May 10 (SeeNews) - Fitch Ratings said that it has upgraded the Long-Term Issuer Default Rating (IDR) of Bulgaria's UniCredit Bulbank to 'BBB-' from 'BB+' with a stable outlook.
Fitch has decided to equalise the ratings of UniCredit Bulbank and its parent - Italy's UniCredit, as it now sees a strong chance that UniCredit will provide support to its unit given that they share a common regulator after Bulgaria's entry to the Banking Union, and that UniCredit Bulbank was included in UniCredit's single point of entry (SPE) resolution group, the ratings agency said in a statement last week.
UniCredit Bulbank's Viability Rating (VR) was also affirmed at 'bb+'.
Fitch also said in its statement:
"KEY RATING DRIVERS
IDR AND SUPPORT RATING
Bulbank's IDR and Support Rating (SR) reflect Fitch's view of a high probability of support from its parent. In our view, a default of Bulbank would entail considerable reputational risk for UniCredit, given their common regulation and SPE resolution group. In our view, any required support for Bulbank would be immaterial relative to the parent's ability to provide it. The Stable Outlook on the IDR reflects that on the parent.
VR
Bulbank's 'bb+' VR is one notch above our assessment of the Bulgarian operating environment, and is underpinned by the bank's robust capitalisation, stable funding and comfortable liquidity. We believe that near-term uncertainty arising from the coronavirus pandemic on Bulgarian banks' asset quality and earnings is largely contained and lingering risks are outweighed by the country's recovery prospects, underpinned by a resilient economy.
Fitch estimates GDP to have contracted only 4.2% in 2020, compared with our earlier estimate of a 5.7% contraction, followed by a forecast 3.4% expansion in 2021. This underpins our stable outlook on Bulgarian banks' operating environment assessment of 'bb'. Furthermore, the country's path to eurozone accession will be positive for our assessment of the operating environment. However, Bulgaria (BBB/Positive) still has to show progress on meeting structural commitments before accession and its targeted accession date of January 2024 remains beyond our rating horizon.
Bulbank' capitalisation is a rating strength due to high capital ratios, substantial buffers over regulatory minimum, a conservative risk appetite and solid internal capital generation. We also view positively the bank's low capital encumbrance by unprovisioned impaired loans. At end-2020, Bulbank's Common Equity Tier 1 ratio was 27.9%, excluding any retained profit from 2020.
Bulbank's asset quality weakened as the bank proactively recognised impairments on vulnerable borrowers due to the economic effect of the pandemic. At end-2020, the bank's impaired loans ratio increased to 7%. The bank's coverage remains solid, with total provisions covering about 92% of impaired loans, which should support effective resolution of bad debts.
Bulbank's profitability suffered as revenues came under pressure from weaker lending and transaction volumes and rising loan impairment charges as the bank front loaded expected losses and recognised impairments. The bank's operating profit to risk weighted assets contracted to about 2% in 2020 from about 3.5% in 2019. We believe profitability will remain under pressure in 2021 as loan impairments remain elevated, but revenue and profitability will be supported by gradually recovering lending growth and the return of transaction volumes to more normalised levels.
Funding and liquidity are rating strengths relative to Bulbank's overall credit risk profile. The bank is self-funded with stable and largely granular customer deposits. Its high self-financing capacity is reflected in its moderate gross loans/customer deposits ratio of about 70% at end-2020. Bulbank holds comfortable liquidity buffers. High-quality liquid assets covered around 48% of customer deposits at end-2020, and the bank's regulatory liquidity ratios (liquidity coverage ratio, net stable funding ratio) remained well above regulatory requirements.
RATING SENSITIVITIES
IDR and SR
Factors that could, individually or collectively, lead to negative rating action/downgrade:
-Downgrade of UniCredit's Long Term IDR.
-Change in the resolution strategy of the group with respect to Bulbank, a material rise in sale risk of the bank or a change in our view of the parent's propensity to support Bulbank for other reasons
Factors that could, individually or collectively, lead to positive rating action/upgrade:
-Bulbank's IDR could be upgraded if UniCredit's Long Term IDR was upgraded.
VR
Factors that could, individually or collectively, lead to negative rating action/downgrade:
- Rise in non-performing loans that leads to capital erosion.
Factors that could, individually or collectively, lead to positive rating action/upgrade:
-Upside for Bulbank's VR is limited by adverse economic conditions in Bulgaria. An upgrade of the bank's VR would be contingent on improvement of the operating environment, coupled with maintaining a solid overall credit risk profile."
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