Fitch affirms Romanian banks on revised bank tax ordinance

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Fitch Ratings has on Wednesday affirmed the Long-Term IDRs of Banca Comerciala Romana S.A. (BCR) and BRD-Groupe Societe Generale S.A. (BRD) at ‘BBB+’ and revised their Outlooks to Stable from Negative. Fitch has also affirmed the Viability Ratings (VRs) of BCR and Banca Transilvania S.A. (BT) at ‘bb+’, of UniCredit Bank S.A. (UCBRO) at ‘bb’, of Garanti Bank S.A. (GBR) at ‘bb-‘, of ProCredit Bank S.A. (PCBRO) at ‘b+’, and the VR-driven IDRs of BT at ‘BB+’ and GBR at ‘BB-‘. Short-Term IDRs, other support-driven ratings are unaffected. A full list of rating actions is at the end of this commentary, a release posted on the agency’s website reads.

“The rating actions follow a modification of a bank tax ordinance by the Romanian government, which, in our view, indicates a moderating risk of government intervention in the banking sector.

Fitch had changed the Outlooks on the IDRs of BCR and BRD to Negative in January 2019 on the expectation that we might cap the ratings of Romanian banks at one notch above the Romanian sovereign (BBB-/Stable), rather than the current two notches. This was because of what we perceived as a greater risk of local authorities’ intervention in the banking sector, in case of a sovereign default, which would negatively affect the banks’ ability to service their obligations.

Since then, a lower expected burden on the banking sector through a revised bank tax design indicates, in our opinion, a less aggressive stance of the government towards the sector, and a reasonable willingness of the authorities to respond to concerns raised by the National Bank of Romania and sector representatives. In the meantime, other laws passed through parliament in late December, which would have been detrimental to the sector’s profitability, have been declared unconstitutional and have been voided. As a result, we have moderated our views of prevailing country risks.

The latest ordinance modifying the bank tax (passed on 29 March 2019) significantly reduces pressure on the profitability outlook for the banks compared to the initial December 2018 version. The tax rate has been lowered to 0.4% per annum for larger banks and to 0.2% for banks with less than a 1% market share (including PCBRO). The taxable base has also been reduced and at present essentially encompasses performing loans that are not guaranteed by the state. In our view, the risk to banks’ solvency has reduced greatly due to a provision that relieves pre-bank-tax loss-making institutions from paying the tax, and otherwise limits the tax burden to the accounting profits.

In the new ordinance, additional tax relief can be achieved if banks meet or progress towards government-imposed lending growth and margin targets. The lending growth target of 8% for 2019 appears achievable, at least in part, but may present risks to underwriting quality, as banks may be incentivised to lend to target rather than what they consider the prudent amount.

We have affirmed five banks’ VRs at levels that reflect their varying degrees of resilience. As legislative risks have moderated, pressure on the banks from their operating environment has eased, in our view. The outlook for earnings in 2019 has also improved compared to that under the initial, more punitive bank tax format, and we perceive less pressure on the banks’ business models as a result,” the release reads.

 

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