ֳ

Rating Action Commentary

ֳ Affirms Romanian Banks on Revised Bank Tax Ordinance

Wed 03 Apr, 2019 - 12:09 PM ET

ֳ-Warsaw/London-03 April 2019: ֳ has today affirmed the Long-Term IDRs of Banca Comerciala Romana S.A. (BCR) and BRD-Groupe Societe Generale S.A. (BRD) at 'BBB+' and revised their Outlooks to Stable from Negative. ֳ has also affirmed the Viability Ratings (VRs) of BCR and Banca Transilvania S.A. (BT) at 'bb+', of UniCredit Bank S.A. (UCBRO) at 'bb', of Garanti Bank S.A. (GBR) at 'bb-', of ProCredit Bank S.A. (PCBRO) at 'b+', and the VR-driven IDRs of BT at 'BB+' and GBR at 'BB-'. Short-Term IDRs, other support-driven ratings are unaffected. A full list of rating actions is at the end of this commentary.

The rating actions follow a modification of a bank tax ordinance by the Romanian government, which, in our view, indicates a moderating risk of government intervention in the banking sector.

ֳ had changed the Outlooks on the IDRs of BCR and BRD to Negative in January 2019 on the expectation that we might cap the ratings of Romanian banks at one notch above the Romanian sovereign (BBB-/Stable), rather than the current two notches. This was because of what we perceived as a greater risk of local authorities' intervention in the banking sector, in case of a sovereign default, which would negatively affect the banks' ability to service their obligations.

Since then, a lower expected burden on the banking sector through a revised bank tax design indicates, in our opinion, a less aggressive stance of the government towards the sector, and a reasonable willingness of the authorities to respond to concerns raised by the National Bank of Romania and sector representatives. In the meantime, other laws passed through parliament in late December, which would have been detrimental to the sector's profitability, have been declared unconstitutional and have been voided. As a result, we have moderated our views of prevailing country risks.

The latest ordinance modifying the bank tax (passed on 29 March 2019) significantly reduces pressure on the profitability outlook for the banks compared to the initial December 2018 version. The tax rate has been lowered to 0.4% per annum for larger banks and to 0.2% for banks with less than a 1% market share (including PCBRO). The taxable base has also been reduced and at present essentially encompasses performing loans that are not guaranteed by the state. In our view, the risk to banks' solvency has reduced greatly due to a provision that relieves pre-bank-tax loss-making institutions from paying the tax, and otherwise limits the tax burden to the accounting profits.

In the new ordinance, additional tax relief can be achieved if banks meet or progress towards government-imposed lending growth and margin targets. The lending growth target of 8% for 2019 appears achievable, at least in part, but may present risks to underwriting quality, as banks may be incentivised to lend to target rather than what they consider the prudent amount.

We have affirmed five banks' VRs at levels that reflect their varying degrees of resilience. As legislative risks have moderated, pressure on the banks from their operating environment has eased, in our view. The outlook for earnings in 2019 has also improved compared to that under the initial, more punitive bank tax format, and we perceive less pressure on the banks' business models as a result.


KEY RATING DRIVERS
IDRS, VRS
BCR's and BRD's Long-Term IDRs are based on potential support available from their respective parents, Erste Group Bank AG (Erste, A/Stable) and Societe Generale S.A. (SG; A/Stable). BCR and BRD could be rated within one notch of their respective parents' Long-Term IDRs because of their strategic importance, significant operational and management integration, a track record of support, and their manageable size relative to the parent banks.

The extent to which the Long-Term IDRs can benefit from parental support is constrained at two notches above the sovereign IDR, because of ֳ's assessment of country risk and in particular of potential transfer and convertibility risks. The Stable Outlooks on their respective Long-Term IDRs consequently reflect the Outlook on the sovereign IDR.

BT's and GBR's IDRs are driven by their respective VRs, and their Outlooks reflect the bank's stable standalone credit profiles.

The affirmation of the six banks' VRs reflects our view that their standalone credit profiles are not meaningfully affected by the imposition of a tax on bank assets at the level established in the March 2019 ordinance. The higher VRs of BT and BCR primarily reflect their stronger profitability and capital ratios, less concentrated loan portfolios and deeper deposit franchises compared to UCBRO and, even more so, GBR. PCBRO's VR considers the bank's limited domestic franchise and weakness relating to the implementation of its new business model following the exit from higher-yielding small-ticket loans. This has resulted in weaker profitability over the past two years even without any impact of the bank tax.

RATING SENSITIVITIES
IDRS, VRS
BCR's and BRD's IDRs are mainly sensitive to the sovereign Long-Term IDR. The IDRs are also sensitive to ֳ's assessment of country risks facing Romanian banks, which can affect their ability to use parental support to service their obligations. They are also sensitive to a multi-notch downgrade of their parents' IDRs or a significant decrease in strategic importance, neither of which are likely, in our view.

BT's IDRs are sensitive to the same factors that drive the bank's VR.

GBR's IDR is mainly sensitive to: changes in the VR; the rating of its direct owner, Turkiye Garanti Bankasi A.S. (BB-/Negative); and the strategic importance for the ultimate owner, Banco Bilbao Vizcaya Argentaria, S.A. (A-/Negative).

Upside for Romanian banks' VRs above the 'bb' category is limited given ֳ's assessment that the operating environment in Romania remains fairly volatile and vulnerable to external shocks. The VRs of UCBRO and GBR could be upgraded if their financial metrics gradually converge with higher-rated peers and if the banks deepen their lending and deposit franchises. An upgrade of PCBRO's VR would require a strengthening of its market franchise and a record of profitable growth and improved operating efficiency, while maintaining adequate asset-quality and capital metrics.

The VRs of all the banks could be downgraded if their risk appetite increases as a result of incentives to reach government-directed loan growth rates. The VRs could also be downgraded if the expected economic slowdown or idiosyncratic issues lead to a marked deterioration in asset-quality and capital metrics.

The rating actions are as follows:

Banca Comerciala Romana S.A.
Long-Term Foreign-Currency IDR: affirmed at 'BBB+', Outlook revised to Stable from Negative
Long-Term Local-Currency IDR: affirmed at 'BBB+', Outlook revised to Stable from Negative
Viability Rating affirmed at 'bb+

BRD-Groupe Societe Generale S.A.
Long-Term Foreign-Currency IDR: affirmed at 'BBB+', Outlook revised to Stable from Negative

Banca Transilvania S.A.
Long-Term Foreign-Currency IDR: affirmed at 'BB+', Outlook Stable
Viability Rating: affirmed at 'bb+'

UniCredit Bank S.A.
Viability Rating: affirmed at 'bb'

Garanti Bank S.A.
Long-Term IDR affirmed at 'BB-'; Outlook Stable
Viability Rating affirmed at 'bb-'

ProCredit Bank S.A.
Viability Rating affirmed at 'b+'

Contact:

Primary Analyst
Artur Szeski
Senior Director
ֳ Polska S.A., Krolewska 16, Warsaw, 00-103
+48 22 338 62 92

Secondary Analyst
Ioana Sima (BCR, BRD, BT, UCBRO, GBR)
Director
+44 20 3530 1736

Jakub Kopiec (PCBRO)
Associate Director
+48 22 330 6702

Committee Chairperson
Francesca Vasciminno
Senior Director
+39 02 8790 87 225

Media Relations: Louisa Williams, London, Tel: +44 20 3530 2452, Email: louisa.williams@thefitchgroup.com

Additional information is available on
Applicable Criteria
Bank Rating Criteria (pub. 12 Oct 2018)

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