October 15 (SeeNews) - Fitch Ratings said it affirmed Bulgarian Development Bank's (BDB) Long-Term Issuer Default Rating (IDR) at 'BBB' with a stable outlook.
"The affirmation reflects that there have been no major changes to the ratings agency's assessment of the Bulgarian sovereign's propensity or ability to support the state-owned bank," Fitch said in a statement on Wednesday.
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, the ratings agency added.
Fitch Ratings also said in its statement:
"KEY RATING DRIVERS
IDRS, SUPPORT RATING, SUPPORT RATING FLOOR
BDB's IDRs are equalised with the Bulgarian sovereign rating (BBB/Stable) to reflect a high probability of support from the Bulgarian sovereign, in case of need, as expressed by a Support Rating (SR) of '2' and a Support Rating Floor (SRF) of 'BBB'. The strong incentive to support BDB is mainly driven by the state's almost full ownership of the bank and material funding from or guaranteed by the state.
Our view also considers the bank's role in supporting the government's economic policy. This role has recently strengthened, as demonstrated in BDB's involvement in the government programmes aimed at combating the economic implications of the COVID-19 pandemic. Nevertheless, the bank's pure policy role outside of the COVID-19 support programmes remains underdeveloped and the bank has a moderate portfolio of commercial activities.
BDB's Short-Term IDR of 'F2' is the higher of the two possibilities corresponding to a Long-Term IDR of 'BBB', because a material part of the bank's funding is from or guaranteed by the state.
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 limits the state's ability 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 in the bank and to avoid bailing in senior creditors because a substantial part of BDB's funding is either sourced from or guaranteed by the state, while other sources predominantly reflect international development institutions. The proportion of equity, state-related funding and state-guaranteed funding stood at about 62% of total assets at 1H20.
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-1H20, BDB's total assets equaled about 3% of forecast Bulgarian GDP in 2020. Fitch forecasts Bulgaria's general government debt at about 25% of GDP at end-2020, compared with a median of around 49% for emerging European countries.
BDB has policy-bank status, as defined by dedicated legislation, the BDB Act. The role of BDB as a policy bank has been reinforced with its involvement in governmental programmes to combat the COVID-19-induced crisis. The state injected BGN700million capital into BDB, which caused its common equity tier 1 ratio to rise to a high 50.5% at end-1H20 from 27% at end-2019.
The capital increase was earmarked for two COVID-19 pandemic state-support programmes. The first one is a consumer loan guarantee programme dedicated to employees who are unable to perform their duties or services due to the pandemic with a total cap of BGN200 million and an individual loan cap of BGN4,500. The second is a corporate programme supporting the liquidity of micro, small and medium-sized enterprises impacted by COVID-19, with a total budget of BGN500 million and an individual loan cap of BGN300,000, where BDB will provide guarantee cover of up to 80% of the loan.
While the bank's involvement in the governmental programmes has strengthened, BDB has leeway to pursue commercial activities, as per the BDB Act.
RATING SENSITIVITIES
Factors that could, individually or collectively, lead to positive rating action/upgrade:
The IDRs, SR and SRF of BDB are sensitive to a higher sovereign ability and propensity to support the bank. In case of an upgrade of the Bulgarian sovereign's IDR, the extent of the upgrade of BDB's IDRs and upward revision of SRF would depend on Fitch's assessment of the state's economic incentive to support the bank. This is based on BDB's i) legal status; ii) liability structure; iii) role in carrying out government policies in the economy; and iv) the state's flexibility to support the bank in compliance with local resolution legislation and EU state-aid rules.
An upgrade of the SR would require at least a two-notch upward revision of BDB's SRF.
Factors that could, individually or collectively, lead to negative rating action/downgrade:
A downgrade of the sovereign rating would trigger the same action on BDB's IDRs and SRF. BDB would also be downgraded in case of a material expansion in commercial lending, a significant increase of funding not sourced from or guaranteed by the state, or substantial erosion of capital surplus over regulatory minimums (not our base case).
A downgrade of the SR would require at least a two-notch downward revision of BDB's SFR."
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