Fitch Upgrades ProCredit Holding and ProCredit Banks in Bulgaria and Romania

Tue Jun 24, 2014 10:39am EDT

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(The following statement was released by the rating agency) LONDON/WARSAW, June 24 (Fitch) Fitch Ratings has upgraded ProCredit Holding AG & Co. KGaA's (PCH) Long-term foreign currency Issuer Default Rating (IDR) to 'BBB' from 'BBB-' and the Short-term foreign currency IDR to 'F2' from 'F3'. The Outlook is Stable. At the same time, the agency has upgraded the Long-term IDRs of PCH's subsidiary banks in Bulgaria (PCB), and Romania (PCBR) to 'BBB-' from 'BB+'. A full list of rating actions is available at the end of this commentary. KEY RATING DRIVERS - PCH's IDRS AND SUPPORT RATING The upgrade of PCH's IDRs is based on Fitch's view that the group's core international financial institutions (IFI) shareholders (end-2013: combined stake of almost 37%) remain long-term, committed and strategic shareholders of the group, notwithstanding the potential dilution of their stakes (albeit without a loss of strategic control) through the KGaA structure. This view has been reinforced by recent discussions between Fitch and the core shareholders. As a result of those meetings, and in light of the core shareholders' long and cohesive track record of support in respect of the group, Fitch's view of the propensity and willingness of the core shareholders to provide support to PCH in case of need has strengthened. The upgrade of the Short-term IDR reflects the strong capacity of the core shareholders to provide support, backed up by their proven track record of providing liquidity and funding support to date. Fitch's view of support is based on the group's ownership, effective corporate governance and the important and successful developmental role it fulfils in advancing responsible financing and small business lending in developing markets. This mission is in keeping with the developmental mandates of the core shareholders. Consequently, Fitch regards as high the likelihood of pre-emptive capital support being made available to PCH from core shareholders to absorb unexpected losses, and this underpins the group's ratings. The ability of the shareholders to provide support is strong given the PCH group's small size and high diversification of operations. RATING SENSITIVITIES - PCH's IDRS AND SUPPORT RATING A change in Fitch's view of the support available to PCH, for example, due to the exit of one or more core shareholders, or a change in their support stance, could be negative for PCH's IDRs. However, the Stable Outlook reflects Fitch's view that the propensity and ability of PCH's owners to provide support are unlikely to change. KEY RATING DRIVERS - PCH's VR PCH's 'bb-' Viability Rating reflects the group's exposure to difficult markets and the credit risks inherent in its operations, given its focus on lending to small businesses. As a result, Fitch regards group capitalisation as only moderate. A high double leverage ratio at the holding company level is also a rating negative. However, this is balanced by solid liquidity, risk management and corporate governance across the group, underpinned by PCH's consolidated group supervision by the German Banking Regulator (BaFin). Group performance also remains satisfactory, reflecting wide margins and strict cost control, notwithstanding margin and potential asset quality pressures, and a challenging operating environment. A high level of diversification by market, sector and borrower also underpin the group's reasonable track record of asset quality through the cycle. PCH subsidiary banks' asset quality also typically outperforms their bank peers. RATING SENSITIVITIES - PCH's VR Upside in PCH's VR could result from a significant improvement in the double leverage ratio at the holding company level, increased capital levels on a consolidated basis and an improvement in the operating environments. A marked deterioration in asset quality and capitalisation would be negative for the VR. KEY RATING DRIVERS AND RATING SENSITIVITIES - TRUST PREFERRED SECURITIES PCH's TPS are notched from the IDR, reflecting Fitch's opinion that potential support from PCH's shareholders also helps reduce the non-performance of these instruments. As such, their rating is sensitive to any change in PCH's IDR. Fitch notes that the holders of the TPS largely consist of PCH's shareholders or creditors, who typically share PCH's developmental goals. The three notch difference between PCH's IDR and the rating of the TPS consists of two notches for loss severity, to reflect the deeply subordinated status for this instrument, and one notch for non-performance, reflecting the terms and conditions of the notes (notably the triggers for non-payment of the coupon). KEY RATING DRIVERS: PCB & PCBR's IDRS AND SUPPORT RATING The IDRs and Support Ratings of PCB and PCBR are driven by potential support from its parent, PCH. Their IDRs were upgraded by one notch to 'BBB-', maintaining a one notch difference with their parent, following the upgrade of PCH's IDR. KEY RATING DRIVERS: PCB & PCBR's VRs The VRs of PCB and PCBR reflect their small size and modest capital levels, and, at PCBR, weaker internal capital generation. The VRs also consider the banks' limited domestic franchises, which hamper operating profitability from a lack of benefits of scale. At end-2013 PCBR and PCB accounted for only 0.4% and 1.6% of total banking sector assets in Romania and Bulgaria, respectively. However, their VRs also reflect the banks' sound risk management framework, asset quality that has outperformed their home sectors through the cycle, granular retail funding and comfortable liquidity buffers. The quality and level of capital at PCB is improving, following the introduction of CRDIV in Bulgaria in January 2014. The bank reported a Fitch Core Capital of 22% at end-1Q14, due to both an increase in common equity Tier 1 capital and the relief on risk-weighted assets on the predominantly SME loan book. PCBR's lower VR, relative to PCB's, reflects its smaller franchise and scale, which results in lower efficiency further dampening internal capital generation. Capital at PCBR is lower (Fitch Core Capital of 12% at end-2013), and only adequate in Fitch's view, given the bank's growth plans and weak internal capital generation. RATING SENSITIVITIES: PCB's & PCBR's IDRs, SUPPORT RATINGS & VRs Changes to PCH's IDR would trigger a similar action on the banks' IDRs and Support Ratings. Given today's upgrade of PCH's IDR, a further positive rating action is unlikely in the short- to medium-term. A weakening, in Fitch's view, of the support available to the banks from PCH would also result in a downgrade to the banks' IDRs and Support Ratings, although this is not expected by Fitch at present. Delayed or inadequate support is likely to lead a downgrade of the banks' IDRs and Support ratings. Downside risks to PCB's VR would result from an unexpected and material worsening of the operating environment, and a parallel sharp deterioration in asset quality that puts pressure on profitability and erodes capital. Fitch views this as unlikely in the short-term. Positive pressure on PCBR's VR would depend on the bank building a track record in generating stronger operating revenues and improving efficiency, and thus building its internal capital generation capacity. This will depend on their ability to grow the loan book in an operating environment that remains uncertain, while maintaining sound asset quality, and conservative provisioning and capital levels. Downside risk to PCBR's VR may stem from excessive growth putting pressure on capital levels and limiting available buffers to absorb losses. The rating actions are as follows: PCH Long-term foreign currency IDR: upgraded to 'BBB' from 'BBB-'; Outlook Stable Short-term foreign currency IDR: upgraded to 'F2' from 'F3' Viability Rating: affirmed at 'bb-' Support Rating: affirmed at '2' Tier 1 trust preferred securities (TPS): upgraded to 'BB' from 'BB-' PCB Long-term foreign currency IDR: upgraded to 'BBB-' from 'BB+'; Outlook Stable Short-term foreign currency IDR: upgraded to 'F3' from 'B' Long-term local currency IDR: upgraded to 'BBB-' from 'BB+'; Outlook Stable Short-term local currency IDR: upgraded to 'F3' from 'B' Viability Rating: affirmed at 'bb-' Support Rating: upgraded to '2' from '3' PCBR Long-term foreign currency IDR: upgraded to 'BBB-' from 'BB+'; Outlook Stable Short-term foreign currency IDR: upgraded to 'F3' from 'B' Long-term local currency IDR: upgraded to 'BBB-' from 'BB+'; Outlook Stable Short-term local currency IDR: upgraded to 'F3' from 'B' Viability Rating: affirmed at 'b' Support Rating: upgraded to '2' from '3' Primary Analysts Lindsey Liddell (PCH) Director +44 20 3530 1008 Fitch Ratings Limited 30 North Colonnade London E14 5GN Sandra Hamilton (PCB & PCBR) Director +44 20 3530 1266 Fitch Ratings Limited 30 North Colonnade London E14 5GN Secondary Analysts Eris Huang (PCH) Analyst +44 20 3530 1493 Agata Gryglewicz (PCB) Associate Director +48 42 338 6970 Radu Gheorghiu (PCBR) Analyst +44 20 3530 1253 Committee Chairperson James Watson Managing Director +7 495 956 9901 Media Relations: Elaine Bailey, London, Tel: +44 203 530 1153, Email: Elaine.Bailey@fitchratings.com; Julia Belskaya von Tell, Moscow, Tel: +7 495 956 9908, Email: julia.belskayavontell@fitchratings.com. Additional information is available on www.fitchratings.com. Applicable criteria, Global Financial Institutions Rating Criteria, dated 31 January 2014 are available at www.fitchratings.com. Applicable Criteria and Related Research: Global Financial Institutions Rating Criteria here Additional Disclosure Solicitation Status here ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.

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