November 19 (SeeNews) - Moody's Investors Service said that it has placed on review for upgrade the Baa1 long-term deposit ratings of Raiffeisenbank Bulgaria following the proposed acquisition by Belgium-based financial group KBC.
The bank's A3/P-2 long and short-term counterparty risk ratings (CRR) and its baa3 adjusted baseline credit assessment (BCA) were also placed on review for upgrade, Moody's said in a statement published on Thursday.
Concurrently the rating agency affirmed RBB's P-2 short-term bank deposit ratings, its A3(cr)/P-2(cr) long and short-term counterparty risk (CR) assessments, and its ba1 BCA.
The review for upgrade predominantly reflects the potential for higher affiliate support uplift incorporated in Raiffeisenbank Bulgaria's adjusted BCA following a change in the bank's ownership, Moody's noted.
Earlier this week, 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 ($1.16 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.
Moody's also said in its statement:
"The review for upgrade of RBB's ratings and Adjusted BCA mainly reflects the stronger fundamental credit standing of KBC (baa1 BCA) compared to RBI, the increased importance of Bulgaria to KBC's assets and revenues following the transaction and the high level of operational integration between KBC and its subsidiaries, including designation of KBC Group as the single-point-of-entry (SPE) in the group's resolution plans, that may feed into higher affiliate support uplift for RBB.
RBB's baa3 Adjusted BCA currently incorporates a one-notch rating uplift from its ba1 standalone BCA reflecting RBI's baa2 BCA that the rating agency uses as the affiliate support anchor and Moody's assumption of a high probability of support given RBI's 100% stake in RBB since 1994 when greenfield operations were established, RBI's strong operational support and oversight and RBB's full use of the Raiffeisen logo and name.
In contrast to KBC's SPE strategy that relies on the upstreaming of losses to the parent and the down streaming of capital to an ailing subsidiary, RBI in under the multiple-point-of-entry resolution strategy for its Bulgarian and other regional subsidiaries, whereby RBB would be resolved separately from its parent.
KBC considers Bulgaria as one of its core markets where it is already present through United Bulgarian Bank AD, the third-largest bank with a 10.3% market share in assets as of the end of 2020. RBB was the sixth-largest bank in Bulgaria with a 7.8% market share in assets. Following closure of the deal KBC plans to merge RBB into its Bulgarian operations with a pro-forma combined market share in assets of 18.1% based on Bulgarian National Bank data.
-- CR ASSESSMENT AFFIRMATION
The affirmation of RBB's CR Assessment at A3(cr) reflects its current positioning at one notch above the Bulgarian government rating (Baa1 stable) and that the CR Assessment typically does not exceed the sovereign's rating by more than one notch.
-- BCA AFFIRMATION
The affirmation of RBB's ba1 standalone BCA reflects Moody's expectation that the bank will maintain its credit profile pending closure of the deal.
The ba1 BCA is driven by RBB's strong capital with a tangible common equity/risk-weighted assets ratio of 16.6% as of year-end 2020 based on latest available audited figures, a stable deposit-based funding structure and high liquidity.
Asset quality has improved and the bank has been focusing on retail lending. According to RBI's disclosures, RBB's nonperforming loans/gross loans ratio was 2.3% as of September 2021, well below the Bulgarian system average. The rating agency expects asset quality to deteriorate moderately because of last year's economic downturn and once support measures on borrowers are gradually lifted.
FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS
RBB's long-term deposit ratings could be upgraded following conclusion of the transaction and Moody's assessment of a higher affiliate support uplift incorporated into the ratings.
There could also be positive pressure on the deposit ratings if the bank's liability structure changes to include substantially higher amounts of more junior debt, including the issuance of internal loss absorbing capital to meet regulatory requirements.
Given the review for upgrade there is limited downside pressure to the ratings. However, RBB's ratings could be confirmed at current levels if the agency assesses that upon the completion of the acquisition the affiliate support uplift remains unchanged.
The long-term bank deposit ratings could also be confirmed at current levels owing to changes in RBB's liabilities structure resulting in a lower uplift following the application of Moody's Advanced LGF."
($ = 0.8824 euro)