Fitch Affirms United Bulgarian Bank and Raffeisenbank (Bulgaria)
The upgrade in Raiffeisenbank's VR to 'bb-' from 'b+' reflects improvements in asset quality, further to the bank's action to clean up its legacy loan book through write offs and sales, and a return to operating profitability in 2014, driven by lower credit risks costs. The bank also holds sizeable capital buffers.
KEY RATING DRIVERS
IDRs
UBB's IDRs are driven by its standalone financial strength, as expressed by its VR of 'b'.
Raiffeisenbank is Raiffeisen Bank International's (RBI) 100%-owned Bulgarian subsidiary. The bank's IDRs are notched down once from its parent, driven by a high probability of support, in case of need. This is because we believe that Raiffeisenbank is a strategically important subsidiary for RBI, given the importance of CEE for RBI, Raiffeisenbank's strong integration into the group and the track record of support to date. The Negative Outlook on Raiffeisenbank's Long-term IDR mirrors RBI's Outlook.
VRs
UBB's VR reflects weak asset quality, and a lack of progress in resolving its large stock of legacy NPLs. It also reflects the bank's good liquidity profile, despite significant recent outflow of customer deposits (11% in 1H15) and a gradual weakening of its franchise.
UBB has reasonable capitalisation (Fitch Core Capital: 26% at end-2014), which would act as a buffer against potential additional provisioning costs, and satisfactory pre-impairment profitability. UBB's VR is above that of its parent, National Bank of Greece (NBG; RD), reflecting Fitch's view of only limited contagion risk to UBB from NBG; this is based on UBB's self-sustainability in terms of funding, and marginal credit exposure to NBG.
At end-1H15, liquid assets (defined as cash, accounts with the central bank and unencumbered Bulgarian government debt securities) accounted for a comfortable 30% of total customer deposits. This buffer has deteriorated since end-2014, when it covered 40% of total customer deposits, as a result of (mainly corporate) customer outflows, but remains robust for the rating level. UBB has no major repayments due in 2015-2016, given low volumes of third party institutional funding; non-deposit funding accounted for just 5% of total liabilities at end-2014.
Asset quality remains weak, and UBB reported IFRS impaired loans at 35% of gross loans at end-1H15. The bank has not made progress in cleaning up this portfolio of legacy problem exposures. Coverage of impaired loans with IFRS reserves remains modest (50% of IFRS impaired loans at end-2014), in view of the slow legal environment for the realisation of collateral and depressed real estate prices. Net impaired loans/ Fitch Core Capital (FCC) has improved but remained high at 76% at end-2014. However, capital provides some protection against potential additional provisioning costs, with the FCC ratio standing at 26% at end-2014. Fitch calculates that an increase in coverage to 80% would result in FCC falling to a still solid 16%.
UBB has minimal funding from NGB (a subordinated loan of BGN153m at end-2014, amortising over the next three years; a low 2.8% of total funding at end-2014); and minimal credit exposure to NBG. In February 2015, the Bulgarian National Bank took measures to eliminate potential channels of contagion by requiring Greek subsidiary banks to cut their credit exposures to parent groups. Further to this, UBB repatriated around BGN847m (about EUR400m) of short-term deposits it had with NBG at end-2014. UBB is operationally independent, although its risk management framework is aligned with that of the parent, and senior executive management includes long-term NBG staff members.
Raiffeisenbank's VR reflects improvements in asset quality, as the bank has taken measures to clean up its portfolio, and a return to operating profitability linked to reduced credit risk costs. The bank's individually impaired loans, plus loans past due 90 days but not impaired, were 13.8% of total loans at end-2014 (18.7% at end-2013), following net write offs of 6.6% in 2014 (in particular of large legacy NPLs from the construction and CRE sectors).
The bank's strategy was to absorb the bulk of the loan impairment charges related to its legacy problem loans in 2013, and this allowed it to return to operating profitability in 2014. However, operating results remain under pressure from a low growth environment and high levels of liquidity. Capital provides a sizeable buffer (FCC of 29% at end-2014), although capital ratios are boosted by the introduction of IRB for capital calculation requirements. The bank expects current levels of capital to support renewed growth, as and when the operating environment improves.
RATING SENSITIVITIES
UBB's IDRs are sensitive to changes in its VR. UBB's VR could be downgraded in case of a sharp or sudden weakening of UBB's liquidity profile linked to higher rates of customer deposit withdrawals. Progress in resolving the bank's large stock of legacy NPLs, in parallel with higher levels of coverage with IFRS reserves, would be positive for the bank's VR.
Raiffeisenbank's IDRs are sensitive to a change in RBI's IDRs. They are also sensitive to changes in Fitch's view of RBI's commitment to the CEE in general, and to the Bulgarian market in particular.
Raiffeisenbank's VR could be upgraded further in case of continued improvements in asset quality, and a pick-up in operating profitability linked to renewed loan growth and an improved operating environment for lending.
The rating actions are as follows:
United Bulgarian Bank AD
Long-term IDR affirmed at 'B'; Outlook Stable
Short-term IDR affirmed at 'B'
Support Rating: affirmed at '5'
Viability Rating: affirmed at 'b'
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 'b+'
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