Fitch Ratings has downgraded Oragroup S.A.'s Long-Term Issuer Default Rating (IDR) to 'CCC' from 'B-' and removed it from Rating Watch Negative (RWN).

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 Oragroup's prospects for restoring the group's capital ratios to minimum regulatory requirements by end-2023. The downgrade also reflects the expectation that common equity double leverage will increase further in the near term, thereby increasing bank holding company (BHC) failure risk relative to the group's failure risk.

Oragroup's Government Support Rating (GSR) of 'ns' is unaffected by this rating action. A full list of rating actions is below.

Key Rating Drivers

Oragroup's Long-Term IDR is driven by its standalone creditworthiness, as expressed by its VR of 'ccc'. As a BHC, Oragroup's VR is notched down once from the group VR of 'ccc+' due to high common equity double leverage.

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: Oragroup's VR is one notch below the group VR because there is higher failure risk at the BHC due to high common equity double leverage (130% at end-1H22; Fitch estimates it remained above this level at end-2022). This is expected to increase further in the near term due to capital support for under-capitalised subsidiaries.

Capital Requirements Breached: Oragroup's capital ratios (common equity Tier 1 (CET1): 5.5%; Tier 1: 5.5%; total: 7.5% at end-1H22; largely unchanged at end-2022) have materially breached regulatory requirements (CET1: 7.9%; Tier 1: 8.9%; Total: 11.9%) since a revision in the risk-weights applied to certain loan portfolios in 1H22 caused a large increase in risk-weighted assets.

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 West African Economic and Monetary Union.

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: Oragroup has a presence in 12 West and Central African countries, but only moderate market shares in the larger economies in which it operates and a small balance sheet (USD6.7 billion at end-1H22) compared with other regional banking groups. The majority shareholder, ECP Financial Holding LLC, is attempting to sell its 50% shareholding. This could hinder Oragroup's ability to execute plans to raise capital-qualifying debt.

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.

Oragroup's GSR of 'ns' reflects our opinion that support for the BHC cannot be relied upon from any sovereign authority. Fitch believes that some of the group's key banking subsidiaries could be supported by their respective national authorities, but such support is unlikely to extend to the BHC itself.

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 '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, visitwww.fitchratings.com/esg

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