Fitch Affirms 4 Romanian Banks, Upgrades Banca Comerciala Romana's VR
The agency has also upgraded BCR's Viability Rating (VR) to 'bb-' from 'b+', and affirmed the VRs of UCBRO at 'bb-' and BT at 'bb'. A full list of rating actions is at the end of this rating action commentary.
The upgrade of BCR's VR reflects the bank's progress in resolving its large stock of legacy non-performing loans (NPLs), the increase in coverage of impaired loans with IFRS reserves, and a return to operating profitability in 2015, following full year losses in 2014.
KEY RATING DRIVERS
IDRs AND SUPPORT RATINGS
BCR, BRD, UCBRO
The IDRs and Support Ratings of BCR, BRD and UCBRO reflect the high likelihood of support from their parents. BCR is Erste Group Bank AG's (Erste; BBB+/Stable/bbb+) 93.6%-owned Romanian subsidiary, UCBRO is 95.6%-owned by UniCredit S.p.A (UC; BBB+/Stable/bbb+) and BRD is 60%-owned by Societe Generale (SG; A/Stable/a).
Fitch views the Romanian subsidiary banks, and the wider CEE region, as strategically important for the parent banks, despite recent weak performance. Their importance is evidenced by support track record to date (in terms of funding and emergency liquidity support lines) and by substantial operational and management integration within the group. In addition, the potential cost of support would be manageable, given the small size of the Romanian subsidiary banks relative to parent group assets.
The IDRs of BCR and UCBRO are notched once from their parents IDRs, reflecting their strategic importance. The Stable Outlooks reflect those on their parents. Fitch would rate BRD's Long-Term IDR one notch below that of SG if country risks allowed. Currently, BRD's IDR is constrained by Romania's Country Ceiling (BBB+) and the Stable Outlook reflects that on the Romanian sovereign.
BT
BT's IDRs are driven by the bank's VR, and therefore share the same key rating drivers. The Support Rating of '5' and Support Rating Floor of 'No Floor' reflect Fitch's view that sovereign support, while possible, can no longer be relied upon for BT, as for most other commercial banks in the European Union.
VRs
BCR
The upgrade of BCR's VR reflects the bank's progress in resolving its large stock of legacy NPLs, the increase in coverage of impaired loans with IFRS reserves, and a return to operating profitability in 2015, following full year losses in 2014. BCR's impaired loans ratio fell to 23.1% at end-1H15 (EBA NPE definition) from 30.8% at end-1H14, driven by write-offs, NPL sales and recoveries. Fitch expects this ratio to improve further, in line with a positive outlook for recoveries - given the bank's investments in its recovery function as well as a positive outlook for Romanian economic growth - and for further NPL portfolio sales, and given that new inflows of impaired loans are currently low. Nevertheless, the VR also reflects headline asset quality indicators that remain weak, still high levels of loan concentrations (top 25 loans net of provisions accounted for a high 105% of FCC), and a declining but high share of EUR lending (55% of gross loans at end-1H15).
Coverage of impaired loans with IFRS reserves had increased to a comfortable 77% of impaired loans at end-1H15, further to the high loan impairment charges (LICs) booked mostly in 3Q14. This has significantly reduced net (unreserved) impaired loans to a more adequate 42% of Fitch Core Capital at end-1H15, which supports our view that BCR's capital (FCC of 15.7% at end-1H15) provides reasonable loss absorption capacity if needed.
BCR's return to operating profitability in 1H15 follows full year losses in 2014. Operating performance in 2015 is supported by cyclically low LICs, which are not expected to normalise at this level. Pre-impairment operating performance shows some resilience to pressures on earnings from a fall in net interest income, and a high proportion of low-yielding liquid assets (mostly cash and Romanian government securities). Unencumbered liquid assets (including mandatory reserves) net of all wholesale funding were equivalent to 21% of customer deposits at end-1H15. The bank's adequate funding profile is supported by the increasing portion of customer deposits to 72% of BCR's total non-equity funding at end-1H15, and the bank's leading franchise in retail deposits. The loans to deposits ratio had improved to 100% at end-1H15.
BT
BT's VR reflects its strong deposit funding base and liquidity position, stable profitability and internal capital generation, low loan concentrations, a lower share of foreign-currency lending than at peers and reasonable coverage of impaired loans (high coverage of 90 day past due loans) by reserves. However, the rating also reflects BT's still weak asset quality. The acquisition of VBRO did not materially change the bank's credit profile.
BT's funding profile is a rating strength. At end-1H15, customer deposits accounted for a high 94% of total funding. They were granular and predominantly (59% of the total) retail. At end-1H15, BT's liquidity position was ample. Unencumbered liquid assets (including mandatory reserves) net of wholesale funding maturing over the next 12 months were equivalent to 46% of customer deposits. The loan to deposit ratio deteriorated somewhat to 76% (2014: 68%) but remained comfortable and in line with BT's targets.
Fitch considers BT's capitalisation strong given its Fitch Core Capital (FCC) ratio of 21.3% at end-1H15 (2014: 17.5%). Improvement over 2014 was driven by reasonable internal capital generation and almost flat risk-weighted assets (RWA). The VBRO acquisition resulted in significant one-off gains that were much higher than the increase of RWA and the capital requirement due to the transaction. These gains, booked in 1H15, are already included in the FCC calculation but were not yet reflected in regulatory capital at mid-year (1H15 Tier 1 ratio: 12:0%). Fitch expects the Tier 1 regulatory ratio and FCC to converge at around 20% at year end.
The fall of the coverage ratio to 57% (2014: 71%) and increase of net impaired loans to FCC to 34.8% (2014: 28.8%) partly reflects marginally lower coverage of NPLs in VBRO's loan book and does not materially change the quality of BT's capital.
Asset quality, as measured by the impaired loans ratio, marginally improved over 1H15 to 17.1% (2014: 18.4%), reflecting the fair value treatment of the VBRO portfolio, significant clean-up of the VBRO loan book before the transaction and quite substantial write-offs. Loans over 90 days past due are still relatively high at 9.1%, but are 85% covered with specific provisions and fully covered by IFRS reserves.
UCBRO
UCBRO's VR reflects Fitch's view of the bank's weak asset quality, its only just adequate capital levels and the ongoing constraint on operating profitability from LICs, given that coverage of impaired loans by IFRS reserves is below Fitch-rated peers. However, the VR also factors in the bank's solid pre-impairment operating performance and its ample liquidity.
UCBRO's headline impaired loans ratio (17.8% of gross loans at end-1H15) reflects a relatively conservative identification of potentially problematic exposures. Regulatory NPLs of 12.5% at end-1Q15 compare well with the sector average, with DPD90 exposures somewhat lower at 8.5%. The difference between impaired loans and the NPL/DPD90 ratios is mainly driven by some large, potentially problematic restructured commercial real estate exposures.
Fitch views UCBRO's capitalisation, with a FCC ratio of 13.3% at end-1H15, as only adequate. This reflects the high, albeit decreasing, level of unreserved impaired loans, at end-1H15 amounting to 67% of FCC. Operating performance continues to be constrained by high loan impairment charges, a contracting net interest margin and high levels of liquid assets. Unencumbered liquid assets (including mandatory reserves) were equivalent to 31% of total non-equity funding at end-1H15. Parent funding remains substantial for UCBRO (38% of total non-equity funding at end-1H15), and drives the bank's high loans to deposits ratio of 173% at end-1H15.
RATING SENSITIVITIES
IDRS, SUPPORT RATINGS
BCR and UCTB's IDRs are sensitive to changes in their parents' ratings, or in Fitch's view of the commitment on the part of Erste and UC to their respective subsidiaries, or to the wider CEE region.
A downgrade of BRD's IDR would require SG's IDR to be downgraded to 'BBB+' or below, or a downward revision of the Romanian Country Ceiling, both of which Fitch currently considers unlikely. An upward revision of the Romanian Country Ceiling could lead to an upgrade of BRD's IDR, but limited to one notch. The IDRs and SR are also sensitive to a change in Fitch's view of the propensity of SG to provide support to BRD, which we currently consider unlikely.
BT's IDRs are driven by the bank's VR and therefore share its key rating sensitivities.
VRs
A further upgrade of BCR's VR would require BCR to complete its resolution of legacy NPLs, while maintaining a tight risk appetite, ensuring good asset quality on new loan production, and maintaining current levels of capital.
An upgrade of BT's VR is unlikely in the near term. Over the medium term, an upgrade would require the smooth integration of VBRO, a material improvement in asset quality, and maintenance of strong capital and liquidity positions. A downgrade could result from a material increase in risk appetite, further deterioration of asset quality or materially weaker capitalisation.
An upgrade of UCBRO's VR would require a material reduction in impaired loan volumes and higher levels of coverage with IFRS provisions. Asset quality deterioration, and/or an increase in unreserved net impaired loans relative to capital could result in a downgrade.
The rating actions are as follows:
Banca Comerciala Romana S.A.
Long-term foreign currency IDR: affirmed at 'BBB'; Outlook Stable
Short-term foreign currency IDR: affirmed at 'F2'
Long-term local currency IDR: affirmed at 'BBB'; Outlook Stable
Support Rating: affirmed at '2'
Viability Rating: upgraded to 'bb-' from 'b+'
Banca Transilvania S.A.
Long-term foreign currency IDR: affirmed at 'BB', Outlook Stable
Short-term foreign currency IDR: affirmed at 'B'
Viability Rating: affirmed at 'bb'
Support Rating: affirmed at '5'
Support Rating Floor: affirmed at 'No Floor'
UniCredit Bank S.A.:
Long-term foreign currency IDR: affirmed at 'BBB'; Outlook Stable
Short-term foreign currency IDR: affirmed at 'F2'
Support Rating: affirmed at '2'
Viability Rating: affirmed at 'bb-'
BRD-Groupe Societe Generale S.A.
Long-term foreign currency IDR: affirmed at BBB+'; Outlook Stable
Short-term foreign currency IDR: affirmed at 'F2'
Support Rating: affirmed at '2'.
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