Fitch Affirms United Bulgarian Bank at 'B'; Revises Outlook to Stable

Mon Jun 2, 2014 10:01am EDT

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(The following statement was released by the rating agency) LONDON, June 02 (Fitch) Fitch Ratings has affirmed United Bulgarian Bank A.D.'s (UBB) Long-term foreign currency Issuer Default Rating (IDR) at 'B'. The Outlook on the IDR has been revised to Stable from Negative. A full list of rating actions is at the end of this rating action commentary. KEY RATING DRIVERS - IDRS, VR UBB's IDRs are driven by the bank's intrinsic financial strength, as expressed by its 'b' Viability Rating (VR). The VR reflects mostly UBB's weak asset quality, marked by high non-performing loans (NPLs) and exposures to construction and real estate sectors, but decent loss absorption capacity. Deposit based funding and comfortable liquidity buffer support the bank's credit profile. UBB's Long-term IDR is one notch above that for its parent National Bank of Greece (NBG; B-/Stable/b-/5). This reflects Fitch's view of only limited contagion risk to UBB from its parent. This is primarily based on no significant reliance on parental funding and only limited exposures to NBG and related entities. The revision of the Outlook to Stable from Negative mainly reflects the fact that the inflow of new NPLs has largely subsided and the bank has returned to profitability. The combined effect of these two factors reduces pressure on UBB's capital position. At end-2013, UBB's 32.2% NPL ratio (based on loans overdue by more than 90 days) was the weakest among its peers rated by Fitch and significantly worse than the sector average. Moreover, there were restructured loans not included in NPLs (at 4.5% of total gross loans), which in Fitch's view are more likely to default than standard exposures. In Fitch's opinion, UBB's high NPLs are due to the combined effect of fast lending growth and loose underwriting standards before the crisis, high exposure to the troubled construction and real estate sectors and some single-name concentrations. The new NPL inflow was small in 2013. However, Fitch believes that the cleaning up of the legacy portfolio will be difficult, at least in the short to medium term, due to the limited liquidity of the underlying collateral and a lengthy legal foreclosure process. UBB's capital position provides a sizeable buffer to absorb potential additional provisioning required for existing NPLs, but is only modest in light of still substantial risks embedded in the bank's loan book and weak internal capital generation. The Fitch core capital ratio (FCC) of 25.8% reflects only a 48% coverage ratio of NPLs with IFRS reserves. Fitch views this proportion as low, especially given the still quite difficult operating environment in Bulgaria. However, according to Fitch's calculations, as of end-2013 an increase of NPL coverage to 80% would result in the FCC ratio falling to an acceptable 15.8%. The regulatory Tier 1 capital ratio, which reflects the impact of quite stringent and conservative local provisioning criteria under which NPLs were 84% covered with provisions, was 14.8% at end-2013. UBB's locally sourced deposit based funding is a rating strength. At end-2013, customer deposits accounted for a high 93% of total funding (2009: 60%), 69% of which were sourced from private individuals. Fitch believes that UBB has sufficient liquid assets to mitigate potential deposit fluctuations, particularly from non-bank financial institutions (9% of all deposits). At end- 2013, highly liquid assets covered 25% of total customer deposits. UBB is not reliant on its parent for funding. Outstanding subordinated loans from NBG (4% of total liabilities), granted back in 2007 as capital support, mature in 2017. UBB's weak profitability reflects its high NPLs, still elevated loan impairment charges (LICs), continuing loan book contraction (4.7% in 2013) and falling market interest rates. A swing to positive bottom line profitability in 2013 was fully attributable to a fall in LICs (down by 41% yoy), while the pre-impairment profit remained subdued. RATING SENSITIVITIES - IDRS, VR UBB's IDRs are sensitive to changes in its VR. The VR could be downgraded if UBB's asset quality and/or capital position weaken. Any significant deterioration in the bank's liquidity position could also put downward pressure on its VR (not Fitch's base case). An upgrade of the VR would require improvements in asset quality and capitalisation metrics combined with sustainable profitability. KEY RATING DRIVERS - SUPPORT RATING UBB's Support Rating of '5' reflects Fitch's view that support cannot be relied upon from the bank's parent, NBG, or the Bulgarian authorities. Parental support is not factored into UBB's ratings due to NBG's weak credit profile. The sovereign propensity to support banks is likely to weaken following the expected national implementation of the provisions of the Bank Recovery and Resolution Directive. RATING SENSITVITIES - SUPPORT RATING An upgrade of UBB's Support Rating would require a multi-notch upgrade of NBG's IDR and Fitch's view of the parent's strong propensity to support UBB. Fitch considers such an upgrade unlikely at present. The rating actions are as follows: Long-term IDR affirmed at 'B'; Outlook revised to Stable from Negative Short-term IDR affirmed at 'B' Viability Rating affirmed at 'b' Support Rating affirmed at '5' Contact: Primary Analyst Banu Cartmell Director +44 20 3530 11 09 Fitch Ratings Limited 30 North Colonnade London E14 5GN Secondary Analyst Agata Gryglewicz Associate Director +48 22 330 69 70 Committee Chairperson Artur Szeski Senior Director +48 22 338 62 92 Media Relations: Hannah Huntly, London, Tel: +44 20 3530 1153, Email: hannah.huntly@fitchratings.com. Additional information is available on www.fitchratings.com Applicable criteria, 'Global Financial Institutions Rating Criteria' dated 31 January 2014, are available at www.fitchratings.com. Applicable Criteria and Related Research: Global Financial Institutions Rating Criteria here Additional Disclosure Solicitation Status here ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.

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