May 14 (SeeNews) - Fitch Ratings said that it has affirmed the Long-Term Issuer Default Ratings (IDRs) of Allianz Bank Bulgaria (ABB), ProCredit Bank Bulgaria, Raiffeisenbank Bulgaria, Expressbank and its subsidiary OTP Leasing, all with stable outlooks.
The agency affirmed the rating of Allianz Bank Bulgaria at 'BBB+', of ProCredit Bank Bulgaria at 'BBB-', of Raiffeisenbank at 'BBB' and of Expressbank and OTP Leasing at 'BB', the global rating agency said in a statement on Monday.
Fitch Ratings has also upgraded the short-term IDR of Allianz Bank Bulgaria to 'F1' from 'F2'.
"The affirmation of the IDRs reflects Fitch's opinion of a high (ABB, PCBB and Raiffeisenbank) and moderate (OTP Leasing) probability of parental support if ever required. The affirmation of Expressbank's IDRs reflects no changes to the bank's standalone credit profile since the last review in the second quarter of 2018 and also a moderate probability of support from the bank's ultimate owner," Fitch said.
Viability Ratings (VRs) have been confirmed for all of the four banks as well as for OTP Leasing.
Fitch Ratings also said in the statement:
"KEY RATING DRIVERS
IDRS AND SUPPORT RATINGS
Expressbank's IDRs are driven by the bank's standalone credit profile, as expressed by the bank's 'bb' Viability Rating (VR) and are also underpinned by potential support from the bank's ultimate owner, OTP. The IDRs of the remaining banks and the leasing company are support-driven. The Stable Outlooks reflects our view of broadly balanced credit risks of Expressbank and of the parents' of the remaining banks and OTP Leasing.
Raiffeisenbank, PCBB and Expressbank are based in a strategically important region for their respective parents. ABB's strategic importance to Allianz is limited, which is demonstrated in ABB's Long Term IDR being four notches below that of Allianz. This is based on the strategic focus of Allianz on the insurance business, with ABB being its only banking subsidiary in central and eastern Europe (CEE), and its marginal contribution to Allianz's insurance and asset management business and its financial self-sustainability.
In our assessment of support for all banks and OTP Leasing we also consider the high ownership stakes in the Bulgarian subsidiaries and the high reputational risk to the owners if their Bulgarian subsidiaries default. The synergies of ABB, Raiffeisenbank and PCBB with their parents are strong and underpinned by their long records of supporting their parents' objectives and a high level of management and operational integration.
The IDRs of OTP Leasing are equalised with those of Expressbank as Fitch views the leasing company as the bank's core subsidiary. The company is an integral part of financial services provided by the bank and is strongly integrated into the parent group at the operational level, while funding is largely provided by its ultimate parent OTP.
We believe that any required support would be immaterial (ABB, Raiffeisenbank) and manageable (PCBB, Expressbank, OTP Leasing) relative to their respective parents' ability to provide it.
The Short-Term IDRs of ABB (F1) and Raiffeisenbank (F2) are the higher of the two possibilities corresponding to their Long-Term IDRs of 'BBB+' and 'BBB', respectively. This reflects their respective parents' solid liquidity and our view that parental propensity to support is more certain in the near term.
VR
The challenging domestic operating environment has weighed on the through-the-cycle performance of Bulgarian banks. As a result, the VRs of all four banks are compressed in the 'bb' range, despite their largely robust capital buffers, moderate risk appetites, low refinancing risks and moderate profitability. The higher VR of Raiffeisenbank (bb+) reflects mainly its superior asset quality. The lower VRs of ABB and PCBB (both bb-) are constrained by their overall modest market franchises.
Raiffeisenbank and Expressbank are medium-sized universal banks with a market share of about 7.6% and 6.7% in total assets, respectively, at end-2018. They are both classified as systemically important credit institutions by the Bulgarian central bank. ABB and PCBB are small banks with low systemic importance (about 2% market share). PCBB's overall franchise is small but its foothold in the Bulgarian SME segment is fairly strong and benefits from the bank being part of the ProCredit Group. ABB has limited competitive advantages given its small scale, but its deposits franchise is moderately strong, supported by a fairly developed offering of pension and asset management products of Allianz.
The sale of Expressbank (by Societe Generale S.A., A/Stable) to DSK (OTP's Bulgarian subsidiary) in mid-January 2019 has a neutral impact on our assessment of the bank's VR. Expressbank will operate as a separate legal entity until a full operational merger with DSK is complete, which is likely by mid-2020. Expressbank's strategy has remained broadly unchanged under the new ownership. The bank's strategic focus on containing customer churn appears reasonable, but challenging in light of keen market competition. We do not expect Expressbank's loan and deposit franchise to be materially weakened before the merger.
We believe that asset quality in 2019 and beyond at the four banks will benefit from contained inflow of new bad debts, conservative origination of new loans, and a supportive economic environment. All banks expect rapid loan growth in 2019 (particularly at PCBB and Raiffeisenbank), but we do not expect this to be achieved through a loosening of credit standards.
At end-2018, the banks' impaired loans ratios (comprising predominantly Stage 3 loans) equalled 2.9% (PCBB), 2.6% (Raiffeisenbank), 8.5% (ABB) and 7.8% (Expressbank), compared with the sector average of 11.2%. PCBB's loan book quality has been the most resilient through the cycle, due to a focused business model and conservative risk appetite. Raiffeisenbank's ratio fell sharply over the last five years due to a portfolio clean-up and loan growth. In our assessment of ABB's asset quality we take into consideration the bank's significant volume of high-quality non-loan exposures (about 52% of assets).
The four banks' earnings and profitability has fared well despite falling margins (amplified by competition) and rising operating expenses (except PCBB). We expect the banks' profitability to remain broadly stable in 2019, supported by low loan impairment charges (LICs) and solid cost efficiency. However, LICs should gradually normalise in the coming periods. In 2018 operating profits/risk-weighted assets (RWAs) remained strong at PCBB (3.9%), Raiffeisen (3.4%) and solid at ABB (2.9%) and Expressbank (2.8%). Profitability at all banks benefit from unsustainably low LICs.
Capitalisation is a rating strength at the four banks and reflects their high capital adequacy ratios, moderate risk profiles, ordinary parental support and low stock of unreserved impaired loans. Our assessment of capitalisation at ABB and PCBB is constrained by their small (in absolute terms) capital base (although capital ratios are strong), which leaves them more vulnerable to unforeseen events, especially in light of high country risks. Raiffeisenbank's large capital surplus over regulatory minimums will materially shrink in the coming years (due to rapid loan growth and hefty dividends), but we do not expect this factor (in isolation) to cause a downgrade of the bank's VR.
At end-2018 the Fitch Core Capital (FCC) ratios of ABB (18.9%), PCBB (21.9%) and Raiffeisenbank (21%) were among the highest in CEE. The FCC ratio at Expressbank (17.3%) was moderately lower, partly because its balance sheet is skewed towards high capital- absorbing assets (such as corporate loans).
Funding and liquidity is a rating strength at the four banks, particularly at Raiffeisenbank and Expressbank because their more diversified deposit franchises are sufficient to withstand even a severe market stress. Liquidity at all banks is strong and sufficiently covers their refinancing needs in 2019 and 2020. The banks' high self-financing capacity is reflected in their moderate-to-low gross loans/deposits ratios. They equalled 56% (ABB), 84% (Raiffeisenbank), 96% (Expressbank) and 99% (PCBB) at end-2018. A greater share of non-deposit funding at Expressbank reflects direct funding of its fully consolidated leasing subsidiary from OTP.
RATING SENSITIVITIES
IDRS AND SUPPORT RATINGS
The IDRs of ABB, PCBB and Raiffeisenbank and Support Ratings of all four banks are sensitive to our view of propensity and ability of their respective parents to support them.
Expressbank's IDRs could be upgraded if the bank's VR is upgraded or if OTP's support ability is strengthened. A downgrade of the bank's IDRs would require both a downgrade of the VR and a weakening, in Fitch's view, of potential support from OTP.
The IDRs and Support Rating of OTP Leasing are sensitive to changes in Expressbank's IDRs.
VR
An upgrade of ABB's and PCBB's VRs would be contingent on a significant improvement of the banks' respective market franchises, coupled with maintaining adequate capitalisation and asset quality. A VR upgrade of Raiffeisenbank and Expressbank would require an improvement of the Bulgarian operating environment or, for Expressbank, a strengthening of its overall credit risk profile. Deterioration in the operating environment, which would result in a substantial inflow of new bad debts and capital erosion at all banks, could lead to their downgrade."
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