Moody’s Investors Service has changed on September 1 the outlook to positive from stable on Banca Comerciala Romana S.A.’s (BCR) Ba1 long-term local and foreign-currency deposit ratings.
Concurrently, the rating agency has affirmed the bank’s long-term Ba1 deposit ratings and Baa3(cr) Counterparty Risk Assessment (CRA). This rating action balances the ongoing improvement in BCR’s standalone credit profile that led to an upgrade of its baseline credit assessment (BCA) to b2 from b3, and reduced uplift from Moody’s Advanced LGF analysis.
The bank’s short-term Not-Prime deposit ratings and its Prime-3(cr) CRA are unaffected by the last rating action, a Moody’s press release informs.
According to Moody’s, the affirmation of BCR’s deposit ratings with a positive outlook was driven by: (1) the upgrade of the bank’s BCA to b2 from b3 with ongoing upward pressure; (2) the rating agency’s unchanged high affiliate support assumption from its parent, Austria’s Erste Group Bank AG (Erste; Baa1 stable/Baa1 stable; baa3), resulting in a two-notch rating uplift and a higher adjusted BCA of ba3 from b1 previously; (3) reducing rating uplift from Moody’s Advanced LGF analysis to one notch from two notches previously; and (4) maintaining one notch of rating uplift from government support given its position as the largest commercial bank in Romania.
The upgrade of BCR’s BCA reflects ongoing improvements in the bank’s asset quality, profitability, capital adequacy and funding structure.
The bank’s non-performing loans (NPL) ratio has declined to 14% as of end — H1 2016 from a high 25.7% as of year-end 2014 owing to the sale and write-off of problem loans, restructuring procedures and increased recoveries as economic conditions improve. Risks stemming from the still large stock of NPLs are mitigated by a high level of coverage, with loan loss reserves standing at 81% of the gross loans as of end-H1 2016. BCR reported a net income of RON636 million in H1 2016 translating to a return on assets (RoA) of 2.04%, moderately higher than RON603 million reported a year earlier, driven by significantly reduced cost of risk but also lower operating income. Improved profitability and reduced risk exposures due to balance sheet deleveraging in the past five years have led to higher capital ratios with the reported Total CAR ratio at 21.6% as of end-Q1 2016. The aforementioned deleveraging has resulted in a more balanced funding structure of the bank as the gross loan-to-deposit ratio gradually declined to 90% as of year-end 2015 from 140% as of year-end 2012.
Moody’s notes, that BCR, similar to other Romanian banks, is affected by a law adopted in late April 2016 that allows mortgage borrowers to opt for a strategic default, (i.e., defaulting on the debt while being financially able to service it) and be discharged of all financial obligations under the mortgage agreement. The rating agency understands that so far only limited number of borrowers have decided to make use of this provision of the law. However, the full negative impact of the implementation of the law may become clear after several months as more borrowers may decide to default and banks may challenge the retrospective application of the law in courts. According to Erste, in Q2 2016 BCR recognised about EUR27 million (0.31% of gross loans as of year-end 2015) additional provisions stemming from the provisions of the law which were absorbed by the bank’s income.
The one notch reduction in the uplift from Moody’s Advanced LGF analysis is driven by the change of the rating agency’s assumption on the proportion of the bank’s deposits considered as junior, comprising institutional and corporate deposits. Based on BCR’s public disclosure of its customer deposits’ structure, Moody’s has applied a 20% proportion of junior deposits in the updated Advanced LGF analysis, reduced from the previously applied 26%, which is the standard assumption based on the EU average of deposits outside of deposit guarantee schemes.
The ongoing improvement in the operating environment for Romanian banks leading to a considerable reduction in BCR’s problem loans and maintaining strong capital ratios, could result in ratings upgrade.
A material deterioration in the bank’s loan book quality affecting its profitability and capital adequacy may have negative rating implications.
Furthermore, alterations in the bank’s liability structure may change the amount of uplift provided by Moody’s Advanced LGF analysis and lead to a higher or lower notching from the bank’s adjusted BCA, thereby affecting deposit ratings and CRA, Moodys’s analysis concludes.