July 18 (SeeNews) - Moody's Investors Service said it has upgraded the long and short-term local and foreign-currency deposit ratings of Raiffeisenbank Bulgaria to Baa3 from Ba2, and of Municipal Bank to Ba3 from B1.
Both banks' long-term deposit ratings carry a stable outlook, the rating agency said in a statement on its website.
"[...] today's rating actions reflect the improving operating environment for banks in Bulgaria, which prompted the rating agency to change the Macro Profile it assigns to Bulgaria to "Moderate-" from "Weak+"," Moody's commented. "This change in the macro profile triggers a lower loss assumption in the application of Moody's Advanced Loss Given Failure (LGF) analysis, which aims to assess the extent of losses to creditors in a bank's resolution, and leads to a higher uplift in banks' deposit ratings."
Moody's also said in the statement:
"The primary driver of the rating actions is Moody's decisions to change the Macro Profile assigned to banks operating in Bulgaria to Moderate- from Weak +. This reflects an improvement in Bulgaria's near-term growth prospects, owing to improved conditions in the country's labour market, which are supporting private consumption growth, and a gradual recovery in investment activity. Moreover, Bulgaria's commitment to its currency board arrangement is a crucial anchor for macroeconomic policies and supports institutional quality.
Moody's notes that the improvement in Bulgaria's Macro Profile triggers a switch to using a lower 8%, rather than the 13% previously assumed, loss rate assumption on tangible banking assets of Bulgarian banks' in resolution. As a result, the reduced expected loss depositors would face in resolution, results in higher rating uplifts.
The more favourable operating conditions as well as ongoing improvements in RBB's financial fundamentals, mainly asset quality and capital, have also resulted in the upgrade of Raiffeisenbank Bulgaria's standalone credit profile.
(2) BANK-SPECIFIC CONSIDERATIONS
RAIFFESENBANK (BULGARIA) EAD
Moody's has upgraded RBB's deposit ratings to Baa3/Prime-3 from Ba2/Not Prime, driven by the upgrade of the bank's BCA to ba2 from ba3, and the revised assumptions in the rating agency's Advanced LGF analysis that now result in a two-notch uplift for deposit ratings. More specifically, the application of the "Moderate-" Macro Profile in Moody's Advance LGF analysis, including the lower 8% loss at failure assumption, has resulted in lower loss-given failure and the higher rating uplift for deposit ratings.
Moody's has also upgraded the bank's BCA to ba2 from ba3, triggered by improvements in both the Macro Profile and in the bank's asset quality and profitability. According to statements prepared by RBB's parent, Raiffeisen Bank International (RBI, rated deposits and senior debt: Baa1 stable, BCA: ba2), RBB's ratio of non-performing loans (NPLs) to gross loans improved to 5.6% as of March 2017 from 11.0% in December 2015, while the NPL coverage ratio has improved to 96.7%. The bank's annualised return on asset also improved to 1.97% as of March 2017.
The rating agency notes, however, that the upward movement in the bank's BCA, which is now aligned with the ba2 BCA of RBI, has eliminated the previous one notch uplift from affiliate/parental support from RBI, reflecting the limited capacity of RBI to support its subsidiary beyond its own credit strength.
RBB's Counterparty Risk Assessments of Baa2(cr)/Prime-2(cr) were also affirmed.
MUNICIPAL BANK AD
Moody's has upgraded Municipal's long-term deposit ratings to Ba3 from B1, reflecting Moody's Advanced LGF analysis, which now provides a two-notch uplift (previously one notch). More specifically, the application of the "Moderate-" Macro Profile in Moody's Advance LGF analysis, including a lower 8% loss at failure assumption, has resulted in lower loss-given failure and higher rating uplift for deposit ratings.
Moody's has also affirmed Municipal's b2 BCA. The affirmation of Municipal's BCA reflects Moody's expectations that the bank's asset quality improvement will be gradual given its large stock of NPLs, while improved prospects for revenue growth will continue to be weighed down by low efficiency. As of December 2016 the ratio of NPLs to gross loans was 29.6% while the ratio of loan loss reserves to NPLs was low at 45%. The annualised return on assets was a low 0.29% owing to the bank's high cost base with a cost to income ratio of 83.4% as of March 2017.
Municipal's Not Prime short-term deposit ratings and Ba2(cr)/Not Prime(cr) Counterparty Risk Assessments were also affirmed.
-- WHAT COULD MOVE THE RATINGS UP/DOWN
According to Moody's, further improvements in the operating conditions and banks' financial performance -- specifically in their asset quality and profitability metrics -- and provided they maintain their strong capital ratios and deposit-based funding structures, would result in positive rating pressure.
A deterioration in the country's operating environment, leading to a lower macro profile and/or individual banks' standalone financial metrics may have negative rating implications.
Furthermore, alterations in banks' liability structure may change the amount of uplift provided by Moody's Advanced LGF analysis and lead to a higher or lower notching from the banks' adjusted BCAs, thereby affecting deposit ratings and CRAs."
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