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Rating Action:

Moody's downgrades BRD -- Groupe Société Générale to Ba2/NP from Baa3/P-3; outlook negative

17 Jul 2013

Baseline credit assessment lowered to b2 from ba3

London, 17 July 2013 -- Moody's Investors Service has today downgraded the long and short-term deposit ratings of BRD - Groupe Société Générale (BRD) in Romania to Ba2/Not-Prime from Baa3/Prime-3, following the lowering of the bank's baseline credit assessment (BCA) to b2 from ba3. Concurrently, Moody's lowered the standalone bank financial strength rating (BFSR) to E+ from D-. The long-term deposit ratings carry a negative outlook.

Moody's says that the lowering of the BCA is driven by (1) the further deterioration of the bank's already weak asset quality; (2) Moody's expectation that the bank will face significant challenges to return to sustainable profitability in 2013; and (3) the bank's exposure to weak and uncertain collateral values. However, BRD remains adequately capitalised to withstand further provisioning needs from the existing stock of non-performing loans (NPLs), and Moody's does not foresee the need for additional capital, if asset-quality deterioration continues to progress in line with the average of the banking system.

At the same time, the expected support available from the parent Société Générale (A2, stable; BFSR C-/BCA baa2, stable) and the Romanian government (Baa3 negative) underpins the three-notch uplift for BRD's long-term deposit ratings from the b2 BCA.

RATINGS RATIONALE

--- PERSISTING MACROECONOMIC PRESSURE CONTINUES TO AFFECT ASSET QUALITY AND PROBITABLITY

Weak economic growth continues to affect banking sector performance with weak credit demand, lower revenues and asset-quality pressures.

Given Romania's high dependence on external markets, particularly in terms of exports and private sector capital inflows, the low growth and financial uncertainty in euro area countries are dragging on Romania's economic performance. Romania's GDP growth decelerated to 0.7% in 2012, and Moody's expects GDP to grow by a modest 1.5% in 2013, with private consumption expected to remain subdued. Although economic growth should improve in the coming years, this will likely remain well below the 2008 pre-crisis levels (about 6% GDP growth per annum). Romania's income level is far below the EU 27 average and the slower pace of growth will delay the pace of income convergence.

Although at a slower pace than in 2012, Moody's expects that the bank's asset-quality will continue to deteriorate as indicated by the relative stabilisation in the high household leverage and in the weak construction industry. However, the bank's exposure to a potential structural weakening of the local currency versus the Euro remains a key credit risk to asset quality. The bank's NPL stock will likely peak in 2013 and risk provisions will remain high, but lower than the previous year's peak of 5.2% of gross loans (unless otherwise noted, data in this press release are from company data or Moody's Financial Metrics).

BRD's asset quality is weak, and the ratio of problem loans to gross loans deteriorated to 22.2% at March 2013 from 21.3% at year-end 2012. While this ratio deteriorated, the bank improved its coverage of NPLs to 53.9% as of March 2013 from about 43% at year-end 2011. Moody's says that the bank's exposure to weak and uncertain collateral values in the country, combined with lengthy recovery procedures, may continue to exert pressure on coverage of NPLs, and on the bank's capacity to write-off NPLs.

The NPL trend reflects the bank's (1) large loan exposure to the weak small and medium enterprises sector and to unsecured consumers; and (2) its significant level of foreign-currency lending, equal to about 58% of the total loan portfolio, mainly Euro-denominated. Weak asset quality and lower net interest income led to a loss in 2012 and will continue to exert pressure on profitability in 2013 and 2014.

Moody's believes that the bank will continue to face challenges in the medium term in its efforts to return to sustainable profitability, following the limited loss of EUR74 million (or -0.88% of average risk weighted assets) reported in 2012, while implementing its new market and product strategy, reinforcing its risk culture and working out its significant non-performing loan portfolio.

Moody's notes the bank's small profit of EUR3 million in Q1 2013, significantly lower than Q1 last year, mainly reflects the significant decrease in the bank's net interest income, while loan-loss provisions are maintained at a high level and costs are decreasing.

--- ADDITIONAL CONSIDERATIONS

BRD's capitalisation remains adequate, with an IFRS capital adequacy ratio of 16.7% at year-end 2012. Against a number of Moody's stress scenarios, which assess BRD resilience against further asset-quality deterioration, the rating agency notes that BRD's existing capital cushion may come under limited pressure.

--- DEPOSIT RATINGS

BRD is the second-largest bank in Romania, with market shares of around 15% in deposits and loans. Société Générale holds about 60% stake in the bank and provides some funding to its subsidiary, mostly to finance its sizeable foreign-currency portfolio. These considerations, together with Moody's view of Société Générale's commitment to the Romanian market, underpin Moody's assumptions of parental and systemic support for the bank, which result in a three-notch rating uplift from the current b2 BCA.

--- RATIONALE FOR THE OUTLOOK

The outlook on the bank's long-term deposit ratings is negative and reflects the possibility that the pressures on asset quality, profitability and capital, if sustained, could lead to the bank becoming more weakly positioned in the E+ BFSR category, resulting in a potential lowering of the deposit ratings.

WHAT COULD MOVE THE RATINGS UP/DOWN

Moody's says that further downward pressure on the BCA could be exerted if the bank became consistently loss-making, which would have a material impact on the sustainability of BRD's large franchise in Romania, or on the capitalisation level which Moody's currently considers as an important cushion. In addition, deterioration in the operating conditions in Romania -- which may continue to affect BRD's asset quality -- could prompt Moody's to revise downward the bank's BCA and long-term deposit ratings.

In addition, a lowering of Société Générale's ratings and/or Romania's sovereign ratings could also exert downward pressure on BRD's ratings.

Given the negative outlook, Moody's does not envisage any immediate upward pressure on the bank's ratings. However, BRD's ability to maintain its large market position -- coupled with a return to a sustainable profitability and significant asset-quality improvements -- could result in upward pressure on the BCA and deposit ratings. In addition, any rating upgrades will also depend on improvements in the operating environment and generally on the evolution of the parent's ratings and the sovereign ratings.

The principal methodology used in this rating was Global Banks published in May 2013. Please see the Credit Policy page on www.moodys.com for a copy of this methodology.

REGULATORY DISCLOSURES

For ratings issued on a program, series or category/class of debt, this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the rating action on the support provider and in relation to each particular rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this rating action, and whose ratings may change as a result of this rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

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Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

Simone Zampa
VP - Senior Credit Officer
Financial Institutions Group
Moody's Investors Service Ltd.
One Canada Square
Canary Wharf
London E14 5FA
United Kingdom
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

Yves J Lemay
MD - Banking
Financial Institutions Group
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

Releasing Office:
Moody's Investors Service Ltd.
One Canada Square
Canary Wharf
London E14 5FA
United Kingdom
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

Moody's downgrades BRD -- Groupe Société Générale to Ba2/NP from Baa3/P-3; outlook negative
No Related Data.
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