January 27 (SeeNews) - Moody's Investors Service said on Monday it has upgraded the long-term local-currency deposit ratings of Raiffeisenbank Bulgaria to Baa1 from Baa2 with a stable outlook.
"Concurrently, the rating agency also upgraded RBB's standalone Baseline Credit Assessment (BCA) to ba1 from ba2, its Adjusted BCA to baa3 from ba1 and the long-term Counterparty Risk Ratings (CRR) to A3 from Baa1," Moody's said in a statement.
Moody's has also affirmed the lender's foreign currency deposit ratings at Baa2, with positive outlook, while its short-term deposit ratings were affirmed at P-2, the credit ratings agency said in a statement.
The rating action predominantly reflects improvements in the bank's standalone credit profile, mainly in terms of the bank's asset risk profile.
Moody's also said in the statement:
"RATINGS RATIONALE
--UPGRADE DRIVEN BY IMPROVEMENTS IN STANDALONE CREDITWORTHINESS
The upgrade of RBB's ratings reflects the upgrade of the bank's BCA to ba1 from ba2, driven by improvements in the bank's standalone credit profile, and predominantly Moody's expectation of lower asset risk resulting from higher exposure to households in Bulgaria and that asset quality will remain strong over the coming 18 months, following significant improvement.
RBB's loan book mix has shifted in recent years in favour of loans to households that accounted for 43% of total as of September 2019 compared to 41% a year earlier and 29% at the end of 2012, because RBB has focused on mortgage and unsecured lending to retail customers. Households are less leveraged in Bulgaria compared to businesses and have benefited from annual real wage increases supporting their repayment capacity. Conversely, the bank's exposure to more highly leveraged Bulgarian businesses has decreased. In particular, RBB's exposure to the cyclical construction and real estate sectors was 6% of its gross loans as of year-end 2018 according to latest available information, from 14% in 2012.
RBB's asset quality has improved significantly in recent years and Moody's expects asset quality to remain strong over the coming quarters, supported by real GDP growth in Bulgaria of 3.2% in 2020, and improved labour market conditions. The seasonally adjusted unemployment rate declined to a new record low of 3.7% in November 2019, based on data by Eurostat. According to RBI disclosures, RBB's nonperforming loans (NPLs)/gross loans improved further to 2.1% as of September 2019 from 2.7% at the end of 2018, and 4.3% at the end of 2017.
Further, the rating agency considers that RBB benefits from a growing and historically sticky customer deposit base in Bulgaria and very low dependence on market funding. Capitalisation will remain solid, providing capacity to absorb sizeable unexpected losses. The bank's tangible common equity/risk-weighted assets was 19% as of year-end 2018. The bank's ba1 BCA, also reflects the risks from recent strong loan growth. Loans to customers grew by 16.7% year-over-year in September 2019 leaving part of the bank's loan book unseasoned, although most of this growth was to households and supported by the aforementioned wage increases. The rating agency expects that low interest rates and competitive pressure will continue to strain the bank's margins, similarly to other Bulgarian banks. However, Bulgarian banks' profitability remains stronger compared to the European Union average. Based on data published by the Bulgarian central bank, Moody's estimates the bank's net income/tangible assets at 1.8% for the first nine months of 2019 and it's cost/income ratio at 47%.
Moody's does not have specific concerns about governance at RBB that would merit a corporate behaviour adjustment in its standalone assessment. Nonetheless, corporate governance remains a key credit consideration for RBB, similarly to all other banking peers, and requires ongoing monitoring.
-- RATINGS CONTINUE TO BENEFIT FROM AFFILIATE SUPPORT AND LGF UPLIFT
Moody's continues to assume a high probability of affiliate support from RBB's parent, RBI, which leads to one notch of uplift for the bank's baa3 Adjusted BCA. Moody's assumption of a high likelihood of support is based on (1) RBI's full ownership of RBB; (2) RBI's strong operational support; and (3) RBB's clear association with the Raiffeisen brand.
Moody's LGF analysis, continues to indicate very low loss given-failure for RBB's Baa1-rated local currency deposits, leading to a two-notch uplift from its baa3 Adjusted BCA, and an extremely low loss given-failure for the A3 CRR with three notches of uplift above the Adjusted BCA. Advanced LGF considers the risks faced by different debt and deposit classes across the liability structure should the bank enter resolution.
The Baa2 foreign currency deposit rating is capped by Bulgaria's Baa2 foreign currency deposit ceiling.
The Baa1(cr) CR Assessment incorporates two notches of LGF uplift above the Adjusted BCA of baa3 because CR Assessments are typically capped at the level of the government debt rating plus one additional notch, unless the bank's Adjusted BCA is higher than the government debt rating. Consequently, RBB's long-term CR Assessment is capped one notch higher than Bulgaria's Baa2 government rating.
-- DEPOSIT OUTLOOKS
The stable outlook on RBB's Baa1 local currency deposit rating is driven by the rating agency's expectation that the bank's financial performance and support considerations will remain broadly unchanged over the coming 12-18 months. Namely, Moody's expects that (1) problem loan levels will broadly stabilise after significant improvement; and that (2) capital metrics will remain solid, despite expected reductions because of growth and profit distribution. The stable outlook is also in line with the outlook on RBI's ratings.
The positive outlook on RBB's Baa2 foreign currency deposit rating is driven by the positive outlook on Bulgaria's Baa2 sovereign rating and reflects the likelihood that the country's foreign currency deposit ceiling could be raised following a potential upgrade of Bulgaria's ratings.
WHAT COULD MOVE THE RATINGS UP/DOWN
An improvement in the operating environment in Bulgaria and a further decline in RBB's asset risk, along with the maintenance of strong capital ratios and an improvement in the bank's core profitability, may lead to an upgrade of its BCA. Such an upgrade in RBB's BCA together with an improvement in RBI's capacity to provide support to RBB, reflected by an upgrade of RBI's own BCA, could lead to an upgrade of RBB's ratings. RBB's foreign currency deposit rating would be upgraded if Bulgaria's ceiling for such deposits is raised.
A deterioration in the bank's asset quality, or a significant reduction in its capital, or, liquidity buffers could result in a rating downgrade. Changes in the bank's liability structure may reduce the uplift provided by Moody's Advanced LGF analysis. Reduced capacity, or, willingness by RBI to provide support to RBB could also result in a downgrade."
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