BOV faces possible Fitch credit rating downgrade

BOV is at risk of getting its credit rating downgraded by Fitch Ratings after the agency placed the bank, Malta’s largest, Under Criteria Observation.

In a statement issued on Tuesday, Fitch said that updates to the criteria it uses to generate banks’ credit ratings left BOV, along with three other banks in Europe and the Middle East (EMEA), with lower scores than they currently have.

The other banks are Credit Europe Bank (Russa) Ltd, ProCredit Bank AD Skopje, and UniCreditBulbank AD.

The American agency will meet in the next six months to review the ratings affected by the change, which was published on 12th November, and decide whether to actually effect the downgrades.

The updated criteria introduce changes to the way Fitch assigns 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 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:

1. The VR may be assigned at a lower level than the implied VR where Fitch believes the implied VR is too high relative to the operating-environment score or the sovereign rating.
2. Fitch 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.
3. The agency may also 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’.

When publishing the changes, Fitch acknowledged that some VRs and certain associated ratings in EMEA and Latin America could be affected by the introduction of the implied VR, while seeking to reassure clients that all changes are expected to be single-notch.

This is because “the implied VRs of the affected banks are one notch below their current VRs, and the business-profile and risk-profile assessments do not currently justify a positive VR adjustment”.

The majority of BOV’s key rating drivers are scored at ‘bbb-‘, except capitalisation & leverage at ‘bbb’ and funding & liquidity at ‘bbb+’.

The ‘bbb’ rating denotes Good Fundament Credit Quality, with good prospects for ongoing viability.

According to Fitch, such a rating indicates that the bank’s fundamentals are adequate, such that there is a low risk that it would have to rely on extraordinary support to avoid default. However, adverse business or economic conditions are more likely to impair this capacity.

BOV’s current Long-Term Issuer Default Rating (IDR) of BBB, which is an assessment of an issuer’s relative vulnerability to default on financial obligations, has also been placed UCO, as has its Short-Term IDR of F2.

A Long-Term IDR of BB denotes a moderate level of default risk relative to other issuers or obligations in the same country or monetary union, while a Short-Term IDR of F2 indicates a good capacity for timely payment of financial commitments, again relative to other issuers or obligations in the same country or monetary union. However, the margin of safety is not as great as in the case of the higher ratings.

In its statement, Fitch stressed that 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.

Upon review of the UCOs, the ratings could be downgraded if the review does not result in an upward revision of VR key rating driver scores, to give a higher implied VR, or an upward revision of the banks’ business profile or risk profile scores that is sufficient to warrant a positive adjustment from the implied VR.

ESG Score

BOV has an Environment Social Governance 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.

The Deiulemar litigation is an ongoing court battle between BOV and around 13,000 bondholders of the Deiulemar Group, which went bankrupt, resulting in the loss of their savings. The bondholders are claiming €363 million from the bank.

The ESG Relevance Scores are meant to transparently and consistently display both the relevance and materiality of individually identified ESG risk elements to Fitch’s rating decision. A score of ‘4’ for governance structure means the factor is relevant to the entity’s rating but not a key driver – it has a rating impact in combination with other factors.

These legal and compliance risks have a moderately negative influence on BOV’s VR, in conjunction with other factors, according to Fitch, which noted that additional risks could arise from the recent grey listing of Malta by the FATF, saying this could pose risks to the bank’s operating environment and profitability.