Fitch Ratings has revised the Outlook on Banca Transilvania's Long Term Issuer Default Rating (IDR) to Stable from Negative and affirmed the IDR at 'BB+'.

We have also affirmed the bank's Viability Rating (VR) at 'bb+'. A full list of rating actions is below.

The revision of the Outlook to Stable reflects the moderation of pandemic-related risks on the operating environment for Romanian banks in general, and on Transilvania's asset quality and earnings in particular.

Fitch has withdrawn Transilvania's Support Rating and Support Rating Floor as they are no longer relevant to the agency's coverage following the publication of its updated Bank Rating Criteria on 12 November 2021. In line with the updated criteria, we have assigned Transilvania a Government Support Rating (GSR) of 'no support' ('ns').

Key Rating Drivers

IDR and VR

Transilvania's IDRs and VR reflect the bank's strong domestic market franchise, solid capitalisation, robust funding and liquidity, resilient asset quality to date and recovering profitability.

We have revised our outlook on the operating environment for Romanian banks to stable from negative. We believe that the impact of the pandemic on Romanian banks' credit profiles has been broadly contained and any residual risks are mitigated by the country's near-term economic recovery prospects. Fitch scores the operating environment for Romania at 'bb+', which is below the 'bbb' implied score, reflecting risks to macroeconomic stability over the medium term.

Transilvania is the largest Romanian bank, with about a 19% market share in total sector assets. Its traditional banking business model focuses on serving SMEs, entrepreneurs and retail clients with whom it has strong relationships. A granular loan book and limited exposure to volatile industries supports its record of solid overall performance through the cycle.

The bank's capital position is solid, underpinned by high capital ratios (with a common equity Tier 1 (CET1) ratio of 17.7% at end 3Q21), reasonable buffers above regulatory minimums and low capital encumbrance by unprovisioned impaired loans. Internal capital generation remains solid, underpinned by the healthy recovery of the bank's profits. The bank's sizable exposure to the sovereign through its holdings of sovereign debt increases the vulnerability of its capital to shocks related to the sovereign and its rating. At end-3Q21, the bank's government bonds portfolio was equal to about 3.8 times its CET1 capital, and mostly comprised Romanian sovereign bonds (BBB-/Negative).

Transilvania's asset quality was fairly resilient to the effect of the pandemic, thanks to its conservative underwriting standards and diversified and granular loan portfolio. Our assessment is also positively affected by the bank's robust provisioning and material non-loan exposures, which are of higher credit quality compared with the average of its loan portfolio. At-end 3Q21, the bank's impaired loans ratio improved to 4.9%, compared with 5.5% at end-2020, on the back of accelerating growth, modest impaired loans generation and effective resolution of bad debts. We expect the bank's asset quality to remain broadly stable, with only moderate downside risk to key metrics.

The bank's provision coverage remains robust, with total provisions covering about 150% of impaired loans, while specific coverage was more moderate at about 62%. The bank has buildup allowances on performing loans (IFRS Stage 1&2) to account for potential risk coming from borrowers vulnerable to the economic effects of the pandemic. Transilvania has granted loan moratoria, which accounted for about 14% of the bank's loan portfolio at their peak. However, by end-3Q21 most of these had returned to repayment, with only about 0.1% of gross loans still having payments suspended.

Profitability has shown solid recovery, as earnings benefited from improved lending growth in 2021 and the cost of risk fell, driven by solid recoveries on bad debts. In 9M21 the bank's operating profit to risk-weighted assets ratio increased to 4.4%, from 2.8% in 2020. This improvement was underpinned by robust recoveries, which limited loan impairments, and higher revenues driven by loan growth and transaction volumes. Although we expect the ratio to come down as loan impairment charges normalise, profits should remain solid, supporting healthy internal capital generation.

Transilvania's funding and liquidity remain rating strengths. The bank is predominantly funded by stable and granular customer deposits. The strong funding profile is reflected in a low gross loan/customers deposits ratio of 51% at end-3Q21. Transilvania's liquidity is ample, comprising mostly Romanian government bonds and placements with the central bank. Basel liquidity ratios (liquidity coverage ratio, net stable funding ratio) remain well above regulatory minimum requirements, while liquid assets covered about 50% of customer deposits at end-3Q21.

GSR

Transilvania's GSR of 'ns' reflect Fitch's view that due to the implementation of the EU's Bank Recovery and Resolution Directive (BRRD), senior creditors of Transilvania cannot rely on full extraordinary support from the sovereign if the bank becomes non-viable.

Rating Sensitivities

Factors that could, individually or collectively, lead to negative rating action/downgrade:

Transilvania's Long-Term IDR and VR could be downgraded if operating environment pressure for Romanian banks materializes to the extent that triggers a reassessment to below 'bb+'.

The bank's Long-Term IDR and VR could also be downgraded if there was material and sustained weakening of the bank's capitalisation and profitability. This could happen if pressure on capital from the bank's sovereign exposure increases, while profitability suffers from weakening asset quality.

Factors that could, individually or collectively, lead to positive rating action/upgrade:

An upgrade of the bank's Long-Term IDR and VR would require an upgrade of the Romanian operating environment score (bb+), while maintaining the bank's solid standalone credit profile.

An upgrade of the GSR would be contingent on a positive change in the sovereign's propensity to support the bank. However, this is highly unlikely, given existing resolution legislation.

VR ADJUSTMENTS

The operating environment score of 'bb+' has been assigned below the implied score, due to the following adjustment: Macroeconomic Stability (negative).

The asset quality score of 'bb' has been assigned above the implied score due to the following adjustments: Collateral and reserves (positive), Non-loan exposures (positive).

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

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, visit www.fitchratings.com/esg

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