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Moody's downgrades Bulgaria's Fibank on high level of problem loans

Author Mario Tanev
Moody's downgrades Bulgaria's Fibank on high level of problem loans Author: First Investment Bank Licence: All Rights Reserved

SOFIA (Bulgaria), June 5 (SeeNews) - Moody's Investors Service said that it has downgraded the long-term deposit rating of Bulgaria's First Investment Bank (Fibank) [BUL:5F4] to B2 from B1, maintaining the stable outlook.

Moody's downgraded Fibank's baseline credit assessment (BCA) and Adjusted BCA to b3 from b2, its long-term Counterparty Risk Rating (CRR) to Ba3 from Ba2 and the long-term Counterparty Risk (CR) Assessment to Ba2(cr) from Ba1(cr), the ratings agency said in a statement on Tuesday.

The bank's short-term deposit rating and CRR were affirmed as Not-Prime and the short-term CR Assessment at NP(cr).

The reason for the downgrades is Moody's view that the bank's high level of problem loans and significant repossessed assets, predominantly foreclosed properties, continue to pose a risk to the bank's capital base. Moody's previous assessments of Fibank incorporated an expectation that these nonperforming assets would have already declined to a materially lower level.

The long-term deposit rating of B2 continues to benefit from one notch of uplift from Moody's expectation of a moderate likelihood of government support, the ratings agency noted.

Moody's also said in its statement:

"RATINGS RATIONALE

-- DOWNGRADE REFLECTS PERSISTENT RISK TO CAPITAL FROM NONPERFORMING ASSETS

The main driver for today's rating action is FIBank's still high level of problem loans, that along with a significant amount of repossessed assets could pose a risk to its capital base. Moody's standalone assessment for FIBank had incorporated a forward-looking view that nonperforming assets would decline through disposals and low new formation at a much faster rate than has been realised to date.

Loans overdue more than 90 days to gross loans declined to 13% as of the end of 2018, from 17.5% at the end of 2017, reflecting ongoing restructuring efforts, recoveries and foreclosures, and write-off and sales of problematic exposures. However, in contrast, under the expanded European Banking Authority nonperforming exposure definition (stage 3 loans under IFRS 9), problem loans to gross loans were slightly up to 21.9% as of end-2018 as the bank transitioned to the new IFRS 9 accounting standard, compared to 21.7% at end-2017.

The ratio of problem loans-to-tangible common equity (TCE) and aggregate loan loss reserves was 91% as of the end of 2018 (end-2017: 83%), while adding repossessed assets to the numerator brings the ratio to 143% (end-2017: 148%). Therefore, Moody's considers that the risk to the bank's capital from its stock of problem loans not covered by provisions, along with the exit risk from the bank's significant real estate portfolio, remains high, and that these characteristics are better aligned with a b3 BCA.

FIBank's b3 standalone BCA also takes into account the bank's relatively strong pre-provision earnings power and recovering bottom-line profitability with a net income to tangible assets of 1.8% in 2018 from 1% in 2017 and its predominantly deposit-based funding structure and sizeable liquidity buffers. The BCA also reflects Moody's view that the bank's corporate governance practices are still evolving and are weaker than global best practices. Additionally, the concentration of the bank's ownership in the hands of two individuals may give rise to some key man risk issues.

FIBank reported a common equity Tier 1 (CET1) capital ratio of 13.3% and a total capital ratio of 16.1% as of end-2018 that exclude current period profits. These would rise to 15.8% and 18.6% respectively if the bank capitalises 2018 profits. FIBank's TCE-to-risk-weighted assets ratio declined to 11.8% as at end-2018, from 13.7% a year earlier, mainly as a result of the first time implementation of IFRS 9 in 2018 that had a negative impact on equity of BGN277 million, and despite yearly profits of BGN172 million.

-- LOSS GIVEN FAILURE ANALYSIS DOES NOT RESULT IN ANY UPLIFT

Owing to the bank's relatively small proportion of loss-absorbing junior depositors (the bank is predominantly funded by retail deposits) and limited hybrid debt, the bank's deposit rating does not benefit from rating uplift as a result of the application of Moody's Loss Given Failure (LGF) analysis.

-- MODERATE LIKELIHOOD OF GOVERNMENT SUPPORT

FIBank's B2 long-term deposit rating continues to incorporate Moody's assessment of a moderate likelihood of government support in case of need for the bank, which results in one notch of rating uplift. This support assumption is in line with the rating agency's approach of assigning government support to European banks with systemic importance despite the introduction of the Bank Recovery and Resolution Directive (BRRD), which limits a government's ability to support banks.

FIBank's was the third-largest bank by loans and fourth-largest bank by assets and deposits in Bulgaria as of the end of 2018. The reported market share of deposits in Bulgaria was 9.6% as of end-2018. Furthermore, Moody's support assessment is backed by the track record of support for FIBank, which received liquidity support from the authorities in 2014.

OUTLOOK

The stable outlook on the bank's long-term deposit ratings reflects Moody's expectation that the downside risks relating to the bank's nonperforming assets, will be balanced by an adequate financial performance, supported by an improving operating environment in Bulgaria.

WHAT COULD CHANGE THE RATING UP/DOWN

FIBank's deposit rating could be upgraded following a significant improvement in its financial fundamentals, mainly a significant reduction in its asset risk through a material decline in problem loans and real estate assets, and significantly improved provisioning coverage of problematic exposure without compromising its profitability and capital, as well as continuing reduced loan concentrations.

A change in the bank's liability structure, such as through the issuance of senior or subordinated and low-trigger hybrid debt, could lead to changes in Moody's LGF analysis, resulting in an uplift to the deposit ratings.

A deterioration in the bank's capital levels and profitability, or, an indication that the bank would need to raise capital to cover reduced asset valuations, would lead to a downgrade. If the comprehensive assessment being carried out on FIBank (together with five other Bulgarian banks) by the European Central Bank identifies material additional risks, these could also put pressure on the rating. A decline in liquidity and deposit outflows could also lead to negative rating pressure.

Changes in the bank's liability structure, mainly from an increased reliance on secured funding, could result in a downgrade of the deposit ratings. Finally, a lower likelihood or capacity of the Bulgarian government to support FIBank, in case of need, may also result in a downgrade of the deposit ratings.

PRINCIPAL METHODOLOGY

The principal methodology used in these ratings was Banks published in August 2018. Please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

LIST OF AFFECTED RATINGS AND ASSESSMENTS

Issuer: First Investment Bank AD

..Downgrades:

.... Adjusted Baseline Credit Assessment, Downgraded to b3 from b2

.... Baseline Credit Assessment, Downgraded to b3 from b2

.... Long-term Counterparty Risk Assessment, Downgraded to Ba2(cr) from Ba1(cr)

.... Long-term Counterparty Risk Rating, Downgraded to Ba3 from Ba2

.... Long-term Bank Deposits, Downgraded to B2 from B1, Outlook Remains Stable

..Affirmations:

.... Short-term Counterparty Risk Assessment , Affirmed NP(cr)

.... Short-term Counterparty Risk Rating, Affirmed NP

.... Short-term Bank Deposits, Affirmed NP

..Outlook Action:

....Outlook Remains Stable"

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