Fitch: CorpBank Rescue Tests Bulgarian Bank Resolution Framework

Thu Jun 26, 2014 10:27am EDT

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(The following statement was released by the rating agency) WARSAW/LONDON, June 26 (Fitch) The Bulgarian National Bank's placing of Corporate Commercial Bank (CorpBank) under conservatorship will test its bank rescue and resolution framework, Fitch Ratings says. But CorpBank's problems are idiosyncratic and any contagion to the largely foreign-owned banking sector will probably be limited. The rescue is therefore likely to be neutral for Bulgarian bank ratings (we do not rate CorpBank). The size of a capital gap, if any, and the extent to which shareholders or the state would cover it is unclear as it is being assessed by new management appointed by the BNB. If a recapitalisation involves state aid, under European Commission rules shareholders and subordinated debt holders could suffer losses before public money is injected. CorpBank had around BGL200m (EUR102m) subordinated debt at end-1Q14. But exceptions to state aid rules are possible where financial stability is at risk or the capital need from the state is relatively small. The authorities' actions have so far focused on maintaining sector stability and preserving depositors, which means bail-in of senior bondholders appears unlikely at present. Most Bulgarian banks we rate are foreign owned, so their ratings are driven by parent support. If the CorpBank rescue is influenced by the spirit of the Bank Recovery and Resolution Directive and brings in a bail-in tool ahead of the 2016 deadline, we would consider accelerating our revision of Support Rating Floors for Bulgarian banks where we factor in sovereign support. The Bulgarian Deposit Insurance Fund would be involved in rescuing the ailing bank, but so too could Bulgarian Development Bank (BDB), according to the BNB. BDB's 'BBB-'/Stable rating is aligned with the sovereign, reflecting our view that the bank's high capitalisation makes it highly unlikely to require a capital injection from its owner that would prompt a problematic state aid inquiry. The owners would also have significant flexibility to act pre-emptively. However, involvement in the rescue of CorpBank could increase BDB's scope for commercial activities and may prompt a review of our support rating path for it. The deposit outflow problems at CorpBank are isolated, according to the BNB, and we do not believe developments regarding it would materially disrupt funding and liquidity for other Bulgarian banks. Their reliance on foreign funding has reduced in recent years. That remaining is mainly from parent institutions and is gradually being replaced by domestic deposits, which are already the main funding source, underpinning liquidity. The BNB's policy response was in part to avert speculation about the stability of its currency board arrangement. We do not believe the arrangement to be under threat as the BNB maintains sufficient foreign exchange reserves to support it, at around 3x the monetary base (M0). The problems at CorpBank also highlight concentration and corporate governance risks - quite common features among domestically owned banks across CEE. According to media reports, deposit withdrawals from CorpBank were significant within just a few days, indicating concentrations. The BNB placed CorpBank under conservatorship on 22 June at the bank's request because of insufficient liquidity. It said external auditors will review the balance sheet in the next 10 days and all necessary actions will be taken by 20 July. Contact: Artur Szeski Senior Director Financial Institutions +48 22 338 6292 Matteo Napolitano Director Sovereigns +44 20 3530 1189 Cynthia Chan Senior Director Fitch Wire +44 20 3530 1655 Media Relations: Elaine Bailey, London, Tel: +44 203 530 1153, Email: Elaine.Bailey@fitchratings.com. The above article originally appeared as a post on the Fitch Wire credit market commentary page. The original article can be accessed at www.fitchratings.com. All opinions expressed are those of Fitch Ratings. 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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