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Fitch puts Raiffeisenbank Bulgaria's 'BBB' on rating watch positive, affirms UBB at 'A-'

Fitch puts Raiffeisenbank Bulgaria's 'BBB' on rating watch positive, affirms UBB at 'A-' Fitch (Author: License: all rights reserved.

SOFIA (Bulgaria), November 24 (SeeNews) - Fitch Ratings said on Wednesday that it has placed Raiffeisenbank Bulgaria's long-term issuer default rating (IDR) of 'BBB' and short-term IDR of 'F2' on rating watch positive (RWP) and affirmed the bank's viability rating (VR) at 'bb+'.

At the same time, Fitch affirmed the long-term IDR of United Bulgarian Bank (UBB), owned by Belgium-based KBC Bank, at 'A-' with a positive outlook and placed the bank's 'bb' VR on rating watch positive, the ratings agency said in a statement.

The rating actions reflect Fitch's expectation that following the recently announced planned acquisition of Raiffeisenbank Bulgaria by KBC Bank, the ratings agency would upgrade the bank's IDR to 'A-' with a positive outlook, reflecting an extremely high probability of support that will accrue to the lender from the new parent.

"We also believe that the subsequent planned merger of UBB and Raiffeisenbank Bulgaria is likely to be positive for UBB's standalone credit profile as it will significantly strengthen the bank's business profile and dilute any residual legacy asset quality risks," Fitch said.

Earlier this month, Belgium-based financial group KBC said that its unit KBC Bank signed an agreement to acquire 100% of the shares of Raiffeisenbank Bulgaria, comprising the Bulgarian banking operations of Austria-based Raiffeisen Bank International, for 1.015 billion euro ($1.13 billion) in cash. The transaction also includes Raiffeisenbank Bulgaria’s fully-owned subsidiaries Raiffeisen Leasing Bulgaria, Raiffeisen Asset Management (Bulgaria), Raiffeisen Insurance Broker and Raiffeisen Service, KBC said at the time.

KBC Group is present in Bulgaria through United Bulgarian Bank (UBB), insurance brand DZI, UBB Interlease, UBB Pension Insurance, UBB Asset Management, UBB Factoring, UBB Insurance Broker and KBC Branch Bulgaria. Earlier this year, KBC acquired the Bulgarian life insurance and pension fund activities of Dutch-based NN Group.

Fitch added that it expects to resolve the rating watch positive on Raiffeisenbank Bulgaria's IDRs following the acquisition by KBC and on UBB's VR following the merger with Raiffeisenbank Bulgaria, each of which may take longer than six months.

Fitch also said in its statement:


On 15 November 2021, KBC reached an agreement with Raiffeisen Bank International (RBI) to acquire RBBG, after which it intends to merge the bank with UBB, KBC's Bulgarian subsidiary. The acquisition is subject to regulatory approvals with expected closing in mid-2022, after which, pending additional approvals, KBC intends to proceed with the merger of both banks. The acquisition would materially strengthen KBC's market position in the Bulgarian banking market, with the combined entity's projected market share about 18% of the Bulgarian banking sector's assets from about 10% held currently by UBB.


RBBG's IDR and SSR continue to reflect our view of a high probability that RBI would support its subsidiary in case of need. Support considerations reflect high reputational risk to the parent in case of RBBG's default. We also believe potential support for RBBG would be manageable, given its small size relative to the parent. The RWP reflects our view that we would upgrade the bank's IDR to 'A-'/Positive following acquisition by KBC.

RBBG's Short-Term IDR of 'F2' is the higher of two options corresponding to the bank's Long-Term IDR and reflects Fitch's view that RBI's propensity to support RBBG is more certain in the near term. We have placed RBBG's Short-Term IDR on RWP, as we expect to upgrade it to 'F1' following the acquisition by KBC.

UBB's IDRs and SSR reflect an extremely high probability that the bank would be supported by its parent, KBC, in case of need. In our view a default by UBB would represent considerable reputational risk for KBC given their common regulator, European Central Bank and resolution authority Single Resolution Board, and also due to UBB being part of a single point-of-entry (SPE) resolution group. The parent's resolution strategy is underlined in our use of KBC's IDR as an anchor for UBB's IDR, given our view that the Bulgarian subsidiary's senior creditors would benefit from the parent's build-up of significant and sustainable junior debt buffers.

In our view, any required support for UBB pre- and post-merger would be immaterial relative to the parent's ability to provide it. UBB's IDR is capped by Bulgaria's Country Ceiling of 'A-', two notches above the Bulgarian sovereign rating (BBB/Positive). The Positive Outlook on UBB's IDRs reflects that on the Bulgarian sovereign IDR.

UBB's Short-Term IDR of 'F1' is the higher of two options corresponding to a Long-Term IDR of 'A-', as we deem the transfer and convertibility risks in Bulgaria materially lower in the short term relative to the long term. This is supported by the sovereign's solid liquidity profile and our view that given the country's planned admission to the eurozone, risks of imposing capital controls are materially lower in the short term.


We have placed UBB's 'bb' VR on RWP because following the merger with RBBG we are likely to upgrade it by one notch. The upgrade would capture the bank's strengthened business profile and further dilution of the legacy asset quality risks. We expect an only modest impact of the merger on the UBB's capital position, given the acquisition will be executed by UBB's parent and the goodwill generated will not weigh on UBB's capital metrics.

UBB's VR continues to reflect its solid capitalisation, a robust funding and liquidity profile, and significant recent progress in resolving legacy problem loans. The rating is also underpinned by the bank's conservative risk appetite, strong domestic franchise and balanced business model, all of which have significantly benefited from KBC's ownership.

In our view, UBB's credit profile post-merger will be strengthened, underpinned by benefits of scale in a relatively small Bulgarian banking sector. The relatively similar risk profiles of UBB and RBBG will converge and we expect the VR of the merged entity to be largely constrained by the operating environment risks. UBB's asset quality will benefit from the merger with RBBG as it will accelerate and dilute any residual legacy asset quality problems, while funding should remain stable, given both banks strong funding franchises and ownership by strong international parents.

We have affirmed RBBG's 'bb+' VR, because we believe that the planned acquisition is unlikely to result in any material changes in RBBG's standalone creditworthiness. RBBG's VR continues to reflect a conservative risk appetite and a particularly strong financial profile, with superior asset quality, in the context of the domestic operating environment. The bank's business profile is a rating strength, supported by a diversified business model, solid franchise, and strong relationships with high-quality borrowers.

The bank's asset quality remains among the strongest among Bulgarian banks, underpinned by a low impaired-loan ratio, robust coverage and conservative risk appetite. Capitalisation remains solid due to conservative risk appetite and healthy internal capital generation capacity.

Factors that could, individually or collectively, lead to negative rating action/downgrade:



- In case the acquisition does not go ahead, we will review RBI's propensity to support RBBG, to assess if it has weakened due to RBBG's reduced strategic importance to RBI.


- We would downgrade RBBG's VR if prior to the merger the risks to the bank's asset quality and earnings materialise and put pressure on its capitalisation.



- A multi-notch downgrade of KBC's IDR.

- A downward revision of the Bulgarian Country Ceiling.

- A material increase in the risk of UBB being sold or a weakening of the parent's propensity to support UBB.


- Deterioration in asset quality or earnings that would erode the bank's capital position, also in case this results from materialisation of integration risks

Factors that could, individually or collectively, lead to positive rating action/upgrade:



- Following the completion of the RBBG's acquisition by KBC, we may upgrade RBBG to 'A-'/Positive. After RBBG is merged into UBB, we will withdraw RBBG's ratings.


- We expect to affirm and withdraw RBBG's ratings upon the merger with UBB. Upside potential for RBBG's VR pre-merger is limited, given the operating environment constraints.



- An upgrade of the Bulgarian sovereign and Country Ceiling, while KBC's IDR and strong propensity to support the bank are maintained.


- Upon the completion of the merger of UBB with RBBG, Fitch may upgrade UBB's VR to 'bb+' if its capital metrics are maintained and legacy asset quality risks are diluted in accordance with our expectations.

- An upgrade of the Bulgarian operating-environment score



The business profile score of 'bb' has been assigned above the 'b' category implied score, due to the following adjustment reasons: Business Model (positive), Group Benefits and Risks (Positive), Historical and Future Metrics (Positive).


The business profile score of 'bb' has been assigned above the 'b' category implied score, due to the following adjustment reasons: Business Model (positive), Group Benefits and Risks (positive), Historical and Future Metrics (positive).

The capitalisation and leverage score of 'bb' has been assigned below the 'bbb' category implied score, due to the following adjustment reasons: Reserve Coverage and Asset Valuation(negative), Internal Capital Generation and Growth (negative)."

($ = 0.89199 euro)

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