RSS
Fitch Affirms BCR at 'BBB+'; Outlook Negative
Fitch Ratings has affirmed Banca Comerciala Romana S.A.'s (BCR) Long-Term IDR at 'BBB+' with a Negative Outlook and Viability Rating (VR) at 'bb+'. A full list of rating actions is at the end of this commentary.
KEY RATING DRIVERS
BCR's Long Term IDR and Shareholder Support Rating (SSR) are driven by our view of potential support from its parent, Erste Group Bank AG (Erste, A/Stable), and are capped by Romania's Country Ceiling. The Negative Outlook reflects that on the Romanian sovereign IDR and Fitch's expectation that the Romanian Country Ceiling will move in tandem with the sovereign rating.
The bank's VR captures its diversified business profile, solid capital position, healthy earnings and good asset quality
Parent Support: We consider probability of support for BCR from Erste to be high, but constrained by Romania's Country Ceiling. Absent this constraint, BCR would be rated one notch below the parent. Our support also considers BCR's strategic importance to the parent, high reputational risks for the parent and its international franchise and high level of integration within a broader Erste group.
Economic Pressures Rise: Romania's significantly slowing economic growth in 2023 coupled with high inflation and monetary tightening will weigh on banking sector performance in 2023, limiting lending growth and exerting pressure on banks' operating expenses. However, improved interest margins, low unemployment and generally reasonable underwriting should contain most of these risks. We believe that the operating environment for banks will be consistent with a 'bb+' score, even in case of a one-notch downgrade of the sovereign IDR
Diversified Business Profile: BCR is the second-largest bank in Romania. Its traditional banking business model is well balanced between retail and corporate customers on both sides of the balance sheet. BCR's franchise benefits from being part of the Erste banking group.
Conservative Risk Profile: Conservative underwriting, diversified loan book and good risk control framework underpin BCR's risk profile. We believe that BCR's franchise strength allows the bank to apply conservative underwriting criteria and keep market shares.
Asset Quality Risks Increase: BCR's asset quality is set to weaken as the Romanian economy slows while cost of living, and inflation remain a challenge for some of the bank's borrowers. However, the bank is entering the economic slowdown with improved asset quality and solid provision coverage. This should allow it to contain the downside risk and support prompt resolution once the economy starts to recover.
Profitability Set to Moderate: BCR's profitability grew to a cyclically high levels with operating profit/risk-weighted assets (RWA) reaching a high 5.5% in 1H22, but we expect it will moderate in 2H22 and 2023 as lending growth, which strongly contributed to 2022 performance, slows, while operating expenses and loan impairment charges start to weigh on profits. Nevertheless, we expect the bank's profits to be solid over the Outlook horizon, while generating sufficient capital to support growth.
Solid Capital Position: Our view reflects a solid regulatory capital position, modest concentrations in the loan book, strong reserve coverage, and good internal capital generation. The common equity Tier 1 (CET1) ratio (18.7% at end 1H22) moderated due to profit distribution and solid lending growth and we expect the ratio will further decrease. However, loss absorption capacity should remain sufficient to withstand even quite significant stress.
Healthy Funding and Liquidity: BCR's funding and liquidity profile is strong, as expressed by a low ratio of gross loan to deposits (77% at end-3Q22). The bank's strong retail presence and leading market shares, as well as its fairly granular and stable. Liquidity coverage remains solid and regulatory liquidity ratios are well above minimums.
RATING SENSITIVITIES
Factors that could, individually or collectively, lead to negative rating action/downgrade:
BCR's IDR and SSR could be downgraded if the Romanian Country Ceiling was lowered.
BCR's IDR and SSR could be downgraded if Erste's Long-Term IDRs were downgraded by more than one notch or if BCR becomes less strategically important to Erste. We consider either of these scenarios unlikely.
BCR's VR would be downgraded if it experienced a simultaneous and sharp deterioration in asset quality and operating profitability. In particular, this could happen if the bank's operating profit to RWAs falls below 2% on a sustained basis, while impaired loans rise above 5%.
We would also downgrade BCR's VR in case the bank's capitalisation deteriorates and leverage rises on a sustained basis. This could be evidenced by the bank's CET1 ratio falling below 15% and Basel leverage ratio falling below 7% on a sustained basis.
Factors that could, individually or collectively, lead to positive rating action/upgrade:
An upgrade of BCR's IDRs and SSR would require an upward revision of Romania's Country Ceiling, which is unlikely given the Negative Outlook on the sovereign rating.
An upgrade of the bank's IDR and VR would require an upgrade of the Romanian operating environment score (bb+), while maintaining the bank's solid credit metrics.
OTHER DEBT AND ISSUER RATINGS: KEY RATING DRIVERS
BCR's SNP debt is rated in line with its Long-Term IDR, reflecting our current expectations that BCR will predominantly use SNP and more junior debt to meet its resolution buffer requirements, and that in total these are likely to exceed 10% of RWAs. According to the final regulatory decision, the minimum requirement for own funds and eligible liabilities (MREL), binding from 1 January 2024, was set at 24.9% of total risk exposure amount (TREA; excluding combined buffer requirement currently at 4.5%). Up to 3.5% of TREA can be met with SP debt.
BCR's SP debt is rated in line with its Long-Term Local-Currency IDR. The SP debt rating is constrained by country risks as reflected by the Country Ceiling.
OTHER DEBT AND ISSUER RATINGS: RATING SENSITIVITIES
The SNP and SP debt ratings are primarily sensitive to a change in BCR's IDR.
The SNP and SP debt ratings would be downgraded if BCR's Long-Term IDR was downgraded.
The SNP debt would also be downgraded by one notch to below BCR's IDR if it became clear that SNP and more junior debt would not sustainably exceed 10% of the Romanian resolution group's RWAs.
VR ADJUSTMENTS
The operating environment score has been below the implied score due to the following adjustment reason(s): macroeconomic stability (negative).
BEST/WORST CASE RATING SCENARIO
International scale credit ratings of Financial Institutions and Covered Bond issuers have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of three notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of four notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from 'AAA' to 'D'. Best- and worst-case scenario credit ratings are based on historical performance.
REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING
The principal sources of information used in the analysis are described in the Applicable Criteria.
PUBLIC RATINGS WITH CREDIT LINKAGE TO OTHER RATINGS
BCR's Long-Term IDR is capped by the Romanian Country Ceiling and therefore linked to the Romanian sovereign Long-Term IDR. BCR's IDRs, SSR and senior debt ratings are driven by support from Erste and therefore linked to the latter's IDR.
ESG CONSIDERATIONS
Unless otherwise disclosed in this section, the highest level of ESG credit relevance is a score of '3'. This means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity.