Rating Action Commentary
ֳ Affirms Romania's CEC Bank at 'BB'; Outlook Stable
Thu 23 Jan, 2025 - 8:23 AM ET
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CEC Bank S.A. - Ratings Navigator
CEC Bank S.A.
ֳ - Warsaw - 23 Jan 2025: ֳ has affirmed Romania-based CEC Bank S.A.'s (CEC) Long-Term Issuer Default Rating (IDR) at 'BB' with a Stable Outlook, its Viability Rating (VR) at 'bb', and Government Support Rating (GSR) at 'b'. A full list of rating actions is below.
Key Rating Drivers
VR Drives IDRs: CEC's IDRs are driven by its VR, which reflects the bank's moderate, albeit strengthening, business profile, adequate capitalisation and reasonable funding and liquidity. These factors offset its asset quality and profitability that are weaker than that of the sector. CEC's risk profile is commensurate with its fairly simple business model, with underwriting standards broadly in line with domestic industry standards, but with partly decentralised lending approval and fairly unsophisticated risk controls.
Operating Environment on Negative Outlook: The Outlook change on the Romanian sovereign to Negative recently has led to a negative revision of the operating environment (OE) outlook for Romanian banks. The OE is assessed at 'bbb-' and capped at the sovereign rating. It will be revised lower should the sovereign be downgraded.
Medium-Sized, State-Owned Bank: CEC is a medium-sized, state-owned bank. It operates a universal bank business model with lending primarily to the non-retail segment, including a large, but declining, exposure to public-sector entities. The bank is largely funded by granular retail customer deposits.
Reasonable Risk Profile: CEC's risk profile assessment is commensurate with its business model and balances a conservative risk appetite for retail lending, dominated by mortgage loans, against a moderately concentrated and fast-growing corporate loan portfolio.
Loan Quality Weaker than Peers: CEC's loan-quality metrics are weaker than peers', largely reflecting problematic corporate and SME exposures. The Stage 3 loan ratio of 7% at end-1H24 was above the peer- and sector-average of 3%, but we expect it to improve slightly toward 6% by end-2026. Gross loans accounted for a low 37% of assets, while other exposures mainly comprised lower-risk Romanian and eurozone sovereign risk, supporting CEC's asset quality.
Improved Profitability: CEC's operating profit improved to 2.6% of risk-weighted assets (RWAs) in 1H24, but its profitability remains weaker than larger peers', reflecting its loan book structure, higher funding costs, and less diversified revenues. We expect CEC's profitability to moderately decline over the next two years, as RWAs growth and higher costs offset a higher net interest margin. However, we expect operating profit to remain above 2% of RWAs.
Adequate Capitalisation: CEC's capitalisation is broadly in line with its peers' and adequate for its business and risk profiles. The common equity Tier 1 (CET1) ratio fell to 17.2% at end-1H24 from 18.6% at end-2023, but we expect the ratio to recover to above 18%, once 2024 earnings are capitalised. Our assessment is underpinned by the state's propensity to provide ordinary support, as demonstrated by its plans for further capital injections.
Stable Funding and Strong Liquidity: CEC's funding and liquidity profile reflects its strong liquidity buffer and a diversified, granular customer deposit base. It had a healthy loans/customer deposit ratio of 44% at end-1H24. However, its deposit franchise is moderately weaker than higher-rated domestic peers', in our view, as reflected in CEC's higher deposit remuneration. We estimate that CEC met its minimum requirement for own funds and eligible liabilities (MREL) with a solid buffer at end-2024, which was further strengthened by the issuance of eligible senior non-preferred (SNP) debt in late 2024.
Rating Sensitivities
Factors that Could, Individually or Collectively, Lead to Negative Rating Action/Downgrade
The bank's VR and IDRs have headroom to absorb a potential one-notch downward revision of the Romanian banks operating environment score, which would most likely be driven by a sovereign downgrade. However, a severe weakening in the operating environment that severely affects business prospects for Romanian banks would increase pressure on CEC's ratings.
CEC's ratings would likely be downgraded if its CET1 ratio weakens to below 15% for an extended period and if a sharp increase in impairment charges erodes operating profitability.
The bank's VR and IDRs could also be downgraded if the bank's risk appetite increases materially, which may be reflected in rapid business expansion and lending growth that materially weakens asset quality.
Factors that Could, Individually or Collectively, Lead to Positive Rating Action/Upgrade
An upgrade of the bank's VR and IDRs would require a stabilisation of the Romanian banks' operating environment and a record of sustained improvements in profitability, underpinned by a structural improvement of its business profile, while its asset-quality metrics materially improve and converge toward those of its domestic peers.
OTHER DEBT AND ISSUER RATINGS: KEY RATING DRIVERS
CEC's SNP is rated in line with the bank's Long-Term IDR. This is in line with the baseline notching under ֳ's Bank Rating Criteria and reflects our expectation that the bank's resolution buffer will be met only by SNP and more junior instruments.
CEC's GSR of 'b' reflects ֳ's view of a limited probability of extraordinary support being provided to CEC by the Romanian state, its 100% owner. We judge that the likelihood of support is reduced by the Bank Recovery and Resolution Directive and the Single Resolution Mechanism, which limits the ability for banks to be supported without the bail-in of senior creditors. Our view of the state's incentive to support CEC is based on its direct, full and willing state ownership and the bank's large presence in Romania's underbanked regions.
OTHER DEBT AND ISSUER RATINGS: RATING SENSITIVITIES
The SNP debt rating would be downgraded if the bank's Long-Term IDR is downgraded.
The SNP debt rating would also be downgraded to one notch below the bank's Long-Term IDR if we expect CEC to use senior preferred debt to meet its MREL while the buffer of SNP and more junior debt would no longer exceed 10% of CEC resolution group's RWAs on a sustained basis.
The SNP debt rating could be upgraded if the bank's Long-Term IDR is upgraded.
The GSR could be downgraded if the state reduces its ownership of CEC, due to partial or full privatisation of the bank, or if sovereign support to the bank is not provided in a timely manner.
An upgrade of the bank's GSR is highly unlikely, given existing resolution legislation.
VR ADJUSTMENTS
The 'bb' earnings & profitability score is below the 'bbb' implied score, due to the following adjustment reason: revenue diversification (negative)
The 'bb+' capitalisation & leverage score is below the 'bbb' implied score, due to the following adjustment reason: risk profile and business model (negative)
The 'bb+' funding & liquidity score is below the 'bbb' implied score, due to the following adjustment reason: deposit structure (negative)
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
CEC's GSR is based on ֳ's assessment of support from the Romanian sovereign.
ESG Considerations
The highest level of ESG credit relevance is a score of '3', unless otherwise disclosed in this section. A score of '3' 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. ֳ's ESG Relevance Scores are not inputs in the rating process; they are an observation on the relevance and materiality of ESG factors in the rating decision. For more information on ֳ's ESG Relevance Scores, visit /topics/esg/products#esg-relevance-scores.
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PARTICIPATION STATUS
The rated entity (and/or its agents) or, in the case of structured finance, one or more of the transaction parties participated in the rating process except that the following issuer(s), if any, did not participate in the rating process, or provide additional information, beyond the issuer’s available public disclosure.
APPLICABLE CRITERIA
ADDITIONAL DISCLOSURES
ENDORSEMENT STATUS
| CEC Bank S.A. | EU Issued, UK Endorsed |