March 21 (SeeNews) - Standard & Poor's said on Wednesday that it had raised its long- and short-term issuer credit ratings on United Bulgarian Bank (UBB) to 'BBB-/A-3' from 'BB+/B', but then withdrew the ratings at UBB's request.
"We raised the ratings because we considered that UBB's integration into the KBC group was progressing well," the rating agency said in a statement.
S&P also said in the statement:
"In line with KBC's plan, UBB merged with KBC subsidiary CIBANK (not rated) on Feb. 6, 2018, thus becoming the third-largest group in the Bulgarian banking sector, with a market share of about 12% in loans and 10% in deposits. We expect that by year-end 2018, the bank will have finalized the integration of information technology, completed the optimization plan for branches, and harmonized the commercial strategy, thus enabling UBB to fully exploit business opportunities in the Bulgarian market.
Although not yet apparent in UBB's results, we expect the benefits of the integration to improve the bank's profitability over the next few years. This is because we expect UBB to expand its business after the severe deleveraging that took place between 2008 and 2016, when the bank's loan book declined by 33%. In addition, we anticipate that the bank's profitability will benefit from the cost synergies derived from the merger with CIBANK.
In addition, under the new management team, UBB is actively managing its large portfolio of nonperforming loans (NPLs), accounting for about 22.2% of the combined entity's total loans as of Dec. 31, 2017. UBB began the clean-up of its portfolio during the second half of 2017, by identifying the loans out of KBC's risk appetite and aligning its provisioning level to KBC's standards. Coverage through provisions was about 57.3% for the combined entity as of Dec. 31, 2017.
We anticipate that UBB's asset quality will improve over time as the bank speeds up the work-out of its NPLs. We expect the NPL ratio will decline to slightly below 15% by the end of 2019, while coverage should improve to about 65% by the same date. In our view, cleaning up the portfolio will allow the bank to focus on its business strategy and improve its performance.
We now consider UBB's business position to be more in line with that of its peers.
We anticipate the bank will maintain strong capitalization, with its ratio of risk-adjusted capital remaining above 10% through 2019. We expect that the bank will distribute the vast majority of its earnings, given the strong regulatory capital ratio. As of Dec. 31, 2017, UBB's Tier 1 ratio was 24.1%, well above the 11.5% regulatory minimum.
At the time of the withdrawal, the stable outlook on UBB reflected our opinion that UBB would continue to benefit from KBC group support. It also reflected our view that the bank's asset quality metrics would improve."