September 5, 2014 / 5:26 PM / 5 years ago

Fitch Affirms First Investment Bank AD at 'BB-'; Outlook Negative

(The following statement was released by the rating agency) LONDON, September 05 (Fitch) Fitch Ratings has affirmed Bulgaria-based First Investment Bank AD's (FIBank) Long-term Issuer Default Rating (IDR) at 'BB-' with a Negative Outlook and its Viability Rating (VR) at 'b-'. A full list of rating actions is available at the end of this commentary. KEY RATING DRIVERS: IDRS, SUPPORT RATING AND SUPPORT RATING FLOOR The Long-term IDR of FIBank is at its Support Rating Floor (SRF) of 'BB-' and reflects Fitch's view that as a domestically-owned systemically important bank in Bulgaria, extraordinary support from the Republic of Bulgaria (BBB-/Stable) may be available, if needed. This was evident in June 2014 when the Bulgarian authorities provided extraordinary liquidity support to FIBank, following significant deposit outflows at the bank. Fitch views the propensity of the Bulgarian authorities to provide extraordinary support to FIBank as moderately strong due to the bank's systemic importance, particularly in terms of its funding profile, which consists almost exclusively of customer deposits. At end-1H14, FIBank was the third-largest bank in Bulgaria, and the second-largest retail deposit-taker. However, in Fitch's view, weaknesses in the bank's corporate governance could result in somewhat greater uncertainty about the authorities' readiness to support the bank in all circumstances, including the provision of capital support in case of need. The Negative Outlook on the Long-term IDRs reflects Fitch's view that there is a clear intention to reduce implicit state support for banks in the EU. This is demonstrated by a series of legislative, regulatory and policy initiatives, in particular the EU's Bank Recovery and Resolution Directive (BRRD) and the Single Resolution Mechanism (SRM) for eurozone banks. Bulgaria, as a member of the EU, has stated that they will abide by the BRRD. RATING SENSITIVITIES: IDRS, SUPPORT RATING AND SUPPORT RATING FLOOR FIBank's IDRs, SR, SRF are sensitive to a change in Fitch's assumptions about the availability of extraordinary sovereign support for the bank. In Fitch's view, under BRRD, sovereign support is likely to weaken also for systemically important banks. Consequently, we expect to revise FIBank's SRF to 'No Floor' and downgrade its SR to '5' at some point by 1H15. This would, in turn, likely result in FIBank's Long-term IDR being downgraded to the level of its VR at the time. FIBank's SRF and hence, its Long-term IDR, are also sensitive to a downgrade of the Bulgarian sovereign rating as it would indicate Fitch's view of a decline in the authorities' ability to provide support. KEY RATING DRIVERS: VR FIBank's VR reflects weaknesses in corporate governance, potentially high related-party and relationship lending, weak asset quality and tight capitalisation. The recent deposit run suggests that customer funding may not be stable in all circumstances; however, liquidity is currently satisfactory following support from the Bulgarian authorities. Borrower concentrations are also high, at several times of the bank's Fitch core capital (FCC). Amortisation of these loans is limited, and some borrowers have been granted additional facilities, further increasing concentrations. Within the largest borrowers, there are a few which are classified as non-performing (NPLs). FIBank's regulatory NPL ratio, although lower than the banking system average of 18%, is still high, amounting to 12.1% at end-1H14. Low reserve coverage at only 37% of NPLs, combined with the high borrower concentrations, further increases credit risks at FIBank. A further 5.4% of loans were classified as being on watch list at end-1H14. Together, unreserved NPLs and watch-listed loans equalled a high 119% of FCC, undermining the quality of its capital. On 27 June 2014, FIBank was faced with a deposit run following the failure of KTB, Bulgaria's fourth-largest bank, and negative rumours about FIBank. As a result, with the approval of the European Commission, FIBank was provided liquidity support by the Bulgarian government, and the bank's deposit base stabilised. Fitch has been informed that a restructuring plan drawn up as a condition for the liquidity support focuses on improving the stability of the bank's deposits. FIBank's FCC ratio at 11.1% at end-1H14 was the lowest among domestic peers. Regulatory Tier 1 and total capital ratios, at 14.2% and 15.5%, respectively, were supported by EUR100m of privately placed hybrid debt and classified as Tier 1 capital by the Bulgarian National Bank. Pre-impairment profit has been moderate, notwithstanding sound fee and commission income, meaning that significant strengthening of the bank's solvency through internal capital generation is unlikely. RATING SENSITIVITIES: VR The VR could be downgraded in case of (i) further marked deterioration in FIBank's loan performance or underlying asset quality, resulting in increased pressure on the bank's capitalisation; or (ii) renewed and sustained pressure on the bank's liquidity, if this is not offset in a timely fashion by external liquidity support. Upside potential for the VR is limited. The rating actions are as follows: Long-term IDR: affirmed at 'BB-', Outlook Negative Short-term IDR: affirmed at 'B' Viability Rating: affirmed at 'b-' Support Rating: affirmed at '3' Support Rating Floor: affirmed at 'BB-' Contact: Primary Analyst Banu Cartmell Director +44 20 3530 1109 Fitch Ratings Limited 30 North Colonnade London E14 5GN Secondary Analyst Agata Gryglewicz Analyst +48 22 330 6970 Committee Chairperson Claudia Nelson Senior Director +44 20 3530 1191 Media Relations: Elaine Bailey, London, Tel: +44 203 530 1153, Email:; Julia Belskaya von Tell, Moscow, Tel: +7 495 956 9908, Email: Additional information is available at Applicable criteria, 'Global Financial Institutions Rating Criteria' dated 31 January 2014, are available at 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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