June 25 (SeeNews) - Fitch Ratings said it has upgraded the Viability Ratings (VRs) of Bulgarian lenders Unicredit Bulbank to 'bb+' from 'bb' and of United Bulgarian Bank (UBB) to 'bb' from 'bb-.
"Fitch Ratings has affirmed Long-Term Issuer Default Ratings of UniCredit Bulbank AD at 'BBB-', United Bulgarian Bank AD at 'A-' and First Investment Bank AD at 'B'. The Outlooks are Stable," the ratings agency said in a statement late on Friday.
First Investment Bank's VR has been affirmed at 'b'.
The upgrade of Unicredit Bulbank's VR reflects its improved asset quality. The upgrade of UBB's VR reflects the strengthening of its credit risk profile as a result of significant restructuring following its acquisition by KBC Bank.
The affirmation of Bulbank's and UBB's IDRs reflects Fitch's opinion that there is a high and extremely high probability that they would be supported, if required, by their respective parents.
Fitch also said in the statement:
"KEY RATING DRIVERS
IDRS, SUPPORT RATINGS, SUPPORT RATING FLOOR
Bulbank and UBB are based in Central and Eastern European (CEE) region, which is strategically important for UniCredit and KBC. The banks' synergies with their respective parents are strong and reflect a high level of management and operational integration. Support for Bulbank is also underpinned by a long track record of supporting its parent's objectives, which is likely to continue. In our assessment of support we also consider the almost full ownership of Bulbank and UBB by their parents and the potential high reputational risk to the owners if their Bulgarian subsidiaries default.
We believe that any required support for the two banks would be immaterial relative to their respective parents' ability to provide it. Our opinion reflects the owners' solid credit profiles and the small size of their Bulgarian subsidiaries. The support for Bulbank is notched once from UniCredit's IDR.
The Positive Outlook on KBC Bank's Long-Term IDR reflects Fitch's expectation that we could rate the IDR one notch above the VR following the build-up of a significant and sustainable junior debt buffer that provides additional protection for senior unsecured creditors. UBB's support-driven IDR is consequently notched once from KBC's VR, reflecting uncertainty whether subsidiary's senior creditors would benefit from the parent's junior debt buffer in case of UBB's failure.
The Stable Outlook on Bulbank's Long-Term IDR mirrors that on the parent. The Stable Outlook on UBB's Long-Term IDR reflects its parent's stable intrinsic creditworthiness.
FIBank's IDRs are driven by its standalone financial strength, as expressed by its VR. The Stable Outlook on FIBank's Long-Term IDR reflects its stable intrinsic creditworthiness.
FIBank's Support Rating Floor (SRF) of 'No Floor' and the Support Rating (SR) of '5' express Fitch's opinion that although potential sovereign support for the bank is possible, it cannot be relied upon. This is underpinned by the EU's Bank Recovery and Resolution Directive, transposed into Bulgarian legislation, which requires senior creditors to participate in losses, if necessary, instead of or ahead of a bank receiving sovereign support.
UBB's Short-Term IDR of 'F1' is the higher of the two possibilities corresponding to the Long-Term IDR of 'A-'. The bank's Short-Term IDR is underpinned by KBC's solid liquidity and our view that parental propensity to support is more certain in the near term.
VRS
The challenging domestic operating environment has weighed on Bulgarian banks' company profiles and caps their VRs in the 'bb' range. This is shown in the banks' less stable business models, weaker asset quality and more volatile performance through the economic cycle, compared with stronger CEE markets such as the Czech Republic or Poland.
Bulbank's VR of 'bb+' is underpinned by its robust capitalisation, solid profitability through-the-cycle, stable funding, comfortable liquidity and its leading domestic market franchise. The bank's VR also considers its recent substantial resolution of bad debts to normalised levels.
UBB's VR of 'bb' is underpinned by its robust funding and liquidity profile and strong capitalisation. We also factor in the bank's significant restructuring after the acquisition by KBC (2017) and merger with CIBANK (1Q18), which resulted in the moderation of UBB's risk appetite and strengthening of its company profile (particularly lending and deposit franchise), management and strategy.
FIBank's 'b' VR suffers mainly from the bank's weak (albeit gradually improving) asset quality and capitalisation. This is evidenced in the high ratio of legacy-impaired loans and non-income generating repossessed assets, high capital encumbrance by unreserved problem assets and significant single-name concentration in the loan book. The VR also reflects FIBank's revamped credit risk appetite, reasonable strategy for 2017-2021 and comfortable liquidity position, underpinned by stable funding, mainly based on granular retail savings.
The banks' asset quality metrics are worse and more vulnerable to changes in economic cycles than those at more stable countries in CEE, which largely reflects Bulgarian country risks. Moreover, Bulgarian banks' inflated impaired loan ratios should be also viewed in light of the underdeveloped local market for distressed debt and the long time required in Bulgaria to enforce collateral.
We believe that asset quality in 2018 and beyond should improve at the three banks due to conservative origination of new loans, moderate credit growth, portfolio cleaning and the supportive economic environment, which contains the inflow of new bad debts. UBB's portfolio cleaning is likely to bear fruit faster (compared with FIBank) due to stronger coverage by loan loss reserves, lower complexity of problem assets and strategic push by KBC towards bad debts reduction.
At end-1Q18, impaired loan ratios equalled about 21% at FIBank and UBB and about 8% at Bulbank, compared with the sector average of 13.5%. FIBank also holds a substantial stock of repossessed assets (mainly non-income generating real estate), which equalled about 14% of assets.
Bulbank's and UBB's capitalisation is a rating strength due to their high Fitch Core Capital (FCC) ratios, moderate risk profiles, ordinary capital support from their respective parents and low (Bulbank) and moderate (UBB) stock of unreserved impaired loans. Bulbank's capitalisation is particularly strong due to its substantial capital surplus over regulatory minimums. FIBank's capitalisation improved in 2017, but remains a rating weakness, due to its large (albeit gradually shrinking) concentration in risky assets.
At end-1Q18 the FCC ratios of Bulbank (26.1% adjusted for the announced dividend) and UBB (22.5%) were among the highest in CEE. We estimate that FIBank's FCC ratio was about 13.5% at end-1Q18. This reflects a decrease of about 1pp in 1Q18 due to the application of IFRS 9, while the impact on UBB and Bulbank was modest.
The three banks' risk appetites are largely harmonised and reflect the risks of the operating environment. Bulgarian country risks cannot be isolated from the effects of the banks' business models. Underwriting standards at Bulbank and UBB are reasonable and commensurate with their business models and country risks. FIBank's underwriting standards under its revamped risk strategy have benefited from supportive economic environment and as a result have not been fully tested through credit cycle yet.
We believe that the banks' profitability is commensurate with their business models and Bulgarian operating environment. The banks' revenue is mainly sourced from lending activity. Bulbank's profitability is the strongest among all Fitch-rated Bulgarian banks. This reflects its stable business model and resilient margins through-the-cycle, strong franchise, contained loan impairment charges (LICs) and robust cost efficiency. UBB's strengthened capacity for stable and recurring revenue and planned cost savings reflects merger with CIBANK. UBB's operating profit is likely to benefit from considerably lower LICs compared with historical average.
FIBank's profitability improved in 2017 and we believe that the implementation of its strategy for 2017-2021 will further strengthen its ability to generate capital internally. In our assessment we take into consideration its revised business model, a gradual reduction of funding costs to levels comparable with peers and moderation in credit risk cost. FIBank's profitability is particularly sensitive to its planned increase in lending to margin-rich SME and retail segments and its progress with reduction of non-income generating assets (such as foreclosed real estate).
Bulbank's ratio of operating profit/risk-weighted assets was the most stable over the economic cycle and equalled 3.7% on average between 2014 and 2017. After the merger, UBB's ratio recovered strongly in 1Q18 and we expect it to remain comfortably above 2.5% in the periods ahead. FIBank's ratio equalled almost 1.6% in 2017 and we believe that it should continue to gradually improve assuming successful implementation of the bank's strategy and no economic stress.
Funding and liquidity is a rating strength at the three banks relative to their overall credit risk profiles. The banks are self-funded with stable and largely granular customer deposits. All banks' high self-financing capacity is reflected in their moderate gross loans/deposits ratios, which equalled 75% (Bulbank), 74% (UBB) and 78% (FIBank) at end-1Q18.
All three banks hold comfortable liquidity buffers. Bulbank and UBB can also rely on ordinary parent liquidity support, such as access to funding in foreign currency. Bulbank's and UBB's well-diversified and stable deposit franchises are sufficient to withstand even a severe market stress. FIBank's funding and liquidity profile is moderately weaker due to its high reliance on term deposits (although this has been gradually shrinking), less diversified deposit franchise (which is only strong in the retail) and smaller coverage of its short-term liabilities by liquid assets.
At end-1Q18, Bulbank was by far the largest bank in Bulgaria, while UBB and FIB were ranked third and fourth by assets, respectively. The three banks are classified as systemically important credit institutions by the Bulgarian central bank. They operate similar and traditional banking models, with loan books dominated by corporate clients and funding sourced mainly from local customer deposits.
FIBank is the largest domestically-owned bank in Bulgaria and is controlled by two Bulgarian private individuals, of whom each holds 42.5% stake in the bank. The rest is widely held. The bank is listed on the Bulgarian Stock Exchange - Sofia."
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