Moody’s cut BCR’s long-term deposit rating to Ba3 from Ba1, while affirming the bank’s standalone bank financial strength rating (BFSR) of E+. Both ratings carry a negative outlook.
The agency said the downgrade of the bank’s baseline credit assessment (BCA) to b3 from b1 was driven by the further deterioration of the bank’s already weak asset quality; Moody’s expectation that the bank will face significant medium-term challenges to return to sustainable profitability; and the bank’s exposure to weak and uncertain collateral values.
“BCR remains exposed to the possibility of additional provisioning needs from the existing stock of non-performing loans (NPLs), as well as the need for additional capital, if the asset quality deterioration continues at a rate similar to that observed in 2012,” the ratings agency said in a statement.
BCR, the Romanian unit of Austria’s Erste Group Bank AG (EBS.RO), is the largest bank in Romania, cumulating around 20% of the local banking system’s assets.
The expected support available from the parent Erste and the Romanian government (which is rated by Moody’s at Baa3, with a negative outlook) underpins the three-notch uplift for BCR’s long-term deposit ratings from the b3 BCA, said Moody’s.
On the other hand, Moody’s Investors Service cut both the long and short-term deposit ratings of BRD to Ba2/Not-Prime from Baa3/Prime-3, following the lowering of the bank’s baseline credit assessment to b2 from ba3. Also, Moody’s lowered the standalone bank financial strength rating to E+ from D-, noting that the long-term deposit ratings carry a negative outlook.
As in the case of BCR, the lowering of BRD’s BCA is driven by the further deterioration of the bank’s already weak asset quality; Moody’s expectation that the bank will face significant challenges to return to sustainable profitability in 2013; and the bank’s exposure to weak and uncertain collateral values.
“However, BRD remains adequately capitalized to withstand further provisioning needs from the existing stock of non-performing loans (NPLs), and Moody’s does not foresee the need for additional capital, if asset-quality deterioration continues to progress in line with the average of the banking system,” the agency said in a separate statement.
BRD is the second-largest bank in Romania, with market shares of around 15% in both deposits and loans. French group Societe Generale holds about 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 Societe Generale’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 b2 BCA.
The agency noted that Romania’s weak economic growth continues to affect banking sector performance with weak credit demand, lower revenues and asset-quality pressures.
“Although at a slower pace than in 2012, Moody’s expects that the bank’s asset-quality will continue to deteriorate as indicated by the relative stabilization in the high household leverage and in the weak construction industry,” the statement reads.
Moody’s expects BCR’s stock of non-performing loans to peak in 2013, while risk provisions will remain high. “BCR’s asset quality is very weak, and the ratio of problem loans to gross loans deteriorated further to 28.2% at March 2013 from 26.7% at year-end 2012. While this ratio deteriorated, the bank improved its coverage of NPLs to 58% as of March 2013 from 50.6% at year-end 2011.”
Poor asset quality led to a relatively large loss in 2012, of about EUR277 million, and will continue to exert pressure on profitability in 2013 and 2014.
According to Moody’s, BRD’s asset quality is weak as well, and the ratio of problem loans to gross loans deteriorated to 22.2% at March 2013 from 21.3% at year-end 2012, but the bank improved its coverage of NPLs to 53.9.
Moody’s believes that BRD will continue to face challenges in the medium term in its efforts to return to sustainable profitability, following the limited loss of EUR74 million (or -0.88% of average risk weighted assets) reported in 2012, while implementing its new market and product strategy, reinforcing its risk culture and working out its significant non-performing loan portfolio.