Fitch Ratings has upgraded Kosovo's ProCredit Bank SH.A.'s (PCBK) Long-Term Issuer Default Rating (IDR) to 'BB+' from 'BB'. The Outlook is Stable. PCBK's Shareholder Support Rating (SSR) has also been upgraded to 'bb+' from 'bb'. The Short-Term Issuer Default Rating has been affirmed at 'B'.
ProCredit Bank SH.A remains the only bank in the country to have consistently received a rating from Fitch for many years. This year, the rating follows the affirmation of the country’s Long-Term Foreign-Currency (LTFC) Issuer Default Rating (IDR) of 'BB-' with a Stable Outlook and a Country Ceiling of 'BBB-'. This milestone marks Kosovo’s first sovereign credit rating, highlighting a stable outlook and positioning the country favourably among Western Balkan nations.
PCBK's Long-Term IDR is higher than that of Kosovo to reflect Fitch’s expectations that the bank would benefit from support from its 100% shareholder, ProCredit Holding AG (PCH; BBB/Stable), even in the case of an extreme sovereign stress. Fitch believes the owner's commitment to the Kosovan subsidiary is sufficiently strong to be rated two notches above the sovereign while transfer and convertibility risks are relatively low as reflected by Kosovo's 'BBB-' Country Ceiling.
Apart from shareholder support that drive the rating, other factors such as: Good Performance in a High-Risk Market, Prudent Risk Framework, Recurring Reasonable Profitability, Strong Deposit Franchise, etc.
Good Performance, High-Risk Market: PCBK's VR reflects its strong domestic franchise, expertise in SME banking and prudent risk management, as reflected in better-than-sector asset quality, and good profitability, notwithstanding high operating environment risks.
Emerging, High-Risk Economy: Fitch’s assessment of Kosovo's operating environment reflects the small size of the economy, low GDP per capita, and less developed regulatory and legal frameworks compared to regional peers. At the same time, the banking sector demonstrates reasonable asset quality, high returns, and adequate capital buffers.
Prudent Risk Framework: The ProCredit group deploys its established risk governance at all subsidiaries, including PCBK, which results in prudent underwriting standards and strict risk controls. This should be seen in the context of the challenging operating environment, which could weigh on banks' opportunities to be consistently profitable.
Asset Quality to Deteriorate Moderately: PCBK's impaired loans ratio improved to 1.3% at end-2023 (end-2022: 2%) and compares well with the 2% sector average. Fitch expects the ratio to deteriorate to about 2% by end-2025, as the bank's prudent underwriting mitigates pressure on borrowers from higher interest rates. The bank's loan loss allowance coverage of impaired loans is relatively high, providing headroom to absorb credit losses in the near term.
Recurring Reasonable Profitability: PCBK's profitability benefits from a net interest margin that is wider than peers. PCBK's operating profit/risk-weighted assets was flat in 2023 at a high 3.2%, supported by high interest rates and continued loan impairment charge (LIC) reversals. Fitch expects the ratio to moderate, but remain reasonable, toward 2.5% by 2025 with lower interest rates and higher LICs.
CET1 Ratio to Weaken: The bank's common equity Tier 1 (CET1) ratio strengthened to 14.6% at end-2023, from 13.2% at end-2022, reflecting strong profit retention. Fitch expects the CET1 ratio to reduce towards 12% by end-2025, due to high dividend payouts and with lending growth, a level which we consider only modest for the bank's risk profile and small nominal capital base.
Strong Deposit Franchise: The bank's funding and liquidity profile is supported by its consistently reasonable loans/deposits ratio at about 75%-80%. Fitch expects PCBK to maintain its high market share in deposits in the medium term, while competitive pressures and migration towards interest-bearing term deposits will raise funding costs. Liquid assets (23% of assets at end-2023) is adequate.
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