June 9 (SeeNews) - Fitch Ratings said that it has affirmed the Long Term Issuer Default Rating (IDR) of Bulgaria's First Investment Bank, or Fibank, [BUL:FIB] at 'B' with a stable outlook and its Viability Rating (VR) at 'b'.
Fibank's ratings were constrained by its high volume of impaired loans and problem assets, which negatively impact profitability and capital, Fitch Ratings said in a statement on Thursday. However, the bank benefits from its domestic franchise, adequate funding and liquidity profiles.
Fibank was the fifth-largest lender by assets in Bulgaria as of the end of April, according to central bank data. The bank's consolidated assets grew to 13.8 billion levs at the end of the first quarter from 13.5 billion levs ($7.4 billion/6.9 billion euro) at the end of last year, its latest financial statement showed.
The lender's allowances for credit-impaired debt instruments grew to 430.2 million levs at end-March from 400.5 million levs at end-2022.
Fitch also said in its statement:
"KEY RATING DRIVER
[...]Strengthened Business Prospects: The Bulgarian economic environment continues to converge to CEE levels, improving Bulgarian banks' moderate opportunities to do consistently profitable business. Banking union membership, significant and structural improvement in asset quality over the last five years and materially reduced sector fragmentation further support banks' business prospects. These factors have driven our upward revision of the operating environment score for Bulgarian banks to 'bb+' from 'bb'.
Constrained Business Model: FIBank's business profile is weighed down by the high share of problem assets, which limits its ability to grow and improve returns. The bank is the fifth-largest in Bulgaria, with total assets accounting for about 8% of the sector's at end-2022.
Risk Profile Weaker Than Peers': FIBank's risk profile has improved over the economic cycle and appetite for higher-risk lending has decreased. This has supported the bank's gradual improvement in asset quality. Nevertheless, the bank's capital position remains vulnerable and could come under pressure from moderate growth or materialisation of asset-quality risks.
High Level of Problem Assets: We expect FIBank will continue to gradually resolve its problem loan portfolio. At end-1Q23 the bank's impaired loans ratio stood at 15.2% and we expect the ratio to fall by end-2024, but to remain above 10%. Our asset-quality assessment also reflects a high stock of problematic repossessed assets, including investment properties. Reserve coverage of problem assets is significantly weaker than peers', with loan loss allowances only covering 38% of impaired loans at end-1Q23.
Modest Profitability: FIBank's profitability metrics have improved (operating profit-to-risk weighted assets (RWAs): 1Q23: 2.3%; 2022: 1.3%), supported by higher interest rates. However, we expect profitability metrics to remain weaker than peers' given its modest provisioning of problem loans and assets, which will keep impairment charges high.
Vulnerable Capitalisation: The bank's reasonable regulatory capital ratios are counterbalanced by sizeable capital encumbrance by unprovisioned impaired loans and assets. While the bank's common equity Tier 1 (CET1) ratio was 16.1% at end-1Q23, unprovisioned impaired loans accounted for a high 56% of CET1 capital. Low provision coverage, coupled with a high stock of other problem assets, leaves FIBank's capital vulnerable to event risk.
Reasonable Funding and Liquidity: The bank's funding profile relies on customer deposits, which are somewhat more confidence sensitive than peers', but has remained stable through recent market uncertainties. Customer deposits are fairly granular and liquidity provides strong coverage of refinancing needs. The bank remains self-funded, as evident in its stable and moderate gross loans/deposit ratio of 63% at end-1Q23. Regulatory liquidity ratios remain comfortably above regulatory minimum requirements.
RATING SENSITIVITIES
Factors that Could, Individually or Collectively, Lead to Negative Rating Action/Downgrade
A weakening of FIBank's asset quality due to a rise in bad debts not adequately provided for and without clear and credible prospects for swift recovery could lead to negative rating action. In particular, an impaired loans ratio above 30% or a meaningful rise in total problem assets would result in a downgrade.
A deterioration of the bank's capital position due to asset-quality pressures or weaker profitability could lead to negative rating action - in particular, if the bank's CET1 ratio falls below 15% on a sustained basis or if the bank's unprovisioned impaired loans exceed its CET1 capital.
Factors that Could, Individually or Collectively, Lead to Positive Rating Action/Upgrade
An upgrade would be contingent on further progress in resolving the bank's problem assets, while maintaining reasonable profitability and capitalisation. In particular, this would require a credible improvement of asset quality with the impaired loans ratio falling below 15% on a sustained basis, coverage of impaired loans increasing closer to the sector average and progress in addressing its stock of non-loan problem assets.
SUPPORT KEY RATING DRIVERS
No Government Support: FIBank's Government Support Rating (GSR) of 'no support' (ns) expresses Fitch's opinion that although potential sovereign support for the bank is possible, it cannot be relied on. This is underpinned by the EU's Bank Recovery and Resolution Directive, transposed into Bulgarian legislation, which requires senior creditors to participate in losses if necessary, instead of or ahead of a bank receiving sovereign support.
SUPPORT RATING SENSITIVTIES
An upgrade of the GSR would most likely result from a positive change in Bulgaria's propensity to support domestic banks. While not impossible, this is highly unlikely in Fitch's view, given the existing resolution legislation.
VR ADJUSTMENTS
The 'b' capitalisation & leverage score is below the 'bb' category implied score due to the following adjustment reason(s): reserve coverage and asset valuation (negative)."
(1 euro = 1.95583 levs)
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