May 15 (SeeNews) - Fitch Ratings said that it has downgraded the long-term Issuer Default Ratings (IDRs) of Bulgaria's UniCredit Bulbank to 'BB+' from 'BBB-', with a stable outlook.
This rating action follows the downgrade of the Bulgarian bank's parent, Italy's UniCredit, earlier in May, to 'BBB-' with stable outlook from 'BBB' with negative outlook and reflects the parent's weakened ability to provide support to its unit in case of need, the rating agency said in an e-mailed statement on Thursday.
Fitch also said in the statement:
"KEY RATING DRIVERS
IDRS AND SR
Bulbank's IDRs and SR reflects our view of moderate probability of support from UniCredit, in case of need. Bulbank is based in central and eastern Europe (CEE), which is a strategically important region for UniCredit. The bank has strong synergies with its parent, underlined in a long record of it supporting UniCredit's objectives, which is likely to continue. In our assessment of support propensity we also consider the high reputational risk to UniCredit in case of the Bulgarian subsidiary's default, and their common branding. While UniCredit's ability to support is now weaker (as indicated by the downgrade of its ratings), we believe that required support for the Bulgarian subsidiary would be immaterial relative to the parent's ability to provide it. The Stable Outlook on Bulbank's IDR reflects that of Unicredit.
Viability Rating (VR)
We believe that the risks of the Bulgarian operating environment have increased due to the economic implications of the coronavirus. We have revised the sector outlook for Bulgarian banks to negative (see 'CEE Banking Sector Outlooks Revised to Negative' dated 30 March, available on www.fitchratings.com). We have also revised the outlook on our 'bb' assessment of the operating environment for Bulgarian banks to negative from stable. The downturn related to the coronavirus outbreak will put additional pressure on Bulbank's earnings and asset quality, leading us to revise the outlook for these factors to negative from stable.
The small Bulgarian economy is significantly exposed to the economic impact of the pandemic, which presents a near-term downside risk to its performance. Fitch's latest forecast sees GDP for Bulgaria contracting 5.1% this year (compared with a previous forecast of 3.2% growth), before returning to 4.2% growth in 2021. The contraction is expected to be more intense than other emerging markets' GDP decline median of 2.8%. We see significant downside risk to our macroeconomic projections given the rapidly evolving impact of the pandemic and possible extensions of containment measures.
The VR reflects our view that Bulbank's credit profile has a reasonable capacity to weather the crisis with only moderate weakening in the bank's overall financial standing. Bulbank's VR of 'bb+' is one notch above our assessment of the Bulgarian operating environment and is underpinned by the bank's robust capitalisation, stable funding, and comfortable liquidity.
Bulbank' capitalisation is a rating strength due to high capital ratios, substantial buffers over regulatory minimum, a conservative risk appetite and solid internal capital generation. We also take a positive view of the bank's low capital encumbrance by unprovisioned impaired loans. At end-2019 Bulbank's Common Equity Tier 1 ratio stood at 21.5% and would have been 24.6% if 2019 profit was included. The bank announced its intention to retain the 2019 profit, in line with the guidance of Bulgarian National Bank. We believe that Bulbank's capital buffers will be maintained in 2020 and are sufficient to withstand even quite a severe stress to the bank's asset quality and profitability.
We believe that the bank's asset quality will likely come under pressure as the economic fallout of the pandemic leads to higher defaults, while loan growth remains muted. Nevertheless, we expect Bulbank's overall asset quality to remain strong compared with the average in the Bulgarian banking sector given the bank's fairly conservative new loan origination, and limited overhang of legacy bad debts. Bulbank's asset-quality metrics continued to improve in the run-up to the crisis with an impaired loan (Stage 3 loans) ratio at 4.9% at end-2019, compared with the sector average of about 9.2%. Provision coverage remains strong with total loan loss allowances accounting for a high 105% at end-2019, while specific coverage of impaired loans was also strong at 75%.
We expect Bulbank's profitability to weaken, as low demand for new lending will put pressure on interest income and weakening asset quality will drive up cost of risk. Bulbank's through-the-cycle profitability remained the strongest among Fitch-rated Bulgarian banks. This reflects solid net interest margins, robust cost efficiency and moderate loan impairment charges. Its strong revenue generation reflects a strong franchise in key business segments and a dominant market position. The bank's operating profit/risk-weighted assets (RWA) ratio was the most resilient among Bulgarian banks over the economic cycle and averaged 3.9% between 2015 and 2019.
Funding and liquidity is a rating strength relative to Bulbank's overall credit risk profile. The bank is self-funded with stable and largely granular customer deposits. Its high self-financing capacity is reflected in its moderate gross loans/customer deposits ratio, which equaled about 73% at end-2019. Bulbank holds comfortable liquidity buffers and can also rely on ordinary support from the parent. High- quality liquid assets covered around 43% of customer deposits at end-2019, and the bank's regulatory liquidity ratios (liquidity coverage ratio, net stable funding ratio) remained well above regulatory requirements. Bulbank's liquidity and funding have remained resilient following the introduction of lockdown measures in Bulgaria."
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