May 24 (SeeNews) - Fitch Ratings said on Thursday it has affirmed the Long-Term Issuer Default Ratings (IDRs) of Bulgarian lenders Allianz Bank Bulgaria, Societe Generale Expresbank, ProCredit Bank Bulgaria and Raiffeisenbank Bulgaria, as well leasing company Sogelease, with stable outlooks.
The agency affirmed the rating of Allianz Bank Bulgaria at 'BBB+', of Societe Generale Expressbank AD and Sogelease Bulgaria at 'A-' and of ProCredit Bank (Bulgaria) EAD and Raiffeisenbank Bulgaria at 'BBB-', Fitch Ratings said in a statement.
The affirmation of all the IDRs reflects Fitch's opinion of an extremely high (Expressbank and Sogelease) and high (the remaining banks) probability that they would be supported, if required, by their respective parents. The stable outlook on the banks' and Sogelease's Long-Term IDR reflects the view that risks related to parents' credit profiles are broadly balanced, Fitch Ratings said.
Raiffeisenbank Bulgaria's Viability Rating (VR) has been upgraded to 'bb+' from 'bb' while the VRs of other banks have been affirmed, the credit agency added.
Fitch Ratings also said in the statement:
"KEY RATING DRIVERS
IDRS, SUPPORT RATINGS
All banks are based in strategically important region for their respective parents. Their synergies with their parents are strong (limited in case of ABB) and underpinned by long records of supporting their parents' objectives and a high level of management and operational integration. We also believe that the high ownership stakes in Bulgarian subsidiaries underpins owners' support propensity.
We believe that ABB's strategic importance to Allianz is limited. Consequently, ABB's Long-Term IDR is four notches below that of Allianz. This is based on the strategic focus of Allianz on the insurance business, with ABB being its only banking subsidiary in central and eastern Europe (CEE), and ABB's marginal contribution to the parent group's profits. In our view, Allianz's commitment to ABB depends on the subsidiary's contribution to Allianz's insurance and asset management business and its financial self-sustainability.
In our assessment of support, we also take into consideration relatively small size of the three banks, except ProCredit, relative to their respective parents. ProCredit accounts for 17% of its consolidated parent assets at end-2017. We believe that any required support is likely to be considerable (ProCredit) or immaterial (the remaining banks and Sogelease) relative to ability of parents to provide it.
Sogelease's IDRs are equalised with those of Expressbank as Fitch views the leasing company as the bank's core subsidiary. Sogelease is an integral part of financial services provided by SocGen in Bulgaria and is strongly integrated into the parent group at both operational and funding levels.
Expressbank's and Sogelease's Short-Term IDR of 'F1' is the higher of the two possibilities corresponding to the Long-Term IDR of 'A-'. Both Short-Term IDRs are underpinned by their respective parents' solid liquidity and our view that parental propensity to support is more certain in the near term.
VRS
The challenging domestic operating environment has weighed on the through-the-cycle asset quality and performance of Bulgarian banks. As a result, the VRs of all banks are compressed in the 'bb' range, despite their largely robust capital buffers, moderate risk appetites, low refinancing risks and moderate profitability. The higher VR of Raiffeisenbank reflects its superior asset quality following its successful reduction of impaired loans to normalised levels and overall moderate credit risk profile. Lower VRs of ABB and ProCredit are constrained by their overall modest market franchises.
We believe that asset quality in 2018 and beyond at the four banks will benefit from contained inflow of new bad debts, conservative origination of new loans, moderate (fast at ProCredit) credit growth and the supportive economic environment. ProCredit's fast growth should be seen in light of the bank's small size.
We expect a further gradual progress in portfolio cleaning at ABB and the acceleration of this process at Expressbank, driven by SocGen group's strategic focus on bad debts reduction. However, a substantial reduction in the high impaired loan ratios at both banks is likely to be lengthy due to underdeveloped local market for distressed debt and long time required in Bulgaria to enforce collateral. Further material asset-quality improvement at Raiffeisenbank and ProCredit is unlikely due to already low levels of impaired loans and significantly healthier loan book structures than sector average.
Impaired loan ratios at the four banks are below the sector average (14.8% at end-2017) due to more prudent through-the-cycle underwriting and tighter parental control. However, the asset-quality metrics are worse and more vulnerable to changes in economic cycles than more stable countries in CEE, such as the Czech Republic, Poland and Slovakia.
ProCredit's loan book quality has been the most resilient through the cycle, due to its focused business model and conservative risk appetite. The bank's impaired loans ratio improved to 3.2% at end-2017. Raiffeisenbank's impaired loans ratio shrank rapidly to 4.3% at end-2017 compared with the peak of almost 19% at end-2013. This reflects the bank's well-executed bad debt reduction strategy, front-loading of credit losses at early stage of portfolio cleaning and good liquidity of seized collateral. At end-2017, the ratio at ABB improved to 12.8% after the peak at 14.5% at end-2016. The bank's asset quality is also supported by the significant volume of high-quality non-loan exposures comprising about 55% of its total assets at end-2017. The ratio at Expressbank modestly deteriorated to 10.6% at end-2017, but it has remained relatively stable at about 10% over the past four years. Forborne performing loans were low at the four banks.
Bulgarian banks' earnings have been suffering since 2014 due to narrowing credit spreads (amplified by competition), already low cost of funding and inflated regulatory cost and recent pressure on wage growth. However, the four banks fared reasonably well compared with CEE peers due to higher (albeit decreasing) margins, shrinking loan impairment charges (LICs) and solid cost efficiency. We believe that the pre-impairment profitability should remain stable or modestly improve in 2018 if margins stabilise and loan growth gains momentum. In 2018 banks' operating profits will continue to benefit from low LICs, but this is unsustainable and we believe that impairment is likely to increase in 2019 as new loans start to season and banks recoveries from legacy bad debts dry up.
ProCredit's ratio of operating profit/risk-weighted assets (3.9% in 2017) was the most stable over the economic cycle. This reflects the bank's strong focus on cost optimisation, which largely offset shrinking margins after the bank's strategic shift to the lower-yielding segment of SMEs (from micro companies). Raiffeisenbank's ratio remained stable and high at about 4% in 2017 and 2016, but this level is not sustainable in the medium term because it was boosted by record recoveries from legacy bad debts. In 2017, the ratio improved at Expressbank to 2.7% due to higher revenue and remained almost flat at ABB at 2.9%.
Capitalisation is a rating strength. Our assessment takes into consideration banks' high capital adequacy ratios, moderate risk profiles, ordinary capital support for banks from their respective parents and low (or moderate at Expressbank) stock of unreserved impaired loans. Our assessment of capitalisation at ABB and ProCredit is constrained by their small (in absolute terms) capital base (although capital ratios are strong), which leaves them more vulnerable to unforeseen events, especially in light of risks related to their operating environment. We view the capitalisation as particularly strong at Raiffeisenbank due to its significant capital surplus over regulatory minimums and moderate risk profile.
At end-2017, the Fitch Core Capital (FCC) ratios of ABB (20.6%), ProCredit (21.2%) and Raiffeisenbank (24.6%) were among the highest in CEE. The FCC ratio at Expressbank (17.6%) was moderately lower, partly because its balance sheet is skewed towards higher capital absorbing assets (such as corporate loans). Application of IFRS 9 had modest impact on the banks' FCC ratios.
Funding and liquidity is a rating strength. The banks are self-funded with stable and largely granular customer deposits. They hold ample liquidity buffers and all can rely on ordinary parent liquidity support, such as access to funding in foreign currency. Funding and liquidity is stronger at Raiffeisenbank and Expressbank. We believe that both banks' well-diversified and stable deposit franchises and ample liquidity (underpinned by ordinary parental support) is sufficient to withstand even a severe market stress.
The banks' high self-financing capacity is reflected in their moderate to low gross loans/deposits ratios, which equalled about 55% (ABB), 85% (Raiffeisenbank), 90% (Expressbank) and almost 100% (ProCredit) at end-2017. Non-deposit funding at all banks is low and mainly comprises funding from owners or international financial institutions (particularly at ProCredit). A greater share of loans from banks at Expressbank reflects direct funding of its leasing subsidiary by SocGen.
Liquidity at all banks is strong and sufficiently covers their refinancing needs in 2018. Highly liquid assets (mainly cash, short-term interbank deposits and unencumbered Bulgarian sovereign debt) equalled almost 50% of Allianz's customer deposits and the ratio was about 40% at the remaining banks at end-2017.
Raiffeisenbank and Expressbank are medium-sized universal banks with market shares of about 7% in total assets at end-2017. They are both classified as systemically important credit institutions by the Bulgarian central bank. ABB and ProCredit are small banks of low systemic importance (about 2% market share). ProCredit's overall franchise is weak, but its foothold in the Bulgarian SME segment is relatively strong and benefits from being part of the ProCredit group. ABB has limited competitive advantages given its small scale, but its deposit franchise is moderately strong.
All banks operate similar and traditional banking models, with loan books dominated by corporate clients (balanced at ABB) and funding sourced mainly from local customer deposits. Banks offer simple and standard array of products and services, but they charge higher margins than most CEE peers.
RATING SENSITIVITIES
IDRS, SUPPORT RATING
The IDRs and Support Ratings of all banks are sensitive to our view of propensity and ability of their respective parents to support them. The IDR and Support Rating of Sogelease would likely move in tandem to the rating of Expressbank. The Stable Outlooks on all banks and Sogelease indicate that we do not expect rating changes in the next 12 to 24 months.
SocGen's current strategy assumes a reduction of up to 5% of risk-weighted assets tied in sub-scale and/or low synergetic entities. SocGen has not announced any revision of its regional presence yet. However, if the planned RWA comprises Bulgarian operations we will review SocGen's propensity to support Expressbank.
VRS
An upgrade of ABB's and ProCredit's VRs would be contingent on a significant improvement of their market franchises coupled with maintaining adequate capitalisation and asset quality. Raiffeisenbank's and Expressbank's VR upgrade would require an improvement of the operating environment or strengthening of the Expressbank's overall credit risk profile.
Deterioration in the operating environment, which would result in a substantial inflow of new bad debts and capital erosion at the banks, could lead to their downgrade."
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