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Fitch affirms Bulgarian Development Bank at 'BBB', outlook positive

Fitch affirms Bulgarian Development Bank at 'BBB', outlook positive Photo: Bulgarian Development Bank / All rights reserved.

SOFIA (Bulgaria), August 18 (SeeNews) - Fitch Ratings said that it affirmed state-owned Bulgarian Development Bank's (BDB) Long-Term Issuer Default Rating (IDR) at 'BBB', with a positive outlook on the long-term IDR positive.

"The affirmation reflects no major changes to our assessment of the Bulgarian sovereign's propensity or ability to support the bank," Fitch said in a press release on Wednesday.

Following an update in its bank rating criteria after November 2021, the ratings agency has withdrawn the lender's Support Rating of '2' and Support Rating Floor of 'BBB' since they are no longer relevant to its coverage, it added.

In line with the update, Fitch assigned BDB a Government Support Rating (GSR) of 'bbb'.

Here is what Fitch Ratings also said in its statement on BDB:

"KEY RATING DRIVERS

BDB's IDRs are equalised with the Bulgarian sovereign rating (BBB/Positive), reflecting a high probability of support from the Bulgarian sovereign, in case of need, as expressed by its GSR of 'bbb'. The strong incentive to support BDB is mainly driven by the state's full ownership of the bank. Additionally, as a development bank, we see limited scope for bail-in of its senior creditors that would be politically acceptable for the state. BDB's Short-Term IDR of 'F2' is equalised with that of the Bulgarian sovereign.

Fitch does not assign a Viability Rating to BDB because the bank does not have a meaningful standalone franchise that could exist without its state ownership.

Developing Policy Role: Our assessment considers the bank's role in supporting the government's economic policy. BDB has a policy-bank status, as defined by the Law on BDB. This role has strengthened, in our view, following the inclusion of BDB within the government's programmes aimed at alleviating the economic fallout from the Covid-19 pandemic. Nevertheless, BDB's pure policy role outside of the Covid-19 support programmes remains under-developed and the bank has a portfolio of commercial activities.

The changes to the Law on BDB in 2021, with the introduction of a maximum exposure in new underwriting, mean the bank's focus will increasingly be targeted towards small and medium-sized enterprises. This over time should strengthen the bank's policy mandate. The changes follow an inquiry by the authorities into the underwriting standards of the bank. Since then the bank has focused on resolving some of its more concentrated exposures.

Resolution Legislation Complicates Support: BDB is subject to Bulgarian resolution legislation, which requires senior creditors to participate in losses, if necessary, instead of or ahead of a bank receiving sovereign support. This could limit the state's propensity to provide extraordinary support to BDB, particularly in view of the lack of a clear separation between its pure policy role and its commercial activities.

However, we believe that the state would act pre-emptively to prevent BDB's failure due to its ownership of the bank and to avoid bailing in senior creditors. This is because a substantial part of BDB's funding is either sourced from or guaranteed by the state, with most of the remainder coming from international development institutions, bail-in of which would not be politically acceptable.


Weak Asset Quality: Asset-quality metrics remain poor with a high impaired loans ratio of 14.5% at end-2021, although a significant share of the bank's problem loans are longstanding, and also given the bank's limited write-offs. BDB's existing loan portfolio remains heavily concentrated, which also contributes to the bank's high problem loans ratio. Additionally, the bank's asset quality is weighed down by its equity minority holdings in First Investment Bank AD (FIBank, B/Stable/b), which accumulated over BGN100 million in revaluation losses since BDB's participation in FIBank's capital increase in 2020.

Pandemic Programmes Weigh on Profits: BDB has been loss-making over the last two years, driven by its pandemic-support programmes, impairment on its existing loan portfolio and revaluation losses. Losses generated on the pandemic-support programmes and from equity investments have been covered by a capital injection by the state.

Solid Capital Position: BDB's capital is underpinned by its high capital ratio, which stood at 36% at end-2021. Capital encumbrance by unprovisioned impaired loans is modest, reflecting high levels of total provisioning. Nevertheless, capital remains exposed to meaningful losses in case of a downturn, given the significant concertation of the bank's loan portfolio. We expect further ordinary support from the sovereign in case of need.

Potential support for BDB would be easily manageable for the state, due to the bank's small size and the sovereign's sound public finances. At end-2021, BDB's total assets equaled about 2.7% of Bulgaria's 2021 GDP. Fitch forecasts Bulgaria's general government debt at about 29% of GDP at end-2022, compared with a median of around 49% for European emerging countries.

Stable Wholesale Funding: Funding structure is dominated by wholesale funding from various international financial institutions and deposits from the Bulgarian government or government- related entities. The government has also guaranteed funding for the bank's programme aimed at increasing energy efficiency of Bulgarian households. The proportion of equity, state-related funding and state-guaranteed funding stood at about 53% of total assets at end-1Q22.

Liquidity remains solid, more than adequately covering the bank's modest refinancing needs over the next 12 months. Liquid assets accounted for over 20% of the bank's assets, while regulatory liquidity ratios are comfortably above their regulatory requirements.

RATING SENSITIVITIES

Factors that could, individually or collectively, lead to negative rating action/downgrade:
- A downgrade of Bulgarian sovereign would lead to a downgrade of BDB's IDRs and GSR

- A significant reduction in capitalisation, not promptly addressed by the government, restricting BDB's ability to effectively perform its policy role, could also result in a downgrade. This could happen if defaults and significant losses result from the bank's largest borrowers who are subject to a state inquiry into the compliance of BDB's lending with its development mandate

- Changes to the funding structure that would result in the bank being more politically acceptable to be bailed in

- A weakening of BDB's policy role, including through an expansion of commercial lending, could also result in a downgrade."

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