Fitch Ratings said on Thursday it has assigned Raiffeisenbank Bulgaria a long-term foreign currency issuer default rating (IDR) of 'BBB+' with a negative outlook.
At the same time, it assigned a viability rating (VR) of 'b+', the agency said in a statement.
Fitch Ratings also said in the statement:
"Raiffeisenbank's IDRs and Support Rating are based on Fitch's view that the bank is a strategically important subsidiary of its 100% owner, Raiffeisen Bank International AG (RBI; A/Negative/bbb) and that there is a high probability that Raiffeisenbank would be supported by RBI, if needed. The Negative Outlook reflects the Negative Outlook on RBI's rating.
RATING SENSITIVITIES - IDRs AND SUPPORT RATING
Raiffeisenbank's IDRs and Support Rating are sensitive to changes in RBI's Long-term IDR. A downward revision of RBI's Support Rating Floor (SRF) would likely cause downgrades of its Long-term IDR to the level of its VR at the time (for more information see 'Fitch Revises Outlooks on 18 EU Commercial Banks to Negative on Weakening Support' at www.fitchratings.com). This in turn would result in a downgrade of Raiffeisenbank's support-driven IDR. However, it will most likely remain in the 'BBB' range.
Fitch expects that the propensity of RBI to support Raiffeisenbank will remain strong. However, the support-driven ratings could also be sensitive to any weakening of propensity of the parent to provide support, which Fitch views as unlikely in the foreseeable future.
The upside potential for the bank's Long-Term IDR is limited due to the Bulgarian Country Ceiling of 'BBB+', but it would be downgraded if the Country Ceiling is downgraded.
KEY RATING DRIVERS - VR
The VR is driven primarily by the bank's weak asset quality counterbalanced by decent loss absorption capacity. It also considers the strong funding profile, comfortable liquidity buffers as well as the positive influence of being part of the RBI group for the bank's risk management framework.
At end-2013, the bank reported individually impaired loans and loans past due 90 days but not impaired of 18.7%. The banking sector's non-performing loan indicator of 16.9% at end-2013, combines the bottom two regulatory loan risk categories, non-performing and loss, and includes loans with overdue payments above 90 days. The bank's current volume of impaired loans derives mainly from the bank's legacy loan book, built before 2008, and consists mainly of concentrated exposures to the troubled commercial real estate and construction sectors.
Although the volume of NPL inflow fell year-on-year in 2013, Fitch believes that the bank's efforts to clean up the portfolio will be slowed down by the limited liquidity of the underlying collateral and a lengthy foreclosure process.
Raiffeisenbank's capital position provides a sizeable buffer to absorb potential additional provisioning required for existing NPLs, but is only modest in light of still substantial risks embedded in the bank's loan book and weak internal capital generation. The Fitch core capital ratio (FCC) of 20% reflects a 53% coverage ratio of NPLs with IFRS reserves. Fitch views this proportion as low, especially given the still quite difficult operating environment in Bulgaria. However, according to Fitch's calculations, as of end-2013 an increase of NPL coverage to 80% would result in the FCC ratio falling to an acceptable 14.9%. The regulatory Tier 1 capital ratio, which reflects the impact of quite stringent and conservative local provisioning criteria, was 16.9% at end-2013.
Fitch views Raiffeisenbank's locally sourced deposit based funding, low reliance on parent funding and comfortable liquidity buffers as rating strengths. At end-2013, customer deposits
accounted for a high 83% of total funding.
Parent funding, consisting of long-term senior and subordinated debt, accounted for a low 9% of total liabilities at end-2013.
Raiffeisenbank reported an operating loss in 2013. The bank's operating profitability has suffered from the continuing contraction of the loan book (by 6% in 2013) falling market interest rates and high loan impairment charges (LICs) driven mainly by real estate exposures built before 2008.
RATING SENSITIVITIES - VR
In Fitch's view, the balance of risks for the VR is skewed towards the positive, but upside will depend on the bank building a longer track record in the moderation of new impaired loan formation and cleaning of the loan book whilst maintaining the current levels of capitalisation.
Founded in 1994, Raiffeiseinbank (Bulgaria) EAD is the sixth-largest bank in Bulgaria by assets (market share of 7% at end 2013) with a network of 166 branches throughout the country. At end of 2013, Raiffeisenbank (Bulgaria) EAD ranked fourth in terms of lending to corporate clients with a market share of 7.7% and second in terms of attracted funds from corporates with market share of 8.6%.
The rating actions are as follows:
Long-term IDR assigned at 'BBB+'; Outlook Negative
Short-term IDR assigned at 'F2'
Viability Rating assigned at 'b+'
Support Rating assigned at '2'"