June 22 (SeeNews) - Standard&Poor's Ratings Services (S&P) said it raised its long-term credit rating on United Bulgarian Bank (UBB) to 'BB+' with a positive outlook from 'B' and affirmed its 'B' short-term rating.
"We now view UBB as a strategically important subsidiary of KBC. We anticipate that the change in ownership will have a positive impact on UBB's overall creditworthiness, specifically its liquidity position. We are therefore raising the bank's stand-alone credit profile to 'b+' from 'b'," S&P said in a statement on Wednesday.
On June 14, KBC Group and UBB said they have received all the necessary approvals to finalize the acquisition announced in late December 2016.
"The positive outlook reflects that we could raise the ratings over the next 12 months if we anticipate an improvement in the bank's business profile, in particular, a more focused growth strategy and the successful integration of UBB with KBC's banking operations in Bulgaria. However, an upgrade of UBB is contingent on an upgrade of Bulgaria," S&P added.
S&P also said in the statement:
"Following the acquisition, we no longer view UBB as being exposed to contagion risk from its former shareholder National Bank of Greece. We also consider that UBB is now a strategically important subsidiary of the KBC group, a more creditworthy group with a long-standing focus on Central and Eastern European markets.
Bulgaria is a very important market for KBC and we expect the group to be strongly committed to UBB given its intention to grow significantly in the Bulgarian banking sector. International business growth is one of the pillars of KBC's strategy as the group plans to be among the top three banks and the top four insurers in its core markets--which include Belgium, Bulgaria, Hungary, the Czech Republic, and Slovakia--by 2020.
KBC group has announced its intention to merge UBB with its Bulgarian subsidiary CIBANK (not rated), creating the third largest player in the Bulgarian banking sector, with a prominent market share of about 12% in loans, 10% in deposits, and 22% in life insurance. We think this deal makes sense from a strategic point of view and is in line with the Belgian bank's objective to grow bank and insurance businesses.
UBB and KBC share the same business focus on commercial banking and bancassurance and we expect UBB to leverage on cooperation with KBC to expand its bancassurance activity and explore cross-selling opportunities in commercial banking in Bulgaria. We expect the bank to become progressively integrated within the KBC group, to align risk management practices and benefit from its parent's liquidity support. We acknowledge that this integration will involve some operational and alignment costs, which in our view are manageable for the group. Importantly, we believe the ambitions of the KBC group in Bulgaria should gradually strengthen the competitive position of its local operations, with higher growth and higher profitability over time.
We also expect KBC to help its subsidiary to work out, more actively than in the past, the very high amount of nonperforming loans (NPLs) it accumulated during the financial crisis in 2008-2009, amounting to 27.7% of its gross loans book. The management of the large amount of NPLs will represent the main challenge for the group, but we expect the work out to be facilitated by the positive economic momentum in Bulgaria and expertise acquired in managing a similar NPL stock in Ireland.
UBB's liquid assets accounted for 44% of total customer deposits as of March 31, 2017 and we expect the bank to continue to hold significant liquidity buffers, in line with regulatory requirements and with the system average. We also anticipate that the KBC group will maintain adequate liquidity at UBB. We view the reduction on contagion risk with the former parent as the most important improvement for the bank's financial profile in the short term.
The positive outlook on UBB reflects our view that we could raise the ratings on the bank over the next 12 months if we raise the sovereign credit ratings on Bulgaria and we see an improvement in the bank's business profile, in particular, a more focused growth strategy and the successful integration of UBB into KBC's banking operations in Bulgaria. This could happen if we saw evidence that the bank was regaining competitiveness in the Bulgarian banking sector through a successful alignment with KBC group strategy and acceleration of the workout of the NPLs it accumulated during the crisis. As UBB is a domestic bank operating in Bulgaria only, we would not rate the bank higher than the sovereign.
We could also raise the ratings if we see UBB's importance within KBC group increasing. This could happen if the bank became more integrated within the group.
We could revise the outlook to stable if we revised the outlook on Bulgaria to stable or we anticipate that the bank's NPL ratio will remain materially above the system average in the long term, therefore increasing the risk of higher losses and draining managerial and financial resources."