Fitch Ratings has placed certain ratings of four EMEA banks Under Criteria Observation (UCO), following the publication of its updated Bank Rating Criteria on 12 November 2021.
The banks are Bank of Valletta, Credit Europe Bank (Russia) Ltd, ProCredit Bank AD Skopje and UniCredit Bulbank AD. "The support-driven Issuer Default Ratings (IDRs) of ProCredit Bank AD Skopje (BBB-/Negative/F3) and UniCredit Bulbank (BBB-/Stable/F3) are unaffected," Fitch said.
Fitch will review all affected ratings as soon as practical, but no later than six months from the publication of the updated criteria.
Key rating drivers
"The updated criteria introduce changes to the way we assign Viability Ratings (VRs), which measure a bank's intrinsic creditworthiness. The criteria include a fixed weighting scheme to derive an implied VR from the bank's scores for each key rating driver," Fitch said.
"We may then assign a VR higher or lower than the VR implied by the weighting of the key rating drivers scores in the following three cases:
- We may assign the VR at a lower level than the implied VR where we believe the implied VR is too high relative to the operating-environment score or the sovereign rating;
- We may assign the VR at a higher or lower level than the implied VR when a bank's business profile and/or risk profile may have a stronger impact on the assigned VR than the weighting would suggest;
- We may assign the VR at a lower level than the implied VR when one or more financial key rating drivers (asset quality, earnings & profitability, capitalisation & leverage, and funding & liquidity) represent a bank's 'weakest link'."
"The VRs of the four EMEA banks, Bank of Valletta, Credit Europe Bank (Russia), ProCredit Bank AD Skopje and UniCredit Bulbank, placed Under Criteria Observation could be downgraded by one notch as their implied VRs are one notch below their current VRs, and the business-profile and risk-profile assessments do not currently justify a positive VR adjustment."
Bank of Valetta's 'BBB'/'F2' Long-Term and Short-Term IDRs are also placed Under Criteria Observation as they are driven by the bank's 'bbb' VR. The majority of Bank of Valletta's key rating drivers are scored at 'bbb-', except capitalisation & leverage at 'bbb' and funding & liquidity at 'bbb+', Fitch said.
Fitch has placed Credit Europe Bank (Russia)'s 'BB-' Long-Term IDR, which is driven by the 'bb-' VR, UCO. Most of the bank's key rating drivers are scored 'b+' or 'bb-'.
Fitch has placed ProCredit Bank AD Skopje's 'bb-' VR UCO, most of the bank's key rating drivers are scored 'b+' or 'bb-'.
Fitch has placed UniCredit Bulbank's 'bb+' VR UCO as most of the bank's key rating drivers are scored 'bb' with the exception of capitalisation & leverage at 'bb+' and funding & liquidity at 'bb+'.
"The ratings listed above represent all public bank ratings in the EMEA region that could be affected by the changes in criteria. However, not all of the ratings placed on UCO will necessarily experience changes. The UCO will be removed once Fitch completes its analysis of the four banks' key rating drivers," Fitch said.
ESG considerations
BoV has an ESG Relevance Score of '4' for governance structure, reflecting the uncertainty surrounding the timing and resolution of the Deiulemar litigation that would have a negative impact on BoV's credit profile, notably its capitalisation, Fitch said. "These legal and compliance risks have a moderately negative influence on BoV's VR, in conjunction with other factors. Additional risks could arise from the recent grey listing of Malta by the FATF, which could pose risks to the bank's operating environment and profitability."
"Unless otherwise stated in the above, the highest level of BoV's and all other banks' ESG credit relevance is a score of '3'. This means ESG issues are credit-neutral or have only a minimal credit impact on the entities, either due to their nature or the way in which they are being managed by the entities. For more information on Fitch's ESG Relevance Scores, visit www.fitchratings.com/esg"
Rating sensitivities
Factors that could, individually or collectively, lead to negative rating action/downgrade:
Upon review of the UCOs, the ratings could be downgraded if the review does not result in i) an upward revision of VR key rating driver scores to give a higher implied VR; or ii) an upward revision of the banks' business profile or risk profile scores that is sufficient to warrant a positive adjustment from the implied VR.
Negative rating sensitivities defined in banks' latest published rating action commentaries continue to apply.
Factors that could, individually or collectively, lead to positive rating action/upgrade:
In the event the UCO reviews do not result in a downgrade, positive rating sensitivities outlined in banks' latest published rating action commentaries continue to apply.
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