SOFIA (Bulgaria), December 11 (SeeNews) – Fitch Ratings said on Monday it has upgraded Bulgarian Development Bank's (BDB) Long-Term Issuer Default Rating (IDR) to 'BBB' from 'BBB-' with a stable outlook.
The rating agency has also revised the Support Rating Floor (SRF) to 'BBB' from 'BBB-' and upgraded the Short-term IDR to 'F2' from 'F3', Fitch Ratings said in a statement.
The rating actions follow Fitch's upgrade of the Bulgaria sovereign rating to 'BBB' from 'BBB-' on 1 December 2017.
Fitch Ratings also said in the statement:
"KEY RATING DRIVERS
BDB's IDRs and SRF are equalised with those of the Bulgarian sovereign. The ratings reflect Fitch's belief of a high probability of support from the Bulgarian sovereign, in case of need. The state's strong economic incentive to support BDB is mainly driven by the almost 100% ownership of the bank by and significant funding from (or guaranteed by) the state. Our view also considers the bank's role in supporting the government's economic policy. The Stable Outlook mirrors that on the Bulgarian sovereign.
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.
In our opinion, the state will likely maintain a high capital surplus at BDB over regulatory minimums, without breaching EU state aid rules. The state retained half of 2016 net income and will most likely do the same in respect to 2017 net profit. At end-1H17, the bank's CET1 ratio was 51% and its equity was sufficient to fully cover a write-down of all loans not guaranteed by the state.
Potential support for BDB would be easily manageable for the state due to the bank's small size (total assets equal to 2% of Bulgarian GDP at end-1H17) and the sovereign's sound public finances. At end-1H17, the bank's liabilities not linked to the sovereign represented less than 1% of the country's GDP. Fitch forecasts Bulgaria's general government debt to modestly fall to 26.7% of GDP at end-2017, compared with a 39% 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 significant leeway in pursing commercial activities. BDB's policy mandate has been developing through the bank's participation in the state-supported National Energy Efficiency Programme (NEEP), started in late 2015, and aimed at improving the energy efficiency of multi-family housing in Bulgaria. Since August 2017, shareholders rights have been exercised on behalf of the Bulgarian state by the Minister of Economy, which also oversees other development-related institutions.
BDB lends directly to Bulgarian companies and recipients of the government NEEP programme, but the key strategic focus in the long-term is on refinancing development-oriented portfolios of commercial banks and NEEP. At end-1H17, these business lines represented 68% and 7% of the bank's assets, respectively. Pure policy loans in direct lending comprised only NEEP-related facilities (46% of gross loans at end-1H17), while the remainder was generally commercial lending. NEEP loans were the key growth driver in 2017.
RATING SENSITIVITIES
IDRS, SUPPORT RATINGS
BDD would be downgraded in case of a significant increase of funding not sourced from or guaranteed by the state, material erosion of the bank's capital surplus over regulatory minimums, or a substantial expansion in commercial lending (not our base case). A downgrade of the sovereign rating would also trigger the same action on BDB's IDRs.
If the sovereign was upgraded, an upgrade of BDB would depend on Fitch's assessment of the state's economic incentive to support the bank 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."
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