October 22, 2014 / 3:00 PM / 5 years ago

UPDATE 2-Audit says Bulgaria's Corpbank must write off two thirds of assets

* Run on Corpbank triggered bank crisis in June

* Corpbank must write off nearly two-thirds of assets: audit

* Corpbank likely to shut down: analyst

* Shareholders yet to submit rescue plan (Adds quotes, details, background)

By Tsvetelia Tsolova

SOFIA, Oct 22 (Reuters) - Bulgaria’s Corporate Commercial Bank (Corpbank) needs to write off almost two thirds of its assets due to major failings in the way it was run, an audit commissioned by the central bank found, making a rescue of the lender increasingly unlikely.

The central bank ordered the international audit after Corpbank, Bulgaria’s fourth-largest lender, was hit by a run on deposits in June that triggered the country’s worst financial crisis since the late 1990s.

The audit found Corpbank needed to write off 4.2 billion levs ($2.7 billion) on total assets of 6.7 billion levs, adding that only 13 percent of Corpbank’s loans were properly backed by collateral. The majority of the companies to which Corpbank lent money had little or no business activities or employees, and lent the money on to third parties, the audit said.

“In the bank’s activities, unusual for the banking system, bad business practices are observed, which were carried out though sophisticated operations aimed to cover the nature of deals and transactions,” the central bank said on Wednesday.

“One example of this is the specific mode of lending, carried through ‘special purpose vehicles’ and similar holdings, in order to finance the acquisition of assets, that does not conform to standard and sound banking practices.”

Corpbank has remained shut for the past four months, during which time its main owner has been charged with embezzlement. Furious depositors still can’t access their money and have held regular street protests, bondholders have threatened legal action and the European Commission has started infringement procedures against Bulgaria over the blocked deposits.

The run on Corpbank and the subsequent hit on another lender raised questions about the quality of banking supervision in Bulgaria, which joined the EU in 2007 and is its poorest member.

The central bank has now asked the administrators it had appointed to supervise Corpbank to carry out the necessary accounting calculations based on the audit’s assessment and present it with a report by the end of the month.

The report could play a key role in determining whether Bulgaria — still without a government weeks after a general election on Oct. 5 — rescues the bank or allows it to collapse.

“The impairment costs will translate into a loss of 4.2 billion levs ... This is a huge loss that will wipe out the bank’s capital and will force the central bank to revoke the bank’s licence,” said Georgi Angelov, an economist with the Sofia-based Open Society Institute.

Under Bulgarian law, if a bank’s capital is negative, the central bank has five days to revoke its licence, shut its operations and ask a court to open bankruptcy proceedings.

“Raising such funds in such a short time to cover the gap and rescue the bank seems impossible, even for the government. Revoking the licence and seeking the bank’s bankruptcy seems more likely,” Angelov said.

In its statement on Wednesday, the central bank said Corpbank could still be restructured or rescued, but a decision could only be taken if the new parliament adopts legal changes, without elaborating.

“According to current laws, the central bank has no other option but to withdraw the bank’s licence. If the parliament makes legal changes, other solutions will be possible,” a spokesman for the central bank told Reuters.

A spokesman for the finance ministry said the caretaker government — which has been in power since August but has a limited mandate — would need time to look at the central bank’s statement before making a comment.

A spokeswoman for the centre-right GERB party, which won the October election and is most likely to try to form a new administration, was not immediately available for comment.


Earlier efforts to rescue Corpbank — a plan that involved hiving off its healthy activities into a recently acquired subsidiary — were derailed by political squabbles in the run up to the October polls. Bulgaria has been plagued by instability and its next government will be the fifth in under two years.

Unnerved by reports of shady deals at Corpbank and leaked news of a central banker being investigated, clients withdrew more than a fifth of deposits in a week-long run on deposits, which prompted the central bank to shut Corpbank’s operations.

Bulgarian law allows payments of guaranteed deposits of up to 100,000 euros to start within 20 days once a bank’s licence is revoked. However, the Deposit Insurance Fund is estimated to be 1.6 billion levs short of the funds required, meaning the new government could need to raise new debt to plug the shortfall.

That, in turn, would require the approval of parliament, which will convene on Monday.

Prosecutors have charged Tsvetan Vassilev, Corpbank’s main shareholder, with embezzlement at the bank. Other shareholders include Oman’s sovereign fund and Russia’s VTB Bank.

Vassilev has denied any wrongdoing and said the run was a plot hatched by his competitors in collusion with some state officials and prosecutors.

The businessman, who has turned himself into Serbian authorities and is awaiting a court ruling on an extradition request by Bulgaria, is also under investigation by authorities in Liechtenstein on suspicion of money laundering.

The central bank has said it would give current shareholders and other prospective investors until Nov. 20 to come up with a rescue plan. Vassilev has indicated he is willing to give up his stake if that helps save the bank.

Austrian consultancy EPIC, together with the Omani fund and other potential investors, has expressed an interest in restructuring the bank, possibly with state aid.

1 US dollar = 1.5434 Bulgarian lev Editing by Matthias Williams, David Holmes and Mark Potter

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