Rating Action Commentary
ֳ Affirms Romanian ProCredit at 'BBB-'; Outlook Stable
Mon 23 Dec, 2024 - 4:49 AM ET
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ProCredit Bank S.A.
ֳ - Warsaw - 23 Dec 2024: ֳ has affirmed ProCredit Bank S.A.'s (PCBR) Long-Term Issuer Default Rating (IDR) at 'BBB-' with a Stable Outlook and its Viability Rating (VR) at 'b+'. A full list of rating actions is below.
Key Rating Drivers
Support-Driven IDRs: PCBR's IDRs and Shareholder Support Rating (SSR) reflect ֳ's view of ProCredit Holding AG's (PCH; BBB/Stable) high propensity to provide extraordinary support to its Romanian subsidiary. The Stable Outlook on PCBR's ratings mirrors that on the parent.
Small Subsidiary, Strategically Important Region: The bank's Long-Term IDR is notched down once from PCH's to reflect the strong linkages and a strategically important relationship between the parent and the subsidiary. PCBR represents only about 5% of PCH's consolidated assets and has a mixed record of profitable operations but supports the parent's strategic objectives in the broader region, as the south-eastern Europe banking franchise remains strategically important to PCH.
Support Record, Reputational Risks: Our support assessment also considers high reputational damage to the wider group from a PCBR default, the bank's strong integration within the group and a record of ordinary capital and liquidity support. The full ownership and common branding further substantiate the parent's propensity to support the bank. In our view, any required support for PCBR would be limited relative to PCH's ability to provide it, given PCBR's small balance-sheet size.
Business Profile Drives VR: PCBR's VR is a notch below the implied VR of 'bb-' because ֳ believes the bank's business profile has a greater impact on the VR than implied by its weighting, due primarily to its small absolute size. The VR also factors in reasonable financial metrics with a fairly short record of profitability following years of losses, prudent risk management and limited impaired loans.
Scale Limitation Challenges: PCBR is a small SME-oriented bank in the competitive Romanian market. It has below a 0.5% share of sector assets, and a modestly stronger presence in agricultural and green lending to businesses. Its small scale is a rating weakness, as it translates into sizeable balance-sheet concentrations, limited pricing advantage and weaker profitability than peers'.
Cautious Risk-Management: ProCredit Group deploys its established risk governance at all subsidiaries, including PCBR, which results in prudent underwriting standards and strict risk controls. Our assessment balances the bank's higher-risk SME focus with selective underwriting of largely collateralised exposures, moderate growth appetite and limited market-risk exposures.
Resilient Asset Quality: Asset quality continues to be a strength for the VR, underscored by prudent underwriting, low levels of problem loans, and high coverage ratios. These characteristics help mitigate risks stemming from a partly concentrated loan book. The impaired loans ratio has consistently outperformed the sector average, remaining below 2% over the past four years, which we expect to continue.
Low Profitability: The bank's profitability remains weaker than that of domestic peers, although it is structurally improving. We expect the bank's operating profit/risk-weighted assets (RWAs) to moderate closer to 1% in the next two years from the annualised 1.8% reported for 9M24, with loan impairment charges normalising to 30bp-40bp of average gross loans.
Small Capital Base: ֳ views the bank's common equity Tier 1 (CET1) ratio of 20.1% at end-3Q24 as reasonable for its small nominal capital base and business concentration. We expect PCBR to become less reliant on ordinary capital support from its shareholder to sustain business growth, given improved structural profitability.
Small Deposit Franchise: Our assessment of PCBR's funding profile reflects its modest deposit franchise and larger-than-peers' reliance on wholesale funding from international financial institutions (IFIs) and the group. The loans/deposits ratio of 100% at end-3Q24 is below historical averages, but still above that of the sector. The bank has a satisfactory liquidity buffer.
Rating Sensitivities
Factors that Could, Individually or Collectively, Lead to Negative Rating Action/Downgrade
PCBR's IDRs and SSR are sensitive to a downgrade of PCH's Long-Term IDR, which in turn is sensitive to changes in our assessment of institutional support for the group from its IFI shareholders. They are also sensitive to a weakening of the bank's strategic importance to PCH.
We would downgrade the VR if the bank's capitalisation materially weakens, with the CET1 ratio falling close to 15% or below, for example, due to excessive and capital-intensive lending growth or large losses. We would also downgrade the bank's VR on weaker-than-expected profitability, for example, from higher-than-expected operating expenses or loan impairment charges.
Factors that Could, Individually or Collectively, Lead to Positive Rating Action/Upgrade
An upgrade of the bank's Long-Term IDR and SSR would require an upgrade of PCH's Long-Term IDR, while the bank remains strategically important to its parent.
A VR upgrade is unlikely given the bank's small size and limited franchise. It would require a meaningful broadening of the bank's franchise and an increase in its size, accompanied by record of a resilient business model and performance over the medium term, but also reduced single-name concentrations.
OTHER DEBT AND ISSUER RATINGS: KEY RATING DRIVERS
The bank's IDRs (xgs) are driven by the parent's IDRs (xgs), which exclude assumptions of extraordinary government support available to PCH. The Short-Term IDRs (xgs) are mapped to the Long-Term IDRs (xgs).
OTHER DEBT AND ISSUER RATINGS: RATING SENSITIVITIES
The bank's IDRs (xgs) remain sensitive to the parent's IDRs (xgs), which are in turn sensitive to the parent's VR and changes to our assessment of institutional support available from PCH.
VR ADJUSTMENTS
The 'bb' asset quality score is below the 'bbb' implied category score, due to the following adjustment reason: concentrations (negative).
The 'b+' earnings and profitability score is below the 'bb' implied category score, due to the following adjustment reason: revenue diversification (negative).
The 'bb-' capitalisation and leverage score is below the 'a' implied category score, due to the following adjustment reason: size of capital base (negative).
The 'b+' funding and liquidity score is below the 'bbb' implied category 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
PCBR's IDRs, SSR and IDRs(xgs) are linked to PCH's ratings.
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.
Additional information is available on
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
| ProCredit Bank S.A. | EU Issued, UK Endorsed |