Fitch Ratings said on Wednesday the recent runs on the two largest domestically owned Bulgarian banks highlight corporate governance problems at domestically owned companies.
Liquidity risks are heightened for all Bulgarian banks after two bank runs in quick succession but domestically owned banks are more vulnerable to a loss of depositor confidence because of their corporate governance weaknesses, the ratings agency said in a statement.
Fitch Ratings also said in the statement:
"The IMF's June report on Bulgaria highlighted that efforts to "reduce corruption and cronyism, including through independent regulation and audit, as well as measures to reinforce the rule of law" were key to economic growth. Poor corporate governance, including potential related-party lending, is incorporated into the low 'b-' Viability Rating of domestically owned First Investment Bank (FIBank).
Political stability would also reduce risks for financial stability. The president has announced that he will dissolve parliament on 6 August and call elections for 5 October, so political uncertainty is likely to persist in the near term.
Foreign-owned banks, which make up 70% of the sector, have better corporate governance and stronger risk management. They hold large amounts of customer deposits, which they have increased in recent years to repay parent funding, but are less exposed to a loss of customer confidence and may have benefited from deposit inflows during the turmoil.
The authorities took action quickly to ease the situation at FIBank, including a commitment to provide liquidity support to the banking sector. The actions were in line with our view that state support for FIBank would be forthcoming, as reflected in its 'BB-' rating. The run at FIBank was triggered by electronic media messages, rather than credit fundamentals. In addition to providing liquidity, the authorities moved swiftly to counter the rumours concerning the bank.
Our support-driven rating is based on FIBank's position as the largest Bulgarian-owned bank and the second-largest Bulgarian bank by retail deposits. We do not rate Corporate Commercial Bank, the first bank to be affected by a deposit run and now under special supervision by the Bulgarian National Bank.
Overall, the Bulgarian banks we rate have solid capitalisation. The system's regulatory Tier 1 ratio was 18.2% at end-1Q14, well above the levels required by the central bank. We expect capitalisation to remain stable, with moderate internal capital generation in line with modest business growth. The current problems have more to do with confidence than solvency."