Fitch Ratings has affirmed
A full list of rating actions is below.
Key Rating Drivers
Shareholder Support Drives IDRs: PCBS's IDRs are driven by its SSR, which reflect Fitch's view of potential support from the bank's sole shareholder,
Modest Franchise; SME Focus: PCBS's VR balances its modest domestic franchise, expertise in SME banking, reasonable profitability and capitalisation and prudent risk management with risks stemming from the Serbian operating environment.
Stable Operating Environment:
Prudent Risk-Management Framework: The
Higher Impaired Loans: PCBS's impaired loans ratio weakened to 3.6% at end-2023 (end-2022: 2.6%), largely due to new defaults and loan book contraction. However, we expect the ratio to fall to about 3% by end-2025 with loan growth and effective loan workouts. Sustained loan quality weakening, reflected in a higher impaired loans ratio compared with historical averages, would weigh on our assessment.
Strengthened Profitability: PCBS's operating profit improved to 2.9% of risk-weighted assets (RWAs) in 2023, mainly supported by higher yields. We expect the ratio to moderate to about 2.3% by end-2025, driven by falling rates and increased operating expenses, but to remain stronger than in recent years. Consequently, we have upgraded the score to 'bb-' from 'b+'.
Adequate Capital Buffers: PCBS's common equity Tier 1 (CET1) ratio weakened to 18.6% at end-2023 (end-2022: 19.1%) as a result of increased RWAs, stemming from an increase in operational risk, despite loan contraction. We believe the 760bp buffer above regulatory requirements is adequate against the risks PCBS faces and is supportive of growth. Fitch's assessment of capitalisation also takes into account potential ordinary support from the parent.
Increased Deposit Funding: PCBS's loans/deposit ratio fell just below 100% at end-2023 given recent years of deposit growth, reduced parent funding and loan book contraction. Funding is supplemented by long-term loans from international financial institutions earmarked for SME development projects. Liquidity (19% of assets) is adequate and primarily comprises central bank reserves, short-term government securities and cash.
Rating Sensitivities
Factors that Could, Individually or Collectively, Lead to Negative Rating Action/Downgrade
PCBS's Long-Term IDRs would be downgraded if
PCBS's VR could be downgraded on a marked weakening in asset-quality metrics, in particular if its impaired loan ratio increases above 5%, accompanied by a significant acceleration in loan impairment charges above our expectations significantly weighing on profitability.
Factors that Could, Individually or Collectively, Lead to Positive Rating Action/Upgrade
PCBS's Long-Term IDRs and SSR could be upgraded if the parent's Long-Term IDR and the Country Ceiling were upgraded. However, this is unlikely in the near term given the Stable Outlooks on PCH's Long-Term IDR and the sovereign rating.
An upgrade of PCBS's VR would require a combination of an improvement in its operating environment and a strengthening of its franchise and financial profiles, in particular improved profitability with an operating profit comfortably and sustainably above 1.25% of RWAs.
OTHER DEBT AND ISSUER RATINGS: KEY RATING DRIVERS
PCBS's Short-Term IDRs are the only option mapping to their respective Long-Term IDRs. PCBS's Long-Term Foreign- and Local-Currency IDRs (xgs) are at the level of the bank's VR and they are also underpinned by support from PCH. The Short-Term IDRs (xgs) are mapped to their respective Long-Term IDRs (xgs).
OTHER DEBT AND ISSUER RATINGS: RATING SENSITIVITIES
PCBS's Short-Term IDRs are sensitive to changes in their respective Long-Term IDRs. PCBS's LT IDRs (xgs) could be downgraded if the bank's VR was downgraded and the parent bank's ability or propensity to provide support simultaneously weakens, as assessed by Fitch. The latter could stem from a downgrade of the parent bank's Long-Term IDRs (xgs).
An upgrade of the Long-Term IDRs (xgs) would require an upgrade of the bank's VR. An upgrade could be also triggered by an upgrade of the parent bank's Long-Term IDRs (xgs), provided Fitch's view of the parent bank's ability and propensity to provide support was unchanged. PCBS's Short-Term IDRs (xgs) are primarily sensitive to changes in their respective Long-Term IDRs (xgs).
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.
Public Ratings with Credit Linkage to other ratings
PCBS's IDRs and SSR are driven by support from PCH.
ESG Considerations
The highest level of ESG credit relevance is a score of '3', unless otherwise disclosed in this section. A score of '3' 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. Fitch's ESG Relevance Scores are not inputs in the rating process; they are an observation on the relevance and materiality of ESG factors in the rating decision. For more information on Fitch's ESG Relevance Scores, visit https://www.fitchratings.com/topics/esg/products#esg-relevance-scores
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