June 9 (SeeNews) - Fitch Ratings said it has affirmed the long-term issuer default rating (IDR) of Bulgaria's UniCredit Bulbank at 'BBB', with a stable outlook.
The bank's viability rating has been retained at "bb+", the ratings agency said in a statement on Thursday. Viability ratings, a component of IDR, are used by Fitch to measure the creditworthiness of financial institutions.
The ratings action on UniCredit Bulbank's IDR and shareholder support rating (SSR) is driven by Fitch's view that there is a high probability of support for the Bulgarian bank's Italian parent, UniCredit SpA. The affirmation of the stable outlook mirrors Fitch's outlook on the Italian financial services group.
Fitch also said in the statement:
"Bulbank's VR balances its resilient and conservative business and risk profiles and robust financial metrics against its exposure to Bulgarian operating environment risks.
Parent Support: We view probability of support for Bulbank from UniCredit as high, as a default of Bulbank would entail considerable reputational risk for UniCredit, given their common regulation and UniCredit's single point-of-entry resolution group. Our shareholder support assessment also considers the strategic importance of Bulgaria and the broader Central and Eastern Europe (CEE) region to UniCredit.
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'.
Resilient Business Profile: Bulbank is one of the largest banks in the concentrated Bulgarian banking sector. The bank's business profile is underpinned by high market shares (about 19% of end-2022 sector assets), particularly among large corporates. Bulbank's business model has remained resilient to various shocks through economic cycles.
Operating Environment Risks: Bulbank's risk profile has strengthened given our improved assessment of the operating environment. Nevertheless, Bulbank's conservative risk profile is constrained by operating environment risks, given its domestic focus.
Cyclical Asset-Quality Risks: We expect Bulbank's impaired loans ratio (end-2022: 4.1%) to increase by end-2024, but to remain below 5%, primarily due to the impact of high energy prices, higher interest rates and broader price inflation having a negative impact on borrowers' repayment capacity. Bulbank's asset-quality metrics improved in 2022, due to lending growth and limited new defaults, both helped by deeply negative real interest rates.
Profitability Set to Moderate: We expect Bulbank's operating profit-to-risk-weighted assets (RWAs; 4.1% in 2022) to remain broadly stable in 2023 as revenue growth remains strong while loan impairment charges (LICs) increase. Medium-term prospects remain favourable for Bulbank in our view, helped by Bulgaria's still significant economic growth potential supported by the country converging to CEE's average levels. .
Strong Capital Position: We expect Bulbank's CET1 ratio (end-2022: 25.4%) to fall and stabilise at around 20% by end-2024 due to dividends and RWA growth. Bulbank's high capital ratios, material buffers over regulatory requirements, conservative underwriting, low capital encumbrance by problem loans and strong internal capital generation underpin its capitalisation.
Healthy Funding and Liquidity: The bank is self-funded with stable and largely granular customer deposits (loans/customer deposits at end-2022 of 71%). Bulbank holds comfortable liquidity buffers, which strongly cover its modest refinancing needs. The bank's regulatory liquidity ratios remain well above regulatory requirements.
RATING SENSITIVITIES
Factors that Could, Individually or Collectively, Lead to Negative Rating Action/Downgrade
Bulbank's IDRs would be downgraded if UniCredit's ratings are downgraded. They could also be downgraded on adverse changes to the resolution strategy of the group with respect to Bulbank on a material weakening in Bulbank's strategic importance to UniCredit.
As Bulbank's VR headroom is significant a downgrade of the VR would require a combination of significant and structural weakening of the bank's asset quality, profitability and capitalisation metrics. This could happen if the bank's impaired loans ratio rises above 10% or its operating profit/RWAs falls below 1.5%, all on a sustained basis.
Factors that Could, Individually or Collectively, Lead to Positive Rating Action/Upgrade
Bulbank's IDRs could be upgraded if UniCredit's Long Term IDR is upgraded.
An upgrade of the bank's VR would be contingent on an upward revision of our assessment of the Bulgarian operating environment, while the bank maintains its robust risk and financial profiles.
VR ADJUSTMENTS
The asset quality score of 'bb' is above the 'b' implied category score due to the following positive adjustments: collateral and reserves (positive) and underwriting standards and growth (positive).
The capitalisation and leverage score of 'bb+' is below the 'bbb' implied category score due to the following negative adjustments: risk profile and business model (negative)."
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