Fitch Ratings has affirmed BRD-Groupe Societe Generale S.A.'s (BRD) and Banca Comerciala Romana S.A.'s (BCR) Long-term Issuer Default Ratings (IDR) at 'BBB+' and Garanti Bank S.A.'s (Garanti Romania) Long-term IDR at 'BBB-'. The Outlooks are Stable, said the agency in a statement.
The agency has also downgraded BCR's Viability Rating (VR) to 'b+' from 'bb-'.
BCR and BRD remain strategically important to their respective parents
"BCR's, BRD's and Garanti Romania's IDRs reflect the high likelihood of support from their respective majority shareholders: Erste Group Bank AG, Societe Generale and Turkiye Garanti Bankasi A.S.
Fitch believes that BCR and BRD remain strategically important to their respective parents, notwithstanding the weak performance of the Romanian market for the past four years, in light of Erste's and SG's broader focus on Central and Eastern European (CEE), the subsidiaries' strong integration into their respective groups and the track records of support to date.
Fitch classifies Garanti Romania as a strategically important subsidiary of TGB. Fitch's view on the high likelihood of support for Garanti Romania reflects the strong integration of the bank with TGB (the bank shares the parent's brand, systems and sources top management from TGB), high reputational risk to TGB from any default of Garanti Romania, the history of capital support and Garanti Romania's small size relative to TGB. At the same time, Fitch does not view Romania as a core market for TGB, despite its long presence in the country", said the agency.
BCR and BRD ratings, constrained by Romania's Country Ceiling of 'BBB+'
"BCR's and BRD's IDRs are constrained by Romania's Country Ceiling of 'BBB+' and the Stable Outlooks on the banks' IDRs reflect that on the sovereign. Any change in the Country Ceiling would likely result in a change in the banks' Long-term IDRs.
Any marked reduction in the parent banks' commitment to the CEE region and to the Romanian market in particular (not Fitch's base case expectation at present) could also trigger a negative rating action.
In Fitch's view there is a clear intention to ultimately reduce state support for systemically important banks in Europe. If the agency changes its view about the propensity of the Austrian or French authorities to provide support to major Austrian and French banks, this would lead to downward pressure on Erste's and SG's IDRs, Support Ratings and Support Rating Floors.
However, any downside risk for Erste and SG's Long-term IDRs should be limited to one notch, to the level of their 'a-' VRs, and this would therefore be unlikely to result in a downgrade of BCR or BRD.
Garanti Romania's IDRs are sensitive to changes in TGB's IDRs, and the Stable Outlook mirrors that on TGB. Garanti Romania's IDRs could also be downgraded if there were a marked reduction in the strategic importance of the bank for TGB", added the agency.
The downgrade of BCR
"The downgrade of BCR's VR reflects (i) high and still rising impaired and non-performing loans (NPLs, defined as loans more than 90 days overdue); (ii) the high level of uncovered impaired loans relative to Fitch core capital (FCC); and (iii) the bank's continued weak performance in 1H13 following the large loss in 2012.
The VR also considers (i) high reliance on parent funding; and (ii) tail risks related to the significant amount of foreign currency lending. At the same time, BCR's VR also reflects (i) the bank's significant loss absorption capacity; (ii) the slowdown of NPL growth in 2013 and improved coverage of impaired loans; (iii) solid pre-impairment profitability, driven by high cost efficiency and a healthy interest margin; and (iv) comfortable liquidity.
The share of problem loans continued to rise in 1H13, with NPLs reaching 25.6% of gross loans and impaired exposures (as reported in IFRS accounts; this also includes most restructured loans) standing at 29.2%. While the coverage ratio of both NPLs (70%) and impaired loans (62%) are broadly in line with peers, the uncovered portions of NPLs and impaired loans were equal to a sizable 55% and 78%, respectively, of FCC at end-1H13.
Fitch calculates that BCR could have created reserves equal to 80% of impaired loans and still maintained a FCC ratio of 9.4% at end-1H13 (compared with the actual level of 15.6%), which suggests significant loss absorption capacity.
Furthermore, pre-impairment profit in both 1H13 and 2012 was equal to about 4% of average gross loans, meaning that it should be possible to further increase provisioning without eating into capital. The reliance on parental funding fell slightly to 33% of liabilities at end-1H13 (2012: 35%), but BCR still relies on Erste for the bulk of its foreign currency funding.
The share of foreign currency loans remains high for both retail exposures and non-retail exposures exposing the bank to asset quality risks related to exchange rate movements, especially in the retail portfolio. Fitch expects the share of foreign currency loans to gradually decrease following the bank's decision made late last year to discontinue foreign currency lending to unhedged borrowers and focus on local currency loans.
Fitch expects BCR to be able to improve reserve coverage of impaired loans without eating significantly into capital, and therefore views a further downgrade of the VR as unlikely at present. However, a sharper than expected further deterioration of asset quality would put downward pressure on the VR. An upgrade would require tangible improvement in asset quality metrics and loan impairment charges as well as continued sound pre-impairment profitability in an environment of lower interest rates and limited growth.
Garanti Romania
Garanti Romania's 'b' VR reflects its limited track record, modest franchise high loan concentrations, deterioration in asset quality (with NPLs rising to 14.95% at end-1H13, but still below the sector average of 20.3%) and reliance on foreign deposits (26% of liabilities at end-1H13 and parent funding (15.2%) . The VR also considers the improvement in the FCC ratio to 18% at end-1H13 after a EUR20m equity injection in October 2012, with impaired loan coverage in line with peers, and the currently comfortable liquidity position. Profitability improved in 1H13 after losses in 2011 and 2012, driven by a reduction in impairment charges and higher trading gains.
An upgrade of the VR would require a stabilisation of asset quality and evidence that the bank can generate sustainable profits. A downgrade of the VR could result from a marked deterioration in asset quality and profitability, leading to erosion of capital.
BRD is Romania's second-largest bank, with around 12.7% of total assets at end-1H13. Fitch has not undertaken a full review of BRD, and has therefore not assigned a VR to the bank", said Fitch.
The rating actions are as follows:
- BCR Long-term foreign currency IDR affirmed at 'BBB+'; Outlook Stable; Short-term IDR affirmed at 'F2'; Support Rating affirmed at '2'; Long-term local currency IDR affirmed at 'BBB+'; Outlook Stable; Viability Rating downgraded to 'b+' from 'bb-'
- BRD Long-term IDR affirmed at 'BBB+'; Outlook Stable; Short-term IDR affirmed at 'F2'; Support Rating affirmed at '2'
- Garanti Romania Long-term IDR affirmed at 'BBB-'; Outlook Stable; Short-term IDR affirmed at 'F3'; Support Rating affirmed at '2' Viability Rating affirmed at 'b'
