July 7, 2017 / 4:04 PM / 6 months ago

Fitch Upgrades First Investment Bank; Affirms 3 Other Bulgarian Banks

(The following statement was released by the rating agency) WARSAW/LONDON, July 07 (Fitch) Fitch Ratings has upgraded First Investment Bank AD's (FIBank) Long-Term Issuer Default Rating (IDR) to 'B' from 'B-' and the bank's Viability Rating (VR) to 'b' from 'b-'. The Outlook on FIBank's Long-Term IDR is Stable. The agency has also affirmed Raiffeisenbank (Bulgaria) EAD (Raiffeisenbank) and UniCredit Bulbank AD (Bulbank) at Long-Term IDR 'BBB-' with a Stable Outlook and United Bulgarian Bank AD (UBB) at Long-Term IDR 'BBB+' with a Positive Outlook. Fitch has also upgraded UBB's VR to 'bb-' from 'b+' and affirmed the VRs of Raiffeisenbank and Bulbank at 'bb'. The upgrade of FIBank's Long-Term IDR and VR is driven by the stabilisation of the bank's asset quality, improvements in profitability and capitalisation and a moderation of the bank's risk appetite. The upgrade of UBB's VR reflects further moderate improvements in the bank's impaired loan ratio and coverage of impaired loans, expected benefits from the recent acquisition by KBC Bank (A/Stable/a) and greater emphasis in Fitch's assessment on the bank's sound capital and funding positions. The affirmation of the VRs of Raiffeisenbank and Bulbank reflects no major changes to their financial metrics over the last 12 months. The affirmation of Raiffeisenbank's, UBB's and Bulbank's IDRs reflects Fitch's opinion of a high probability that they would be supported, if required, by their respective parents. The three banks are owned, respectively, by Raiffeisen Bank International (RBI; 100% stake), KBC Bank (A/Stable/a; 99.9%) and UniCredit S.p.A. (BBB/Stable/bbb; 99.5%). KEY RATING DRIVERS IDRS, SUPPORT RATINGS, SUPPORT RATING FLOOR Bulbank and Raiffeisenbank are based in the CEE region, which is strategically important for both Unicredit and RBI. The banks' synergies with their respective parents are strong and underpinned by long track records in supporting their parents' objectives - which is likely to continue - and a high level of management and operational integration. We see also strong synergies between UBB and KBC because Bulgaria is strategically important for KBC. KBC acquired UBB from National Bank of Greece (Restricted Default) on 14 June 2017 (see 'Fitch upgrades United Bulgarian Bank to 'BBB+' on acquisition by KBC; Outlook Positive' at www.fitchratings.com). In our opinion, any required support for the three banks would be small relative to their respective parents' ability to provide it. Our opinion reflects the owners' solid credit profiles and the small size of their Bulgarian subsidiaries relative to their respective parents. UBB could be rated within one notch of its parent were it not for the constraint from Bulgaria's Country Ceiling, which caps UBB's Long-Term IDR at 'BBB+'. Consequently, the Positive Outlook on UBB reflects that on the Bulgarian sovereign rating (BBB-/Positive). The Stable Outlooks on Raiffeisenbank's and Bulbank's Long-Term IDRs reflect our view that the risks related to their parents' credit profiles are broadly balanced. FIBank's IDRs are driven by standalone financial strength, as expressed by the bank's VR. The Support Rating Floor (SRF) of 'No Floor' and the Support Rating (SR) of '5' for FIBank express Fitch's opinion that although potential sovereign support for the bank is possible, it cannot be relied upon. This is underpinned by the EU's Bank Recovery and Resolution Directive, transposed into Bulgarian legislation, which requires senior creditors to participate in losses, if necessary, instead of or ahead of a bank receiving sovereign support. VRs Bulbank Bulbank's VR is constrained by our assessment of the challenging Bulgarian operating environment, which has particularly weighed on the bank's asset quality. Positively, the VR is underpinned by strong capital buffers, solid profitability, stable funding, comfortable liquidity and Bulbank's leading domestic market franchise. We expect Bulbank's fairly weak loan book quality to continue to improve in 2017 due to loan write-offs and healthy new loan origination. Its impaired loans ratio (about 11% at end-1Q17) is considerably better than the domestic sector average (about 18%), but is still quite high relative to other regional peers. This is mitigated by reasonable coverage of impaired loans by total reserves (about 73%), substantial capital buffers and a high proportion of low-risk exposures outside the loan book. Capitalisation is underpinned by the bank's high capital surplus over regulatory minimums, strong recurring profitability and moderate risk appetite. However, capital adequacy must be viewed in the context of the still difficult operating environment. At end-1Q17, the Fitch Core Capital (FCC) ratio, adjusting for a likely full distribution of 2016 annual profit, was 26.9%. Unreserved impaired loans accounted for a moderate share (about 13%) of adjusted FCC. Bulbank's strong franchise and large size have translated into more resilient through-the-cycle performance than Bulgarian peers. The bank's ratio of operating profit/risk-weighted assets (RWA; 3.8% in 2016) compares favourably with regional peers', reflecting a still wide net interest margin (3.9% in 2016) and high cost efficiency (cost/income ratio of 37%). Refinancing risks are low because the bank is self-funded with customer deposits. Bulbank has a strong deposit franchise, high liquidity buffers and can rely on ordinary liquidity support from its parent. The loans/deposits ratio fell to 80% at end-1Q17, from 86% at end-2015, reflecting continuing deposit inflows. Highly liquid assets covered 49% of customer deposits at end-1Q17. Raiffeisenbank Raiffeisenbank's VR reflects the bank's successful and fast reduction of impaired loans, cautious new lending, low refinancing risk, robust capitalisation, improving profitability and a moderately strong company profile. Raiffeisenbank's asset quality should remain one of the strongest in the banking sector due to the bank's successful and swift portfolio clean-up and moderate risk appetite. At end-2016, the bank's impaired loan ratio fell to 7.1% (from 19% at end-2013) and then improved further in 1Q17. The bank's conservative underwriting standards are underpinned by a well-developed risk-control environment and tight parental control. The bank is self-funded with granular deposits (89% loans/deposits ratio at end-2016) and could also rely on liquidity support from RBI. Its ample liquidity buffer equalled 29% of assets or 40% of customer deposits at end-2016. At end-2016, the bank's FCC ratio was robust (about 22% net of the proposed dividend on 2016 income). Fitch's assessment of capitalisation is also underpinned by the bank's moderate risk appetite, limited expansion plans and relatively stable pre-impairment profit generation compared with local peers. Improvement in the bank's operating profit/RWAs (2016: 4%, 2015: 2.2%) was mainly driven by smaller credit losses and lower funding costs. However, the bank's results in 2017 will be moderately weaker due to pressure on credit spreads and limited opportunities for further reductions in funding and operating costs. At end-2016, the bank was ranked sixth by total assets (about 7% market share). Its loan pricing power is weak, but the cost of its deposit funding was one of the lowest in the sector. The bank's through-the-cycle performance has been somewhat variable, but more resilient than most local peers due to the bank's stable business model and experienced management. UBB UBB's VR primarily reflects the bank's substantial capital buffers, solid pre-impairment profitability and limited refinancing risks. However, it also reflects the bank's weak, albeit improving, asset quality and some profitability pressures. The bank's impaired loans ratio has moderately improved (27.5% at end-1Q17, down from 29.6% at end-2015) due to loan write-offs, but it is still the highest among peers, mainly reflecting legacy problems. The inflow of new bad debt should remain contained. Significant improvement of loan quality metrics could be difficult to achieve, however, due to continuing loan book contraction. Coverage of impaired loans by total reserves strengthened (to 56% at end-1Q17 from 51% at end-2015) but remains only adequate compared with higher-rated peers, which is partly mitigated by available capital buffers. Capitalisation is underpinned by the bank's substantial capital buffers, solid pre-impairment profits and moderate risk appetite, which mitigate challenges stemming from the operating environment and weak asset quality. The bank maintained high capital buffers over regulatory minimums despite sizeable dividend pay-outs to its previous owner in 4Q16 and 1Q17. At end-1Q17, its adjusted FCC ratio (reflecting the dividend and 1Q17 net profit) was 24.4%. Unreserved impaired loans absorbed 54% of the adjusted FCC. However, if all outstanding impaired loans were 80% covered, the FCC ratio would drop to a still healthy 18.4%. Pre-impairment profitability has been supported by strong net interest margin (4.4% at end-2016) and good cost efficiency (cost/income ratio of 45%), which has offset high loan impairment charges (LICs; equal to 2.3% of average gross loans). At end-2016, operating profit/RWAs of 2.3% was average compared with peers. In 2017 UBB may face additional LICs due to its full asset review following the acquisition by KBC. UBB's limited refinancing risks reflect the bank's stable deposit-based funding, substantial liquidity buffers and potential liquidity support from KBC. At end-2016, the loans/deposits ratio fell to a comfortable 82% (end-2015: 97%) due to loan book shrinkage and deposit inflows. At end-1Q17, highly liquid assets covered about 35% of the customer deposit base. FIBank The upgrade of FIBank's VR predominantly reflects the stabilisation of the bank's asset quality metrics and improvements in the risk management framework, including consistent application of loan classification criteria in line with industry standards. It also reflects the reduction of unreserved impaired exposures, improved capitalisation - albeit this is still weak compared with peers - and improved loss absorption capacity through recurring profit generation. The VR is also supported by the bank's stable funding based on granular retail deposits and healthy liquidity. FIBank's VR continues to reflect significant asset quality problems associated with legacy loans, with the impaired loans ratio materially above the sector average, unreserved impaired loans equal to 71% of FCC, and a large stock of non-income generating repossessed assets equal to around 123% of FCC at end-2016. The VR also factors in significant and only gradually declining single-name concentrations in the loan book and still only moderate, albeit improved, capital buffers given FIBank's risk exposures. FIBank's risk management framework has improved and risk appetite has been reduced. The record of the bank's operation under the new risk management structure is, however, still short and legacy problems will continue to weigh on the risk profile of the bank over the medium term. Corporate governance deficiencies have largely been addressed, but some weaknesses are still present, in Fitch's view. These relate mainly to limited representation of independent members in the board. The bank's impaired loans ratio remained broadly unchanged at 24.4% at end-2016 (end-2015: 23.9%). Fitch expects the reported asset quality ratio to improve over 2017, driven by a contained inflow of new impaired loans, modest growth of new lending and moderate clean-up of the impaired loan stock through work-outs and write-offs. Coverage of impaired loans by provisions improved over 2016, but remained modest at 58% at end-2016. The loan book, although reasonably well-diversified across economic sectors, has large single-name concentrations. These are being gradually reduced, but no material reduction is expected over the medium term given the long-term nature of many of the largest exposures. The bank returned to operating profitability based on recurring revenues in 2016 supported by a strong net interest margin (around 5%) and reasonable cost efficiency (49% cost/income ratio) as well as more moderate impairment charges (around 260bps of average gross loans; 2015: 520bps). The record of improved profitability is short; however, operating profitability is likely to be supported by contained impairment charges driven by an improved economic environment. Earnings have, however, been weaker and more volatile through the cycle than at peers. Some weaknesses in FIBank's lending franchise and a reduction of risk appetite are putting pressure on lending margins, and further potential reduction in funding costs may not be sufficient to mitigate these. This was evident in 1Q17 results, with the net interest margin falling to around 4.2%, albeit still in line with that posted by peers in 2016. FIBank's FCC ratio improved over 2016 to 13.7% due to profits generated during the year, which will be fully retained. The quality of capital has also improved, although unreserved impaired loans still accounted for a high 71% of FCC at end-2016 (2015: 93%). Loss absorption capacity is enhanced by BGN210 million (equal to 3.4% of RWAs) of Basel 3 compliant AT1 securities included in regulatory Tier 1 capital. Capital buffers above Tier 1 regulatory minimum were moderate at end-2016, but will increase by around 160bp following the inclusion of 2016 profit. Funding is a rating strength and refinancing risk is low. Granular, mostly retail customer deposits accounted for 96% of total funding at end-2016. The growth of customer deposits in both 2015 and 2016 suggests that FIBank's deposit franchise has recovered from the turbulence that resulted in state liquidity support in 2014, which was fully repaid in 2016. However, FIBank's deposit funding relies mostly on term deposits, while the share of cheaper current and saving account deposits is lower than peers. RATING SENSITIVITIES IDRS AND SUPPORT RATINGS The IDRs and SR of Raiffeisenbank, Bulbank and UBB are sensitive to our view of ability or propensity of their respective parents to support their Bulgarian subsidiaries. We do not expect the banks' owners' support propensity to weaken. UBB would be upgraded if Bulgaria's Country Ceiling is revised upwards. FIBank's IDRs are sensitive to changes in the bank's VR. VRs An upgrade of Raiffeisenbank's and Bulbank's VRs would require an improvement of the operating environment and a further strengthening of overall credit profile (Raiffeisenbank). An upgrade of UBB would require a significant reduction of its high impaired loans, a strengthening of its general risk management framework and an extended record of solid financial results. A further upgrade of FIBank would require faster resolution of legacy impaired loans, a reduction of loan book concentrations and monetisation of repossessed assets without denting its capitalisation, and a longer record of sound profitability. Deterioration in the operating environment, which would result in a substantial inflow of new bad debt and capital erosion at the four banks, could lead to downgrades of their VRs. The rating actions are as follows: Bulbank Long-Term IDR: affirmed at 'BBB-'? Outlook Stable Short-Term IDR: affirmed at 'F3' Support Rating: affirmed at '2' Viability Rating: affirmed at 'bb' FIBank Long-Term IDR: upgraded to 'B' from 'B-'? Outlook Stable Short-Term IDR: affirmed at 'B' Viability Rating: upgraded to 'b' from 'b-' Support Rating: affirmed at '5' Support Rating Floor: affirmed at 'No Floor' Raiffeisenbank Long-Term IDR: affirmed at 'BBB-'? Outlook Stable Short-Term IDR: affirmed at 'F3' Support Rating: affirmed at '2' Viability Rating: affirmed at 'bb' UBB Long-Term IDR: affirmed at 'BBB+'? Outlook Positive Short-Term IDR affirmed at 'F2' Support Rating: affirmed at '2' Viability Rating: upgraded to 'bb-' from 'b+' Contact: Primary Analysts Michal Bryks, ACCA (Raiffeisenbank, UBB, Bulbank) Director +48 22 338 6293 Fitch Polska SA Krolewska 16, 00-103 Warsaw Artur Szeski (FIBank) Senior Director +48 22 3386292 Fitch Polska S.A. Krolewska 16, 00-103 Warsaw Secondary Analyst Agata Gryglewicz Associate Director +48 22 330 6970 Committee Chairperson James Watson Managing Director +7 495 956 6657 Media Relations: Peter Fitzpatrick, London, Tel: +44 20 3530 1103, Email: peter.fitzpatrick@fitchratings.com. 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