Last week, Moody’s also cut SocGen’s standalone financial strength by one notch to C-/baa2 from C-/baa1. The outlook on both the standalone financial strength and long-term debt and deposit ratings is stable.
The agency announced Monday evening that it also downgraded BRD’s standalone bank financial strength rating to D-/ba3 from D/ba2. The long-term and short-term local currency deposit ratings were downgraded to Baa3/Prime-3 from Baa2/Prime-2; while the long- and short-term foreign currency deposit ratings of Baa3/Prime-3 were confirmed. The outlook on all ratings is negative, Moody’s said in a news release.
It said the rating actions on BRD reflect the deterioration of the operating environment in Romania, and the rapid increase in the bank’s non-performing loans, counterbalanced by Moody’s view of SocGen’s continuing commitment to the local market.
According to Moody’s, Romania’s economic performance has deteriorated, as its high dependence on external markets, particularly in terms of exports and private sector capital inflows, renders it vulnerable to the weakening growth prospects of the euro area.
Romania registered mild quarter-on-quarter GDP contraction in the last quarter of 2011 and the first quarter this year; while private consumption and job creation remain subdued. “Although Moody’s expects economic performance to improve in the coming years, growth rates will likely remain well below the levels reported prior to the 2008 global financial crisis (over 6% GDP growth per annum), which will render income convergence with wealthier European countries more challenging, given the significant disparity in household income at 64% below the EU-27 average. Moody’s expects the macroeconomic weaknesses to affect banking sector performance through weak credit demand, lower revenues and significant asset-quality pressures,” the statement reads.
As a reflection of the weakening operating environment, BRD’s non-performing loans have increased significantly, reaching 16.8% of the total loan portfolio in December 2011 and continuing to increase in the first quarter of 2012. As a result of the increase in non-performing loans, in conjunction with rapidly rising loan-loss charges and subdued credit growth, Moody’s expects that BRD’s profitability will remain under pressure through 2013. In Moody’s view, the risk of further downward pressure on profitability is also driven by the bank’s need to increase its provisioning coverage of NPLs, currently at a relatively modest 43%.
“Although BRD’s current capital buffer provides an adequate loss absorption capacity, with the Tier 1 capital ratio at 14.5% as of March 2012, the bank’s capitalisation may provide only a limited cushion, in Moody’s view, if the economic environment in Romania deteriorates more than currently expected.”
Moody’s noted that BRD is the second-largest bank in Romania, with market shares of around 15% in deposits and loans. SocGen holds a 60% stake in the bank and provides some funding to its subsidiary, mostly to finance its sizeable foreign-currency portfolio. These considerations, together with Moody’s view of SocGen’s commitment to the Romanian market, underpin Moody’s assumptions of parental and systemic support for the bank, which result in a three-notch rating uplift from the current ba3 standalone credit assessment.
The outlook on BRD’s ratings is negative, reflecting the possibility that the pressures on asset quality, profitability and capital, if sustained, could further weaken the bank’s credit profile. Moody’s also notes that BRD has some exposure to the Romania’s state-owned electricity generator Hidroelectrica, which recently filed for insolvency, and these developments could exert additional pressure on the bank’s balance sheet.
Besides BRD, Moody’s also took rating actions on Komercni Banka (Czech Republic), and three Russian entities: Rosbank, DeltaCredit Bank and Rusfinance Bank.