OREANDA-NEWS. Fitch Ratings has affirmed ProCredit Bank (Macedonia)'s (PCBM) Long-term Issuer Default Ratings (IDRs) at 'BBB-' with a Negative Outlook. At the same time, the agency has upgraded the Viability Rating (VR) to 'bb-' from 'b+'. A full list of rating actions is available at the end of this rating action commentary.

The upgrade of PCBM's VR reflects the bank's track record of stable financial performance and sound asset quality through the cycle, compared with the sector average in Macedonia and peers. It also reflects a reassessment of the bank's credit profile, based on comparisons of financial metrics with other Fitch-rated banks in the PCH Group.

KEY RATING DRIVERS
IDRS
The IDRs and Support Ratings of PCBM reflect the likelihood of support from its parent, ProCredit Holding AG & Co. KGaA (PCH, BBB/Stable), based on 100% ownership by the parent, the strategic importance of south eastern Europe to PCH, strong integration within the parent group and a track record of capital and liquidity support. Absent of Country Ceiling constraints, these considerations are typically reflected in a one notch differential between the rating of the parent, PCH, and that of PCBM.

PCBM's IDRs are at the Macedonian Country Ceiling (BBB-), and above the Macedonian sovereign Long-term foreign-currency IDR (BB+), as Fitch believes there is strong support from the bank's Germany-based parent, PCH, and if needed, from PCH's core international financial institution shareholders, which would likely allow PCBM to withstand a sovereign debt crisis.

The Negative Outlook reflects the Outlook on the Macedonian sovereign rating (see 'Fitch Revises Macedonia's Outlook to Negative, Affirms at 'BB+' dated 21 August 2015 on www.fitchratings.com) and in turn the possibility that the Country Ceiling may also be lowered.

VR
The upgrade of PCBM's VR reflects the bank's track record of stable financial performance and sound asset quality through the cycle, compared with the sector average in Macedonia and compared with Fitch-rated peers in the PCH Group. Our reassessment of the bank's financial performance takes into account recent improvements in profitability metrics, supported by low loan impairment charges reflecting the bank's sound asset quality.

Impaired loans were 4.5% of gross loans at end-3Q15; however, this reflects a conservative definition of impairment as loans past due 30 days. The bank benefits from PCH's participation, in terms of strong corporate governance and risk management frameworks.

The VR also reflects moderate capitalisation and the bank's small size, which constrains its internal capital generation capacity. We view the bank's Fitch Core Capital of 11.2% at end-3Q15 as only moderate given the bank's risk profile, limited internal capital generation and growth plans. However, our view of capital is partly mitigated by sound reserve coverage of impaired loans (86% at end-3Q15), and ordinary capital support from the parent through subordinated debt and capital injections, if required to support growth.

The bank remains a small bank with a limited franchise in Macedonia, accounting for 3.8% of total banking sector assets at end-3Q15.

RATING SENSITIVITIES
IDRS AND SENIOR DEBT
PCBM's IDRs are at the level of Macedonia's Country Ceiling. The IDR and Support Rating would therefore be sensitive to a downward revision of the Country Ceiling.

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.

VR
A downgrade of PCBM's VR could result from significant deterioration in capital and asset quality metrics. A further upgrade of the VR is unlikely in the short-term following today's rating action. A VR upgrade would be contingent on economies of scale, and improved internal capital generation capacity, while maintaining sound asset quality and capital levels.

The rating actions are as follows:

PCBM
Long-term foreign currency IDR affirmed at 'BBB-'; Outlook Negative
Short-term foreign currency IDR affirmed at 'F3'
Long-term local currency IDR affirmed at 'BBB-'; Outlook Negative
Short-term local currency IDR affirmed at 'F3'
Viability Rating upgraded to 'bb-' from 'b+'
Support Rating affirmed at '2'