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Fitch Affirms 3 Bulgarian Banks and a Leasing Company
May 31, 2017 / 11:53 AM / 6 months ago

Fitch Affirms 3 Bulgarian Banks and a Leasing Company

(The following statement was released by the rating agency) WARSAW/LONDON, May 31 (Fitch) Fitch Ratings has affirmed the Long-Term Issuer Default Ratings (IDRs) of Allianz Bank Bulgaria AD (ABB), Societe Generale Expressbank AD (Expressbank) and Sogelease Bulgaria (Sogelease) at 'BBB+' and of ProCredit Bank (Bulgaria) EAD (PCBB) at 'BBB-'. The Outlooks are Stable. Fitch has also affirmed the three banks' Viability Ratings (VR). A full list of rating actions is available at the end of this rating action commentary. The affirmation of the three banks and Sogelease's IDRs reflects Fitch's opinion of a high probability that they would be supported, if required, by their respective parents. ABB, PCBB and Expressbank are owned by Allianz SE (AA-/Stable, 66% stake), ProCredit Holding AG & Co. KGaA (PCH; BBB/Stable, 100%) and Societe Generale (SG, A/Stable, 99.7%), respectively. Sogelease is 100% owned by Expressbank. The affirmation of the VRs of the banks reflects no major changes in their financial metrics over the last 12 months. KEY RATING DRIVERS IDRS AND SUPPORT RATINGS Our assessment of support for ABB takes into consideration Allianz's strong credit risk profile and ABB's relative small size. However, we believe that ABB's strategic importance to Allianz is limited. Consequently, ABB's Long-Term IDR is four notches below that of Allianz. This is based on the strategic focus of Allianz on the insurance business, with ABB being its only banking subsidiary in central and eastern Europe (CEE), and ABB's marginal contribution to the parent group's profits. In our view, Allianz's commitment to ABB depends on the subsidiary's contribution to Allianz's insurance and asset management business and its financial self-sustainability. In assessing the parent's propensity to support PCBB Fitch views positively the strategic importance of Bulgaria and the broader south eastern Europe to the group as well as PCBB's significant role in and contribution to the PCH group's performance. In Fitch's view high reputational risks that would arise due to a subsidiary default provides a strong incentive for the group to support PCBB. At end-2016, PCBB accounted for a high 17% of PCH group's total assets. In Fitch's view any potential support for PCBB would be manageable for the parent. Expressbank is based in the strategically important CEE region for SG and its synergies with the parent are strong. In our assessment of support we also take into consideration significant funding from SG, Expressbank's long and successful track record in supporting SG's objectives (which is likely to continue), almost full ownership by the French parent and a high level of management and operational integration. The potential cost of support would be easily manageable for SG given Expressbank's small size. Expressbank would have been rated one notch off the parent were it not for the constraint from Bulgaria's Country Ceiling. Sogelease's IDRs are equalised with those of Expressbank as Fitch views the leasing company as the bank's core subsidiary. Sogelease is an integral part of financial services provided by SG in Bulgaria and is strongly integrated into the parent group at both operational and funding levels. VRS The VRs of the three banks reflect their small (ABB, PCBB) to moderate (Expressbank) market franchises, moderate risk appetites, better-than-sector asset quality, adequate capitalisation and profitability, stable funding and ample liquidity. The VRs also reflect a challenging operating environment in Bulgaria. ABB's and PCBB's VRs are constrained by the banks' overall modest market franchises, although PCBB is well-established in its core SME market. At end-2016, market shares in total sector assets of ABB and PCBB were below 3%, while Expressbank reached a much higher figure of around 7%. The three banks' asset quality has persistently been better than the domestic sector average due to their lower risk appetites and strong risk controls, which benefit from tight parental oversight. We believe that the banks' stable underwriting standards, already seasoned legacy loans and an improving economic environment (including falling unemployment) bode well for loan book quality. At end-2016, the IFRS impaired loans ratios equalled about 5% (PCBB), 10% (Expressbank) and 14.5% (ABB), compared with about 18% for the sector. Provision coverage of impaired loans was reasonable (stronger at ABB) given a large share of collateralised lending. We view capitalisation at the three banks as adequate and commensurate with the banks' credit risk profiles and the difficult operating environment in Bulgaria. Capitalisation is underpinned by the banks' moderate-risk business models, healthy internal capital generation and potential support available from their parents. At end-2016, the Fitch Core Capital (FCC) ratios equalled about 21% (ABB), 24% (PCBB) and 17% (Expressbank). The proposed dividend payouts at the three banks will not materially weaken their capitalisation. Unreserved impaired loans accounted for a small 9% of FCC at PCBB, and were moderately higher at ABB (20%) and Expressbank (26%). The three banks' profitability compares reasonably well with a wider CEE average, which is underpinned by strong margins in the Bulgarian market. However, Fitch believes that the operating environment for Bulgarian banks became even more challenging in 2017 due to increased margin pressure in the face of harsh market competition, already low funding cost and a limited number of healthy borrowers in the small Bulgarian economy. The pressures are amplified by subdued (albeit gradually improving in 2017) credit demand, in particular in the corporate segment. Refinancing risk is low at the three banks because they are self-funded with stable and largely granular customer deposits. They hold ample liquidity buffers (especially ABB) and can rely on parent liquidity support if needed. Expressbank's funding profile is stronger than PCBB and ABB's and reflects the bank's better deposit franchise. At end-2016, highly liquid assets (mainly cash and Bulgarian sovereign debt) accounted for a significant share of the banks' total balance sheet assets (about 50% for ABB and about 30% for Expressbank and PCBB). The gross loans/deposit ratios fell further down to about 57% (ABB), 100% (PCBB) and 90% (Expressbank), from 66%, 105% and 92% at end-2015. RATING SENSITIVITIES IDRS AND SUPPORT RATINGS The Long-Term IDRs of ABB, Expressbank and Sogelease would be downgraded if Bulgaria's Country Ceiling is revised downwards. PCBB, Expressbank and Sogelease would likely be downgraded in case of a downgrade of their respective parents (multi-notch in the case of SG). A downgrade of Allianz could lead to a downgrade of ABB. The three banks and Sogelease could also be downgraded if Fitch believes that their strategic importance to their parents has weakened, which we view as unlikely. An upgrade of Expressbank and Sogelease would require an upward revision of Bulgaria's Country Ceiling. An upgrade of PCBB would require a rating upgrade of PCH. ABB is unlikely to be upgraded in case of an upward revision of the Country Ceiling, because of its limited strategic importance to Allianz. VRS An upgrade of ABB's and PCBB's VRs would be contingent on a significant improvement of their market franchises coupled with maintaining adequate capitalisation and asset quality. Expressbank's VR upgrade would likely result from an improvement of the operating environment and a strengthening in the bank's overall credit risk profile. Deterioration in the operating environment, which would result in a substantial inflow of new bad debts and capital erosion at the banks, could lead to their downgrade. The rating actions are as follows: ABB Long-Term Foreign Currency IDR affirmed at 'BBB+'; Outlook Stable Short-Term Foreign Currency IDR affirmed at 'F2' Viability Rating affirmed at 'bb-' Support Rating affirmed at '2' PCBB Long-Term Foreign Currency IDR affirmed at 'BBB-'; Outlook Stable Short-Term Foreign Currency IDR affirmed at 'F3' Long-Term Local Currency IDR affirmed at 'BBB-'; Outlook Stable Short-Term Local Currency IDR affirmed at 'F3' Viability Rating affirmed at 'bb-' Support Rating affirmed at '2' Expressbank Long-Term Foreign Currency IDR affirmed at 'BBB+'; Outlook Stable Short-Term Foreign Currency IDR affirmed at 'F2' Viability Rating affirmed at 'bb' Support Rating affirmed at '2' Sogelease Long-Term Foreign Currency IDR affirmed at 'BBB+'; Outlook Stable Short-Term Foreign Currency IDR affirmed at 'F2' Support Rating affirmed at '2' Contact: Primary Analyst Michal Bryks, ACCA Director +48 22 338 6293 Fitch Polska SA Krolewska 16, Warsaw 00-103 Secondary Analysts Agata Gryglewicz, (Expressbank, ABB) Associate Director +48 22 330 6970 Jakub Kopiec, CFA (PCBB, Sogelease) Analyst +48 22 330 6702 Committee Chairperson Artur Szeski Senior Director +48 22 338 6292 Media Relations: Peter Fitzpatrick, London, Tel: +44 20 3530 1103, Email: peter.fitzpatrick@fitchratings.com. 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