Fitch affirms Bulgarian Development Bank at 'BBB', revises outlook to positive

Fitch affirms Bulgarian Development Bank at 'BBB', revises outlook to positive

Fitch Ratings said it affirmed state-owned Bulgarian Development Bank's (BDB) Long-Term Issuer Default Rating (IDR) at 'BBB' and revised the outlook on the IDR from stable to positive.

The revision of the bank's outlook reflects that on the Bulgarian sovereign rating on February 19, Fitch Ratings said in a statement over the weekend.

Last month, Fitch revised the outlook on Bulgaria's IDR to positive from stable and affirmed the IDR at 'BBB'. The change in Bulgaria's rating outlook was due to the improved GDP estimate for 2020 and the expected substantial funding for investment from the EU.

Fitch Ratings also said:

"KEY RATING DRIVERS

BDB's IDRs are equalised with the Bulgarian sovereign rating (BBB/Positive) to reflect a high probability of support from the Bulgarian sovereign, in case of need, as expressed by a Support Rating (SR) of '2' and a SRF of 'BBB'. The strong incentive to support BDB is mainly driven by the state's almost full ownership of the bank and material funding from or guaranteed by the state.

Our view also considers the bank's role in supporting the government's economic policy. This role is demonstrated in BDB's involvement in the government programmes aimed at combating the economic implications of the Covid-19 pandemic. Nevertheless, the bank's pure policy role outside of the pandemic support programmes remains underdeveloped and the bank has a moderate portfolio of commercial activities.

For more information about the support rationale see the previous rating action commentary 'Fitch Affirms Bulgarian Development Bank at 'BBB'; Outlook Stable', dated 14 October 2020, at www.fitchratings.com.

RATING SENSITIVITIES

Factors that could, individually or collectively, lead to positive rating action/upgrade:

BDB's IDRs, SR and SRF are sensitive to a higher sovereign ability and propensity to support the bank. If the Bulgarian sovereign's IDR was upgraded, the extent of the upgrade of BDB's IDRs and upward revision of SRF would depend on the combination of the legal framework applicable to BDB and Fitch's assessment of the state's economic incentive to support the bank. This is based on BDB's i) legal status; ii) liability structure; iii) role in carrying out government policies in the economy; and iv) the state's flexibility to support the bank in compliance with local resolution legislation and EU state-aid rules.

An upgrade of the SR would require at least a two-notch upward revision of BDB's SRF.

Factors that could, individually or collectively, lead to negative rating action/downgrade:

A downgrade of the sovereign rating would trigger a downgrade of BDB's IDRs and downward revision of the SRF. BDB would also be downgraded in case of a material expansion in commercial lending, a significant increase of funding not sourced from or guaranteed by the state, or substantial erosion of capital surplus over regulatory minimums.

A downgrade of the SR would require at least a two-notch downward revision of BDB's SRF."

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