Fitch Ratings has downgraded
Fitch typically does not assign Outlooks to issuers with a rating of 'CCC+' or below.
The downgrade of the Long-Term IDR reflects the downgrade of the Viability Rating (VR) to 'ccc' from
'b-' and removal from RWN. The downgrade of the VR reflects a high degree of uncertainty around
Key Rating Drivers
The group VR of 'ccc+' is highly influenced by capital ratios that remain materially in breach of minimum regulatory requirements and Fitch's expectation that compliance with minimum requirements will not be restored in the near term. The group VR is one notch below the implied VR of 'b-' due to the following adjustment: capitalisation and leverage.
High Double Leverage:
Capital Requirements Breached:
Uncertain Prospects for Restoring Compliance: Fitch views prospects for restoring capital ratios above minimum requirements by end-2023 as uncertain, given that to a large degree capital plans rest on a change in the regulatory treatment of operations outside the
Plans to issue capital-qualifying debt carry heightened execution risks given the group's weak financial condition and strategic uncertainty fostered by the majority shareholder seeking to divest. Prospects for restoring capital ratios are further hindered by weak internal capital generation in 2022 and high CET1 encumbrance by net impaired loans (156% at end-1H22).
Potential Debt Acceleration: Failure to restore the Total Capital Adequacy Ratio above the minimum requirement at end-2022 would lead to a covenant breach if called by a small number of BHC lenders, including shareholders and development finance institutions. This could lead to an acceleration of all BHC debt but Fitch expects the lenders will not call a covenant breach. Even if they were to do so, Fitch views the BHC as having sufficient liquidity to repay the small loans and prevent an acceleration of all BHC debt.
Majority Shareholder Divesting:
Weak Loan Quality: The group's impaired loans (Stage 3 loans under IFRS 9) ratio (16% at end-1H22) remains high, reflecting particularly distressed loan quality in certain subsidiaries and delays in resolving legacy exposures, partly influenced by strict requirements that must be met to write-off impaired loans. Total loan loss allowance coverage of impaired loans (51% at end-1H22) is weak. Asset quality risks are mitigated by substantial non-loan assets, primarily in the form of sovereign fixed-income securities, deemed to be of higher credit quality.
Modest Profitability: The group delivers modest profitability, as indicated by operating returns on risk-weighted assets that averaged just 1.6% between 2018-2021 (1.7% in 1H22 on an annualised basis). Revenue diversification is supported by high fees and commissions and a broad geographical footprint, but profitability is constrained by high costs and high loan impairment charges.
Rating Sensitivities
Factors that could, individually or collectively, lead to negative rating action/downgrade:
The VR and Long-Term IDR would be downgraded further in the event of a prolonged breach of regulatory capital requirements. The ratings may also be downgraded due to capital pressure from uncovered impaired loans or holdings of sovereign fixed-income securities.
The VR and Long-Term IDR would be downgraded if common equity double leverage increases materially from current levels, which would result in a widening of the notching between the group VR and that of the BHC. A widening of the notching could also follow a material tightening of BHC liquidity, which could result from cross-default clauses being triggered by a covenant breach.
Factors that could, individually or collectively, lead to positive rating action/upgrade:
The VR and Long-Term IDR would be upgraded if the group's capital ratios are restored above regulatory minimum requirements.
The VR and Long-Term IDR would be upgraded to the level of the group VR if common equity double leverage sustainably reduces below the 120% threshold.
The GSR is unlikely to be upgraded as we believe the governments' propensity to support the BHC is unlikely to increase.
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 '
REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING
The principal sources of information used in the analysis are described in the Applicable Criteria.
ESG Considerations
Unless otherwise disclosed in this section, the highest level of ESG credit relevance is a score of '3'. This means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. For more information on Fitch's ESG Relevance Scores, visitwww.fitchratings.com/esg
(C) 2023 Electronic News Publishing, source