Fitch Affirms Three Bulgarian Banks
KEY RATING DRIVERS
IDRS, SUPPORT RATINGS
ABB's, PCB's and SGE's IDRs and Support Ratings are driven by potential support available from their respective majority shareholders. Sogelease's IDRs are equalised with those of SGE as Fitch views the leasing company as the bank's core subsidiary.
ABB's ultimate majority shareholder is Allianz SE (AA/Stable) through a 66% stake in Allianz Bulgaria Holding, a direct 99.9%% owner of ABB. PCB is 100% owned by ProCredit Holding AG & Co. KGaA (PCH; BBB/Stable). SGE is a 99.7% subsidiary of Societe Generale (SG, A/Stable), while Sogelease is SGE's 100% subsidiary.
ABB's support-driven IDRs reflect potential reputational damage to Allianz from the bank's default, ABB's very small size relative to its parent and the owner's support track record. However, Fitch views ABB as a subsidiary of only limited strategic importance to its parent and therefore maintains a wider notching between Allianz's and ABB's Long-term IDRs. This is based on Allianz's focus on insurance business, with ABB its only banking subsidiary in central and eastern Europe (CEE), and ABB's marginal contribution to the parent group's profits. Fitch believes that Allianz has no intention to sell the Bulgarian subsidiary. However, in our view, whether ABB remains in the parent group in the long term depends on its contribution to Allianz's insurance and asset management business and ABB's standalone performance.
Fitch views PCB as a strategically important subsidiary to its parent, PCH. The support considerations take into account the 100% ownership, the strategic importance of the South Eastern Europe region to the group, strong parental integration and a track record of capital and liquidity support. At end-2014, PCB accounted for 12% of PCH's total group assets.
Fitch believes that there is a high probability that SGE would be supported, if required, by SG due to its strategic importance to the parent in light of SG's strategic focus on the CEE region. Fitch's view of SG's support propensity is reinforced by the track record of significant funding provision to the subsidiary and strong operational and management integration between the two banks. The potential cost of support would be easily manageable for SG given SGE's very small size (0.2% of SG's total assets at end-2014). Fitch would rate SGE one notch below SG if country risks allow. At present, SGE's Long-term IDR is constrained by Bulgaria's Country Ceiling (BBB+). Its Stable Outlook mirrors that on the sovereign.
Fitch believes that potential support for Sogelease, if needed, could come from SGE or flow directly from SG. Sogelease is an integral part of financial services provided by SG in Bulgaria and is strongly integrated into the parent group at both operational and funding levels.
VR
ABB's and PCB's' VRs reflect primarily the banks' small size and limited market franchise, which makes them more vulnerable to potential adverse changes in the operating environment and limits their internal capital generation ability. The VRs of all three banks are underpinned by their moderate risk appetite, better than sector asset quality, adequate capitalisation as well as strong funding and liquidity profiles. The ratings also reflect the difficult and relatively unstable domestic operating environment for banks.
ABB and PCB represented a small 2.3% and 1.8%, respectively, of the banking's sector total customer loans and 2.6% and 1.1% of total retail deposits at end-2014. The market franchise of medium-sized SGE was materially stronger, as its shares in the sector's loans and retail deposits increased to, respectively, 6.0% and 5.8% at end-2014.
The banks' asset quality has persistently been better than the sector average, which can be attributed to their relatively lower risk appetite, evidenced by limited exposure to the most problematic economy sectors such as construction and real estate sector, focus on larger corporates (ABB, SGE) and/or more selective underwriting (PCB). At the same time, ABB's and SGE's corporate focus has resulted in significant single-name loan book concentrations. At end-2014, regulatory non-performing loans (NPLs; defined based on local regulatory classification) accounted for 9.4%, 4.6% and 6.1% of ABB's, PCB's and SGE's gross loans, respectively, as compared with a much higher 16.7% ratio for the total banking sector. IFRS impaired loans ratios were higher at 12.4%, 8.2% and 10.7%, respectively. Asset quality has stabilised, but Fitch believes that a material improvement would require a marked economic recovery and revival in lending (still unlikely in 2015) or incentives for loan book clean-up through larger scale write-offs or sales.
Fitch considers the banks' capitalisation to be only adequate. Moderate risk appetite, robust coverage of NPLs by total IFRS reserves (75% at ABB, 77% at PCB and 97% at SGE) and relatively resilient performance should be viewed against the challenging operating environment, notably lower coverage of IFRS impaired loans (56.7%, 43.2% and 55.3%, respectively) and significant loan book concentrations (at ABB and SGE). At end-2014, ABB's, PCB's and SGE's Fitch core capital ratios stood at 19.5%, 21.3% and 15.5%, respectively. Following CRDIV implementation in 2014, the required regulatory minimum capital adequacy ratio (CAR) increased to 13.5% from the formerly recommended 12%. SGE's regulatory CAR (13.6%) was marginally above the required minimum. In the medium term, the bank intends to maintain its CAR and Tier 1 ratio at around 14.0%.
Fitch considers shrinking margins and subdued credit demand pose the main risks to maintaining profitability in 2015. The margin pressure is likely to increase given the limited opportunities for further reduction in funding costs and the accumulated large pools of highly liquid but low-yielding assets. Banks are increasingly focused on cost optimisation measures and searching for additional revenue sources. Fitch expects the average cost of risk to remain stable or slightly decrease.
Fitch believes that liquidity risks have increased for all Bulgarian banks since the deposit runs on the two largest Bulgarian-owned banks. The events at Corporate Commercial Bank (CCB) and First Investment Bank in June 2014 highlighted the corporate governance problems at domestically-owned companies and low level of public trust in the banking system. ABB's, PCB's and SGE's deposit base remained resilient throughout 2014. Increased inflows of deposits from private individuals at these banks support Fitch's view that they are less exposed to a loss of customer confidence and benefit from a flight-to-quality effect.
The banks' sound funding and liquidity profiles are mostly reflected in the large and overall stable customer deposit base and high liquidity buffers. At end-2014, loans/deposit ratios shrank to 72%, 107% and 102% for ABB, PCB and SGE, respectively, following strong deposit growth (of 10%, 7%, and 36%, respectively). The latter was fuelled by deposits from the former customers of the collapsed Corporate Commercial Bank. The risk of potential deposit fluctuations is mitigated by sizeable liquid assets (covering 33%, 35% and 41% of total customer deposits at ABB, PCB and SGE, respectively) and liquidity facilities available at the parents.
RATING SENSITIVITIES
IDRS, SUPPORT RATINGS
ABB's, PCB's, SGE's and Sogelease's IDRs and Support Ratings would be downgraded in case of a downgrade of their parents' IDRs (multi-notch in case of SG) or Bulgaria's Country Ceiling (not PCB). An upwards revision of the Country Ceiling (although unlikely in Fitch's view) would likely lead to an upgrade of SGE's IDR and Support Rating, albeit limited to one notch.
ABB's, PCB's, SGE's and Sogelease's ratings are also sensitive to Fitch's view of their strategic importance to their respective parents. A weakening of Fitch's view of the strategic importance of PCB, SGE or Sogelease could widen the notching between the entities' and their parents' IDRs. ABB's ratings could be downgraded if, in Fitch's view, the bank becomes less important to Allianz's insurance business in Bulgaria, and ultimately to Allianz.]
VR
An upgrade of all banks' VRs would require considerable improvement in their market franchises, coupled with maintaining asset quality and adequate capitalisation.
Any deterioration in the operating environment, which would result in substantial NPL inflow and increased pressure on capitalisation, and/or put the banks' liquidity under stress could lead to a downgrade.
The rating actions are as follows:
ABB
Long-term IDR affirmed at 'BBB+'; Outlook Stable
Short-term IDR affirmed at 'F2'
Viability Rating affirmed at 'bb-'
Support Rating affirmed at '2'
PCB
Long-term IDR affirmed at 'BBB-'; Outlook Stable
Short-term IDR affirmed at 'F3'
Long-term Local Currency IDR affirmed at 'BBB-'; Outlook Stable
Short-term Local Currency IDR affirmed at 'F3'
Viability Rating affirmed at 'bb-'
Support Rating affirmed at '2'
SGE
Long-term IDR affirmed at 'BBB+'; Outlook Stable
Short-term IDR affirmed at 'F2'
Viability Rating affirmed at 'bb'
Support Rating affirmed at '2'
Sogelease
Long-term IDR affirmed at 'BBB+'; Outlook Stable
Short-term IDR affirmed at 'F2'
Support Rating affirmed at '2'
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