September 26 (SeeNews) - Fitch Ratings said on Monday it assigned a long-term issuer default rating (IDR) of 'BBB', a support rating (SR) of '2' and a viability rating (VR) of 'bb' to Unicredit Bulbank, the largest lender by total assets in Bulgaria.
"The long-term IDR is on negative outlook," Fitch said on its website.
Bulbank's IDRs and SR reflect a high probability of extraordinary support from the bank's ultimate owner, UniCredit, the global ratings agency added.
Fitch also said in its statement:
"UniCredit's commitment to its Bulgarian subsidiary has been evidenced by a track record of significant operational and managerial support for the bank. Bulbank contributed around 6% to UniCredit's consolidated net profit in the first half of 2016, despite its relative small size.
The bank's Short-Term IDR of F2 - the higher of two options corresponding to a Long-Term IDR of 'BBB' - reflects potential support from higher-rated UniCredit. The Negative Outlook on the bank's Long-Term IDR reflects that on UniCredit.
Bulbank is directly owned by UniCredit Bank Austria AG (Bank Austria; BBB+/Negative/bbb+), which holds a 99.5% stake in the bank. The upcoming transfer of CEE operations from Bank Austria to UniCredit (planned in 4Q16) will be neutral to Fitch's view of the parental support available to the Bulgarian subsidiary as it is already notched from the ultimate parent, UniCredit.
VR
Bulbank's standalone profile reflects the bank's leading domestic market franchise, solid profitability, strong capital buffers, robust funding and liquidity. At the same time, Fitch also factors in Bulgaria's challenging operating environment, the bank's high impaired loans ratio and overall moderate risk appetite compared with peers. The VR is also underpinned by potential ordinary support available from its parent.
Bulbank's strong local franchise and scale have translated into its more resilient performance through- the-cycle compared with Bulgarian peers. At end-June 2016, Bulbank was by far the largest bank in Bulgaria by total assets (around 20% market share), customer loans (around 19%) and deposits (around 19%; for retail customers: 15%). The bank has a dominant market position in Bulgaria in the corporate segment and is ranked second in retail banking. The bank operates a traditional banking business, with a solid foothold in the corporate segment, which accounted for around 74% of gross loans.
Bulbank's weak asset quality reflects mostly legacy problems stemming from relaxed corporate lending pre-global financial crisis, including financing of the commercial real estate and construction sectors (around 13.5% of gross loan book at end-1H16). Retail loans performed distinctly better, but should be viewed against regular write-offs in the consumer loan portfolio.
At end-1H16 the bank's impaired loans ratio (defined as IFRS impaired loans and non-impaired loans past due by more than 90 days) stood at around 13.9% (around 8% for retail loans only), which was considerably below the sector average (around 20%), but fairly high in the wider CEE region. The impaired loans ratio fell from around 17.5% at end-2013, driven by loan expansion and portfolio clean-up, which should benefit from a slowly recovering real estate market.
Bulbank's profitability has been fairly resilient, despite pressure from subdued domestic credit demand, low market interest rates and excess liquidity. The bank's results compare favourably with regional peers due to the bank's still wide margins (around 4% at end-1H16) and high operational efficiency (cost/income ratio of around 40%). Loan impairment charges amounted to a considerable 1.5% of average gross loans at end of the first half of the year.
Bulbank's substantial capital surplus over regulatory minimums must be viewed against the difficult operating environment in Bulgaria. Reserve coverage of impaired loans is moderate, but if all outstanding impaired loans were fully covered with reserves, the bank's Fitch core capital ratio would still be above 20% at end-1H16. The common equity Tier 1 ratio increased in July 2016 by around 250bp from 23.7% at end-June 2016, due to the bank's transition to the Advanced IRB method.
Refinancing risks are low because the bank is self-funded with customer deposits (around 85% of total funding at end-1H16), it has a strong deposit franchise, high excess liquidity and can rely on ordinary parental support. Corporate deposits (around 50% of total deposits) are generally stable and granular. Available highly liquid assets at end-June 2016 covered around 48% total deposits.
The loans/ deposits ratio dropped to around 84% at end-June 2016 from above 100% at end-2014. This was driven by deposit growth of around 25% in both 2014 and 2015, reflecting flight-to-quality sparked by the collapse of the second-largest domestic bank and the intensification of the Greek crisis, respectively."