these instruments. As such, their rating is sensitive to a change in PCH's IDR. Fitch notes that the holders of the TPS largely consist of PCH's shareholders or creditors, who typically share PCH's developmental goals.

The three-notch difference between PCH's IDR and the rating of the TPS consists of two notches for loss severity, to reflect the deeply subordinated status for this instrument, and one notch for non-performance risk, reflecting the terms and conditions of the notes (notably the triggers for non-payment of the coupon).

RATING SENSITIVITIES

IDRS AND SUPPORT RATINGS
A change in Fitch's view of the support available to PCH, for example, due to the exit of one or more core shareholders, or a change in their support stance, could be negative for PCH's IDRs. However, the Stable Outlook reflects Fitch's view that the propensity and ability of PCH's owners to provide support are unlikely to change.

Changes in Fitch's perception of risks relating to Kosovo or Bosnia in either direction could affect PCBK's and PCBiH's IDRs and Support Ratings. Movements in Serbia's sovereign rating, accompanied by a change in the Country Ceiling, are likely to affect PCBS's IDRs.

PCH - VR
Upside in PCH's VR could result from significant improvements in the double leverage ratio at the holding company level, increased capital levels on a consolidated basis and an improvement in the operating environments. A marked deterioration in asset quality and capitalisation would be negative for the VR.

SUBSIDIARY BANKS - VR
The banks' VRs 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. Upside potential is currently limited for the VRs of PCBK and PCBS given the challenges of their local operating environments.

Positive pressure on PCBiH's VR would depend on the bank building a track record in generating stronger operating revenues and improving efficiency as well as strengthening its franchise.

The rating actions are as follows:

PCH
Long-term foreign currency IDR: affirmed at 'BBB'; Outlook Stable
Short-term foreign currency IDR: affirmed at 'F2'
Viability Rating: affirmed at 'bb-'
Support Rating: affirmed at '2'
Tier 1 trust preferred securities (TPS): affirmed at 'BB'

PCBiH
Long-term foreign currency IDR: affirmed at 'B'; Outlook Stable
Short-term foreign currency IDR: affirmed at 'B'
Long-term local currency IDR: affirmed at 'B+' Outlook Stable
Short-term local currency IDR: affirmed at 'B'
Viability Rating: affirmed at 'b-'
Support Rating: affirmed at '4'

PCBS
Long-term foreign currency IDR: affirmed at 'B+'; Outlook Stable
Short-term foreign currency IDR: affirmed at 'B'
Long-term local currency IDR: affirmed at 'BB-' Outlook Stable
Short-term local currency IDR: affirmed at 'B'
Viability Rating: upgraded to 'b+' from 'b'
Support Rating: affirmed at '4'

PCBK
Long-term foreign currency IDR: affirmed at 'B+'; Outlook Stable
Short-term foreign currency IDR: affirmed at 'B'
Viability Rating: affirmed at 'b'
Support Rating: affirmed at '4'