Fitch Ratings has affirmed Banca Transilvania S.A.’s (Transilvania) Long-Term Issuer Default Rating (IDR) at ‘BB+’ with a Stable Outlook and Viability Rating (VR) at ‘bb+’, according to FitchRatings.com.
KEY RATING DRIVERS
Banca Transilvania’s ratings reflect the bank’s strong and well-established domestic franchise, solid capital position supported by resilient internal capital generation and healthy funding profile. It also factors in the bank’s reasonable asset quality, underpinned by conservative underwriting.
Economic Pressures Rise: Romania’s significantly slowing economic growth in 2023 coupled with high inflation and monetary tightening will weigh on the banking sector’s performance in 2023, limiting lending growth and excreting pressure on banks’ operating expenses. However, improved interest margins, low unemployment and banks’ generally reasonable underwriting should contain most of these risks. We believe that the operating environment for banks will be consistent with a ‘bb+’ score, even in case of a one-notch downgrade of the sovereign IDR.
Solid Capital Position: Transilvania’s rating capture its solid capital ratios, low capital encumbrance by unprovisioned impaired loans and robust profitability. The bank’s sizable exposure to the sovereign remains a risk, increasing vulnerability of capital to shocks related to the sovereign and its rating. At end-3Q22, the government bond portfolio was equal to about 3.9x the bank’s common equity Tier 1 (CET1) capital, and mostly comprised Romanian sovereign bonds (BBB-/Negative).
Profitability Will Moderate: Transilvania’s profitability in 2022 was solid underpinned by rising revenues and good cost efficiency, with operating profits to risk-weighted assets (RWA) equal to a robust annualised 4.4% in 9M22. We believe the bank’s profits have peaked in 2022 and will moderate next year (although remain reasonable) as operating expenses and loan impairment charges rise amid higher inflation and slowing economy. The widened margins following rate hikes should contain most of the risks, even as funding costs continue to increase.
Asset Quality Pressures Rise: Transilvania’s asset quality has benefited from robust growth especially among its non-retail clients, while new impaired loans generation remain muted given still high economic activity. Inflation and increased borrowing costs has only just started to affect borrower repayment capacity and we expect asset quality problems will start to materialise, as economic growth rapidly slows. However solid provision coverage and already some provision front loading should allow the bank to absorb these pressures.
Healthy Funding, Reasonable Liquidity: Transilvania’s funding profile is solid, underpinned by its stable and granular customer deposits, which benefits from its robust franchise. The bank’s liquidity remains reasonable covering well its modest refinancing needs and with sizable holdings of liquid assets.
Leading Domestic Franchise: Transilvania is the largest Romanian bank, with about a 19% market share in total sector assets. Its traditional banking business model focuses on serving SMEs, entrepreneurs and retail clients with whom it has strong relationships. A granular loan book and limited exposure to volatile industries supports its record of solid overall performance through the cycle.
Granular Lending; Sovereign Risk: Transilvania’s moderate risk profile reflects its granular loan book focused on retail and SMEs and mid-sized corporates and conservative risk framework. However, the bank remains heavily exposed to the Romanian sovereign with its direct holdings of sovereign debt a source of elevated market risk.
RATING SENSITIVITIES
Factors that could, individually or collectively, lead to negative rating action/downgrade:
The bank’s Long-Term IDR and the VR could be downgraded if a sustained asset-quality deterioration drives a structural weakening of profitability. This could happen following a combined and sustained rise of the bank’s impaired loans ratio above 5% and fall of its operating profit to RWA below 2.5%.
The ratings could also be downgraded if there were a material and sustained weakening of the bank’s capitalisation, including due to materialisation of risks tied to its sovereign exposure. In particular this could happen if the bank’s CET1 ratio falls to below 15% on a sustained basis.
Factors that could, individually or collectively, lead to positive rating action/upgrade:
An upgrade of the bank’s IDR and VR would require an upgrade of the Romanian operating environment score (bb+), while maintaining the bank’s solid credit metrics.
OTHER DEBT AND ISSUER RATINGS
Transilvania’s GSR of ‘ns’ reflect Fitch’s view that due to the implementation of the EU’s Bank Recovery and Resolution Directive (BRRD), senior creditors of Transilvania cannot rely on full extraordinary support from the sovereign if the bank becomes non-viable.
An upgrade of the GSR would be contingent on a positive change in the sovereign’s propensity to support the bank. However, this is highly unlikely, given existing resolution legislation.
VR ADJUSTMENTS
The operating environment score of ‘bb+’ has been assigned below the implied category score of ‘bbb’, due to the following adjustment: macroeconomic stability (negative).
The asset quality score of ‘bb’ has been assigned above the implied category score of ‘b’ due to the following adjustments: historical and future metrics (positive).
BEST/WORST CASE RATING SCENARIO
International scale credit ratings of Financial Institutions and Covered Bond issuers have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of three notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of four notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from ‘AAA’ to ‘D’. Best- and worst-case scenario credit ratings are based on historical performance. For more information about the methodology used to determine sector-specific best- and worst-case scenario credit ratings, visit https://www.fitchratings.com/site/re/10111579
