November 27 (SeeNews) - Fitch Ratings said on Wednesday that it has revised Bulgarian Development Bank's (BDB) outlook to stable from positive, and affirmed the bank's Long-Term Issuer Default Rating (IDR) at 'BBB'.
The outlook was downgraded to reflect a gradual change in the bank's funding structure to include more wholesale funding not related to or guaranteed by the Bulgarian state, Fitch Ratings said in a statement.
This is likely to weaken the state's propensity to support the bank as third-party wholesale funding would be more politically acceptable to bail-in in case of financial stress at BDB, in the ratings agency's view.
Fitch Ratings also said:
"KEY RATING DRIVERS
IDRS, SUPPORT RATING (SR) AND SUPPORT RATING FLOOR (SRF)
BDB's IDRs, SR and SRF are driven by our view of the high propensity of the Bulgarian sovereign (BBB/Positive) to support the bank, in case of need. The state's strong economic incentive to support BDB is mainly driven by its almost full ownership of the bank and high levels of funding from (or guaranteed by) the state. Our view also considers the bank's role in supporting the government's economic policy, although it does not have a pure policy/development role, with commercial activities playing a moderately increasing role. The Stable Outlook reflects our view that the benefits of the improving sovereign ratings are balanced by the growing levels of funding not provided or guaranteed by the state.
During 2019 BDB has diversified its funding primarily by drawing facilities from various international financial institutions (IFIs), including those from outside the EU, to fund its growing direct lending book. As a result the proportion of state-related or -guaranteed funding has declined gradually, increasing pressure on BDB's IDR. The proportion of equity, state-related funding and state-guaranteed funding to total assets declined to about 69% at end-3Q19 from about 77% a year earlier. This reduction, in our view, represents a growing trend at BDB to diversify funding sources away from that provided 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 the bank's pure policy and commercial activities. However, we believe that the state would act pre-emptively to prevent BDB's failure and avoid bailing-in senior creditors because the vast majority of BDB's funding is either sourced from or guaranteed by the state.
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-1H19, BDB's total assets equaled about 2.3% of forecast Bulgarian GDP in 2019. The bank's liabilities not linked to the sovereign represented about 0.7% of the country's GDP. Fitch forecasts Bulgaria's general government debt to fall to 20.6% of GDP at end-2019, compared with a 40.1% median for 'BBB' countries.
BDB has policy bank status, as defined by dedicated legislation, the BDB Act. However, the bank's policy role has been under-developed so far and the Act gives it leeway to pursue commercial activities. The bank's main policy role has been so far represented by its participation in the state-supported National Energy Efficiency Program (NEEP), started in late 2015 and aimed at improving the energy efficiency of multi-family housing in Bulgaria. This programme is coming to an end and new programmes have not been created so far. BDB's key strategic focus in the long term is on financing SMEs and refinancing development-oriented portfolios of commercial banks.
RATING SENSITIVITIES
IDRS, SUPPORT RATING AND SUPPORT RATING FLOOR
The IDRs, SR and SRF of BDB are sensitive to changes in the Bulgarian sovereign's ability and propensity to support the bank. In case of an upgrade of the Bulgarian sovereign the extent of the upgrade of BDB 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.
Fitch may notch BDB's IDR down once from the Bulgarian sovereign's in case of a further increase of funding not sourced from or guaranteed by the state, material erosion of the bank's capital surplus over regulatory minimums, or further substantial expansion in commercial lending.
PUBLIC RATINGS WITH CREDIT LINKAGE TO OTHER RATINGS
The ratings of BDB are linked to the ratings of the Bulgarian sovereign."