Fitch Affirms Romanian ProCredit Bank at 'BBB-'; Upgrades VR to 'b+'

Fitch Ratings - Warsaw - 15 Jan 2024: Fitch Ratings has affirmed ProCredit Bank S.A.'s (PCBR) Long-Term Issuer Default Rating (IDR) at 'BBB-' with a Stable Outlook and upgraded its Viability Rating (VR) to 'b+' from 'b'. A full list of rating actions is below. The upgrade of the VR primarily reflects improvements in PCBR's business model stability, as reflected in structural improvements to underlying profitability, particularly since 2020. The 'b+' VR also reflects ordinary benefits of being a part of the ProCredit group, including a prudent risk profile, and reasonable asset quality and capitalisation, notwithstanding the bank's small size and nominal franchise.   KEY RATING DRIVERS   Support-Driven IDRs: PCBR's IDRs and Shareholder Support Rating (SSR) are driven by our expectation of support from its ultimate parent, ProCredit Holding AG (PCH; BBB/Stable), in case of need. We believe the parent has strong propensity to support its wholly-owned subsidiary, given its strategic importance to the group's longstanding and well-established presence in south-east Europe. The record of ordinary support from PCH, shared branding, strong integration within the group and potential adverse consequences for PCH's reputation if its subsidiary default are important considerations in Fitch's support assessment.   Business Profile Drives VR: PCBR's VR is a notch below the implied VR of 'bb-' because Fitch believes the bank's business profile has a greater impact on the VR than implied by its weighting, primarily given its small absolute size. The VR also factors in reasonable financial metrics with a relatively short record of profitability following years of losses, prudent risk management and low impaired loans.   Niche Franchise in Romania: PCBR is a small SME-oriented bank in the competitive Romanian market. It has below 0.5% share of sector assets, and modestly stronger presence in agricultural and green lending to businesses. Scale limitation is a rating weakness, as these translate into sizeable balance-sheet concentrations, limited pricing advantage and profitability that is weaker-than peers.   Cautious Risk-Management: ProCredit Group deploys its established risk governance at all subsidiaries, including PCBR, which results in prudent underwriting standards and strict risk controls. Our assessment balances the bank's higher risk SME focus with selective underwriting of largely collateralised exposures, moderate growth appetite and limited market-risk exposures.   Resilient Asset Quality: Asset quality remains a rating strength, reflecting prudent underwriting, low levels of problem loans and high levels of coverage. These features mitigate some of the risks arising from a fairly concentrated loan book. At end-3Q23, the bank's impaired loans ratio (1.4%) remained lower than the sector average of 2.6%, but we expect moderate weakening over the next 18 months, amid still high inflation and interest rates. Nevertheless, PCBR's cushion of loan loss allowances provide it with moderate loss absorption capacity.   Low Levels of Profitability: The bank's profitability, remains weaker than that of domestic peers, although it is structurally improving. Revenues are small in absolute size, which increases the bank's vulnerability to event risk, including larger-than-expected credit losses. We expect the bank's operating profit/risk-weighted assets to moderate from a peak reported in 9M23 (2.7%) to just above 1% in the next two years, primarily due to higher operating costs, including from the punitive turnover tax.   Moderate Capital Levels: Fitch views the bank's high common equity Tier 1 (CET1) ratio of 17.1% at end-3Q23 as reasonable for its small nominal capital base and high single-name concentrations. We expect PCBR to be less reliant on ordinary capital support from its shareholder to sustain business growth, given improved structural profitability.   Small Deposit Franchise: Our assessment of PCBR's funding profile reflects its modest deposit franchise and larger-than-peers' reliance on wholesale funding from international financial institutions (IFIs) and the parent. We expect the loans/deposits ratio (107% at end-3Q23, down from 129% at end-2020) to continue to fall at a slower pace. The bank has a strong liquidity buffer (covering 28% of total customer deposits at end-3Q23) and benefits from access to ordinary liquidity support from the group.   RATING SENSITIVITIES Factors that Could, Individually or Collectively, Lead to Negative Rating   Action/Downgrade   PCBR's IDRs and SSR are sensitive to a downgrade of PCH's Long-Term IDR, which in turn is sensitive to changes in our assessment of institutional support for the group from its IFI shareholders. They are also sensitive to a weakening of the bank's strategic importance to PCH.   We would downgrade the VR if the bank's capitalisation materially weakened, with the CET1 ratio falling close to 15% or below, for example, due to excessive and capital-intensive lending growth or large losses. We would also downgrade the bank's VR in case of weaker-than-expected profitability, for example, from higher than expected operating expenses or loan impairment charges.   Factors that Could, Individually or Collectively, Lead to Positive Rating Action/Upgrade   An upgrade of the bank's Long-Term IDR and SSR would require an upgrade of PCH's Long-Term IDR, while the bank remained strategically important to its parent.   A VR upgrade is unlikely given the bank's small size and limited franchise. It would require a meaningful broadening of the bank's franchise and an increase in its size, accompanied by record of a resilient business model and performance over the medium term, but also reduced single-name concentrations.   OTHER DEBT AND ISSUER RATINGS: KEY RATING DRIVERS   The bank's IDRs (xgs) are driven by the parent's IDRs (xgs), which exclude assumptions of extraordinary government support available to PCH. The Short-Term IDRs (xgs) are in accordance with the Long-Term IDR (xgs) and Fitch's rating mapping.   OTHER DEBT AND ISSUER RATINGS: RATING SENSITIVITIES   The bank's IDRs (xgs) remain sensitive to the parent's IDRs (xgs), and in turn to the parent's VR and changes to our assessment of institutional support available from PCH.   VR ADJUSTMENTS   The 'bb+' operating environment score is below the 'bbb' implied score due to the following adjustment reason(s): macroeconomic stability (negative). The 'b+' funding and liquidity score is below the 'bb' implied score due to the following adjustment reason(s): deposit structure (negative).