OREANDA-NEWS. Fitch Ratings has affirmed Bulgarian Development Bank's (BDB) Long-term Issuer Default Rating (IDR) and Support Rating Floor at 'BBB-', Short-term IDR at 'F3' and Support Rating at '2'. The Outlook on the Long-term IDR is Stable.

Fitch does not assign a Viability Rating to BDB as its business model is solely dependent on support from the state.

KEY RATING DRIVERS
BDB's IDRs and Support Rating Floor are equalised with those of the Bulgarian sovereign (BBB-/Stable). These ratings, as well as the Support Rating, reflect Fitch's opinion that there is a high probability of support for the bank from the Bulgarian sovereign, in case of need. Fitch views both the state's propensity and ability to support the bank as strong, which mitigates the lack of explicit state guarantee on BDB's liabilities.

The state's strong propensity to support BDB is underpinned primarily by BDB's policy bank status. Its role is outlined in the BDB Act. Accordingly, the bank's primary task is to stimulate domestic economic growth, in particular by facilitating access to finance for SMEs, and by providing investment banking for projects of national importance. In addition to its commissioned tasks, the bank is allowed to perform most of the activities of commercial banks, including customer deposit collection. At end-3Q15, the bank provided financing mostly in the form of direct loans to corporates (88% of total gross loan exposure), and, to a lesser extent, loans to commercial banks earmarked for on-lending (the remaining 12%), and issued guarantees.

We expect the bank's loan book to significantly expand, in view of the several EU and state-sponsored lending programmes BDB launched in 2015, in particular a BGN1bn (EUR500m) Energy Efficiency Program. The latter, if fully utilised, would increase the bank's balance sheet by some 60% (to BGN2.6bn). Under the programme, repayment of the loans provided to households will be coming directly from the state, so BDB will effectively act as an administrator of the programme.

The BDB Act does not provide an explicit state guarantee on BDB's liabilities, although it gives the state the ability to do this on a case-by-case basis for bonds and loans with maturities over one year. The BDB Act also allows for an increase in the bank's capital (through a capital injection or bond conversion), while requiring the Bulgarian state to always maintain a minimum 51% stake in the bank. Recent evidence of such state support is a state guarantee for total EUR500m credit lines granted to BDB from international financial institutions (IFIs) in 2015 to finance the Energy Efficiency Program.

BDB is funded mainly by equity and state-related funds. At end-3Q15, equity covered a high 39% of total balance sheet assets. Non-equity funding was, to a large extent (estimated 65%), linked to the state, including deposits placed by a state agency (serving as cash collateral against guarantees issued) and by state-owned companies. The remainder included loans from IFIs and foreign development banks, other customer deposits, bank deposits and issued unsecured bonds.

The sovereign's ability to support BDB reflects the small size of potential contingent liabilities: at end-3Q15, the bank's liabilities due to non-state-related parties represented about 35% of its total liabilities and less than 1% of the country's GDP. The general government debt of Bulgaria rose to an estimated 32% of GDP at end-2015, but significantly below the 'BBB' median ratio (43%).

The state's holding of 99.99% in BDB is also a moderately important factor in our assessment of support.

BDB has not been excluded from the scope of the Bank Recovery and Resolution Directive (BRRD). This means that, in view of the lack of a clear separation between the bank's pure policy and commercial activities, the state could be prevented from supporting the bank's senior creditors due to potential distortion of market competition. However, Fitch views such a scenario unlikely at present due to BDB's small size (1.4% of the sector's total customer loans at end-2015). We also believe that the state has significant flexibility to act pre-emptively. This underpins our Stable Outlook on the bank's Long-term IDR.

RATING SENSITIVITIES
BDB's ratings are sensitive to changes in the sovereign's ability and/or propensity to support the bank, the former being reflected in Bulgaria's ratings. If the sovereign is downgraded, this would trigger a similar action on BDB. However, given the lack of an explicit guarantee on all the obligations of the bank and that it has not been excluded from the scope of BRRD, a sovereign upgrade would not necessarily lead to an upgrade of the bank.

Fitch's view on the sovereign's propensity to support the bank could weaken if Fitch judges that BDB's size and/or mix of commercial and policy banking would lead to an increased risk of the state being prevented from supporting the bank's senior creditors in full. This may especially be the case if the bank's expansion is concentrated on commercial activities and financed primarily by unsecured wholesale funding (which is not our expectation).