December 14 (SeeNews) - Moody's Investors Service said it affirmed the not-prime short-term deposit ratings and the Ba3 long-term local and foreign-currency deposit ratings of Raiffeisenbank Bulgaria while upgrading the outlook to positive from stable on the long-term deposit ratings.
"Concurrently, the rating agency has upgraded the bank's baseline credit assessment (BCA) to ba3 from b1 and affirmed its adjusted BCA of ba3 and the Baa3(cr)/Prime-3(cr) Counterparty Risk Assessment (CRA)," Moody's said in a rating action statement late on Tuesday.
Moody's also said in the statement:
"RATINGS RATIONALE
UPGRADE OF THE STANDALONE BCA
The upgrade of Raiffeisenbank's (Bulgaria) BCA to ba3 from b1 is driven by improvements in the bank's financial fundamentals mainly in its asset quality and liquidity metrics. The upgrade also reflects the banks' sound capital buffers, its improving although modest profitability as well as its favorable funding mix.
Raiffeisenbank's (Bulgaria) ratio of non-performing loans (NPLs) to gross loans declined to 8.6% as of September 2016 from a high 18.7% as of year-end 2013. The improvement in asset quality primarily reflects the sale and write-off of problem loans. Concurrently the bank's cash coverage of NPLs has improved, with loan loss reserves growing to 71% of gross loans as of September 2016 from 53% as of December 2013. The rating agency expects that improved labour market conditions will continue to support the ability of its retail customers to service their loans (38% of the loan book as of end-2015), while the reduction in its exposure to the volatile construction and real estate sector (down to 6% of loans as of end-2015 compared to 14% as of end-2012) will also benefit its asset quality.
The upgrade also reflects the bank's sound capital adequacy and its improved but still modest profitability. Raiffeisenbank's (Bulgaria) Tier 1 ratio stood at 23.50% as of December 2015 (23.67% as of December 2014), while its shareholder's equity to assets ratio was also high at 14.23%. The improvement in the bank's regulatory capital ratios reflects the de-risking of its balance sheet as well as high earnings retention in previous years. The rating agency expects some gradual capital consumption as loan growth gradually picks-up and the bank pays dividends. Although the bank's earnings grew significantly during the nine-months to September 2016 compared to the corresponding period the previous year, the rating agency views Raiffeisenbank's (Bulgaria) profitability and hence internal capital generation ability as still modest and notes that the earnings growth in the nine months to September 2016 was mainly due to one-off items, relating to a disposal and to a substantial recovery of previously provisioned amounts.
The bank's ba3 BCA also captures the increase in its liquidity buffers and its improved funding mix. Liquid assets accounted for 43% of total assets as of December 2015 while the gross loan-to-deposit ratio gradually declined to 83% as of September 2016, compared to from 112% as of year-end 2013. Raiffeisenbank (Bulgaria) is primarily funded by deposits, a more stable funding source, which accounted for 74% of total assets as of December 2016.
RATIONALE FOR THE POSITIVE OUTLOOK
The change in outlook for the Ba3 long-term deposit ratings to positive from stable reflects:
1) Moody's expectation of further improvement in the bank's financial fundamentals, supported by the stabilising economic environment in Bulgaria. Moody's expects the economy will expand by 2.8% in 2016-17 supported by reduced unemployment and increased consumption which will continue to drive improvements in the bank's asset quality and profitability.
2) The positive pressure on the ba3 Baseline Credit Assessment of Raiffeisenbank Bank International AG (RBI), which is Raiffeisenbank (Bulgaria)'s Austria-based parent. While Raiffeisenbank (Bulgaria)'s Ba3 deposit ratings do not currently benefit from uplift from parental support, its deposit ratings could be upgraded by one notch if RBI's BCA is upgraded to ba2 from ba3.
-- WHAT COULD MOVE THE RATINGS UP/DOWN
Further reduction in the bank's problem loans, while maintaining strong capital ratios and improving its core profitability, could have positive rating implications for the BCA. An upgrade of RBI's BCA could result in an upgrade of Raiffeisenbank's deposit ratings and CRA.
A deterioration in the bank's asset quality, continued pressure on its core earnings (fees and commissions and net interest income) affecting overall profitability and weaker capital adequacy, could exert negative pressure on the ratings."
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