OREANDA-NEWS. Fitch Ratings has affirmed the Long-Term Issuer Default Ratings (IDRs) of Raiffeisenbank (Bulgaria) EAD at 'BBB-' with a Negative Outlook, and of First Investment Bank AD (FIBank) at 'B-' with a Stable Outlook. The agency has also upgraded United Bulgarian Bank AD's (UBB) Long-Term IDR to 'B+' from 'B'. The Outlook is Stable.

At the same time, Fitch has upgraded Raiffeisenbank (Bulgaria)'s Viability Rating (VR) to 'bb' from 'bb-', and UBB's VR to 'b+' from 'b'. Fitch has affirmed FIBank's VR at 'b-'. A full list of rating actions is at the end of this rating action commentary.

The affirmation of Raiffeisenbank (Bulgaria)'s IDRs reflects Fitch's opinion that there is a high probability that the bank would be supported, if required, by its parent. The affirmation of FIBank's ratings reflects no major changes in its financial metrics since our last review in May 2016. The upgrade of UBB's Long-Term IDR reflects the upgrade of its VR.

KEY RATING DRIVERS

IDRS, SUPPORT RATINGS

Raiffeisenbank (Bulgaria)'s IDRs are based on potential support from its 100% owner, Raiffeisen Bank International (RBI). Fitch believes that there is a high probability that Raiffeisenbank (Bulgaria) would be supported, if required, by RBI due to its strategic importance to the parent, given RBI's strategic focus on the CEE region, Raiffeisenbank (Bulgaria)'s strong integration into the parent group and the track record of significant funding provision in the past. The potential cost of support would be easily manageable for RBI given Raiffeisenbank (Bulgaria)'s small size. The Negative Outlook on Raiffeisenbank (Bulgaria)'s Long-Term IDR reflects Fitch's view that the balance of risks for RBI's credit profile are on the downside.

UBB's and FIBank's IDRs are driven by their standalone financial strength, as expressed by their VRs.

FIBank's and UBB's Support Ratings (SR) of '5' and Support Rating Floors (SRF) of 'No Floor' reflect Fitch's opinion that potential sovereign support for the banks cannot be relied upon. This is underpinned by the EU's Bank Recovery and Resolution Directive (BRRD), transposed into Bulgarian legislation, which provides a framework for resolving banks that is likely to require senior creditors participating in losses, if necessary, instead of or ahead of a bank receiving sovereign support. Support for UBB from its 99.9% shareholder, National Bank of Greece (NBG) cannot be relied upon given that NBG is currently in default.

VRS

Raiffeisenbank (Bulgaria)'s and UBB's standalone profiles are supported by their moderate risk appetites, substantial capital buffers, solid deposit-based funding and ample liquidity. Raiffeisenbank (Bulgaria)'s higher VR is underpinned by its significantly better asset quality and improving profitability. The upgrades of both banks' VRs are largely driven by their gradual reduction in legacy impaired loans, which is likely to continue in 2016 and beyond.

FIBank's VR reflects its weak capitalisation relative to significant concentrations in its loan book and low reserve coverage of a large stock of impaired exposures, resulting in significant unreserved impaired loans relative to Fitch Core Capital (FCC). The rating also reflects a high share of impaired exposures and repossessed assets on FIBank's balance sheet as well as weak, albeit improving profitability. At the same time, the rating also considers positive changes in the bank's corporate governance and risk management framework; and a recovery in the funding base and liquidity position.

The operating environment for Bulgarian banks is likely to remain difficult in 2H16 and beyond due to subdued credit demand, low interest rates and growing competition for a limited number of borrowers in a small market. We believe that the central bank's on-going sector-wide asset quality review (AQR) and reforms to the supervisory framework should help restore public confidence in the banking sector after the bankruptcy of a large domestically-owned bank.

Fitch expects loan book quality to further improve at Raiffeisenbank (Bulgaria) and UBB in view of the ongoing progress with portfolio cleaning. The inflow of new bad debts should remain contained at the two banks, assuming no economic stress. This reflects selective approaches to the origination of new loans, already seasoned legacy loans and modest expansion plans.

At end-2015, IFRS impaired loan ratios stood at around 11% at Raiffeisenbank (Bulgaria) and a high 24% at FIBank and 30% at UBB (end-2014: about 14%, 12%, 37%, respectively). Raiffeisenbank (Bulgaria)'s markedly better asset quality primarily reflects its earlier loan book cleaning, conservative underwriting in new production and tight parental supervision. The high share of impaired loans at UBB in part reflects significant legacy commercial - and residential real estate lending.

In Fitch's view, the substantial increase in the impaired loans ratio at FIBank in 2015 was driven by a more conservative and consistent application of impairment triggers rather than abrupt deterioration of underlying asset quality. On top of the large stock of impaired exposures, FIBank carries on its balance sheet a significant amount of repossessed assets (around BGN932m, equivalent to around 1.3x FCC), mostly in the form of real estate. These do not generate recurring income, negatively impacting profitability, and are likely to be only gradually monetised.

Fitch views Raiffeisenbank (Bulgaria)'s and UBB's capitalisation as adequate in view of their moderate risk appetites, limited expansion plans, muted credit demand and relatively stable pre-impairment profit generation, which offset challenges stemming from the operating environment. The banks' capital buffers are sufficient to absorb even substantial additional loan provisioning that could result from the AQR. Raiffeisenbank (Bulgaria)'s capitalisation is also underpinned by potential ordinary capital support from the parent.

FIBank's weak capitalisation is negatively affected by high unreserved impaired loans (at around 94% of FCC at end-2015) and large concentrations in the loan book (at multiples of FCC at end-2015). The unreserved impaired loans equalled around 16% FCC at Raiffeisenbank (Bulgaria) and about 58% at UBB.

Subdued domestic credit demand, coupled with lower market interest rates, is affecting the profitability of Bulgarian banks. However, their results generally compare well with regional peers mostly due to still wide margins. Lending activity is unlikely to recover in 2H16 (especially among corporates) and margin pressure will increase since the room for further deposit rate cuts is limited.

Refinancing risks at Raiffeisenbank (Bulgaria) and UBB are limited because they are self-funded with local customer deposits and hold ample liquidity buffers. Raiffeisenbank (Bulgaria) can also rely on ordinary liquidity support from its parent. Fitch believes that UBB's overall funding profile is moderately weaker since its (otherwise fairly strong) deposit franchise could be vulnerable to potential negative developments at its Greek owner. This was evidenced by increased deposit withdrawals at UBB in 1H15 due to intensification of the Greek crisis, as opposed to flight-to-quality at Raiffeisenbank (Bulgaria). UBB's deposit base has recovered since then and has recently been stable.

At FIBank, liquidity has recovered and stabilised following significant deposit outflows in 2014, which triggered extraordinary liquidity support from the sovereign. This was fully repaid in May 2016. FIBank has a fairly granular deposit base with a large share of retail deposits, but these are mostly term deposits that are more expensive than current account balances. At end-2015, gross loans/deposit ratios shrank to around 81% at Raiffeisenbank (Bulgaria), 97% at UBB and 83% at FIBank. The banks' liquidity buffers (mainly cash, short-term interbank deposits and Bulgarian sovereign debt) relative to total customer deposits were considerably above the 20% regulatory minimum.

RATING SENSITIVITIES

IDRS, SUPPORT RATINGS

UBB's and FIBank's IDRs are sensitive to changes in their VRs. A positive change in the sovereign's propensity to support banks, while not impossible, is highly unlikely in Fitch's view. An upgrade of UBB's SR would likely be contingent on a material strengthening of its parent's credit profile.

A significant weakening of the ability and/or propensity of RBI to provide support (not expected by Fitch at present) could result in downgrade of the IDRs and SR of Raiffeisenbank (Bulgaria).

VRS

UBB's VR (b+) is above that of NBG (f), reflecting Fitch's view of only moderate contagion risk to UBB from the parent. This is based on UBB's self-sustainability in terms of funding and marginal direct credit exposure to NBG and Greece. At the same time, Fitch believes that a further upgrade of UBB's VR above the parent is unlikely given the potential sensitivity of UBB's deposit stability on developments in Greece.

Raiffeisenbank (Bulgaria)'s VR could be upgraded further in case of an improvement of the operating environment, further progress with portfolio cleaning, and a pickup in profitability.

FIBbank's VR could be downgraded in case of (i) a further marked deterioration in FIBank's loan performance or underlying asset quality, resulting in increased pressure on the bank's capitalisation; or (ii) renewed and sustained pressure on the bank's liquidity, if this is not offset in a timely fashion by external liquidity support. Upside potential for FIBank's VR is limited in the short to medium term given that the potentially positive impact of actions taken under the restructuring plan, including stronger internal capital generation, will take time to feed through and affect capitalisation, while legacy issues will weigh on the bank's risk profile.

The rating actions are as follows:

First Investment Bank AD

Long-term IDR: affirmed at 'B-'; Outlook Stable

Short-term IDR: affirmed at 'B'

Viability Rating: affirmed at 'b-'

Support Rating: affirmed at '5'

Support Rating Floor: affirmed at 'No Floor'

Raiffeisenbank (Bulgaria) EAD

Long-term IDR: affirmed at 'BBB-'; Outlook Negative

Short-term IDR: affirmed at 'F3'

Support Rating: affirmed at '2'

Viability Rating: upgraded to 'bb' from ' bb-'

United Bulgarian Bank AD

Long-term IDR upgraded to 'B+' from 'B'; Outlook Stable

Short-term IDR affirmed at 'B'

Support Rating: affirmed at '5'

Viability Rating: upgraded to 'b+' from 'b'

Support Rating Floor: assigned at 'No Floor'