S&P Raises Bulgaria's UBB Long-Term Rating To B, Outlook Negative
Standard&Poor's Ratings Services (S&P) said it raised its long-term counterparty credit rating on United Bulgarian Bank (UBB) to 'B' from 'B-'.
At the same time, the ratings agency affirmed its 'C' short-term counterparty credit rating on the bank.
The bank’s outlook remains negative.
“The rating actions follow our upgrade of UBB's 99% owner, the National Bank of Greece," the agency said in a statement on Wednesday. "Under our criteria, a subsidiary is highly unlikely to be rated more than two notches higher than its parent, to reflect the possibility of extraordinary negative intervention."
S&P also said in the statement:
“Consequently, following the upgrade of the parent bank to 'CCC+', we have raised the rating on UBB to 'B', which is the level of its stand-alone credit profile (SACP).
The ratings on UBB reflect the bank's 'bb' anchor, "adequate" business position, "adequate" capital and earnings, "weak" risk position, "average" funding, and "moderate" liquidity, as our criteria define these terms. The SACP remains at 'b'.
We consider UBB to be a "highly systemically important" bank in Bulgaria and the Bulgarian government "supportive" of the domestic banking system. However, we do not incorporate any uplift in our rating on UBB, due to the risk of potential negative intervention related to the parent.
We assess UBB's business position as "adequate," which reflects its good domestic franchise and market share in lending and deposits. This is despite the contraction of the bank's loan portfolio, due to liquidity and asset-quality issues in recent years that have weakened its competitive position. With total assets of Bulgarian lev (BGN) 6.7 billion (about €3.4 billion), UBB is the fifth-largest commercial bank in Bulgaria with a market share of about 9.5% by loans and 10% by retail deposits.
We expect that high credit costs and narrowing margins will continue to constrain the bank's financial performance, thereby hindering its capacity to generate adequate internal capital. However, in our view, capitalization levels are adequate and will remain so over the next 12-18 months. UBB's profitability has declined sharply since 2008, due primarily to increased provisioning and funding costs and lower revenues from falling business volumes. The return on equity has dropped substantially, to 1.8% at year-end 2013 from 8.2% at year-end 2009. However, the bank returned to profit in 2013, recording a net profit of BGN20 million after a loss in 2012 of BGN42 million. We believe that many challenges remain for the Bulgarian banking sector, due to the continuing unfavorable economic environment, the large burden of nonperforming loans (NPLs), weak investor activity, and the lack of opportunities for banking growth over 2014-2015. Therefore, we expect earnings to remain depressed.
We assess UBB's risk position as "weak." The bank's track record in underwriting credit, as measured by NPLs to total loans and annual loss provisions to loans, is weaker than the average for the Bulgarian banking system and some other comparable banking systems. We believe that UBB's asset quality has deteriorated significantly since the Bulgarian economic crisis began in 2008. NPLs, or impaired loans with repayment overdue by more than 90 days, stood at 33% of gross loans by year-end 2013, which is stable compared with 32% at year-end 2012, while loan loss reserve coverage is less than 50%. UBB's funding is "average" and its liquidity is "moderate," which is a negative rating factor in our opinion, principally because of our perception of the ongoing contagion risk from the bank's weaker parent. In our view, the parent bank could destabilize UBB's deposit base and constrain its access to wholesale funding. That said, we view the 9% growth in core customer deposits in 2013, mostly from individuals, as favorable and that it partly enhances the self-sufficiency of the bank's funding base. On Dec. 31, 2013, direct funding from the parent, National Bank of Greece (NBG), comprised only 4.3% of UBB's liabilities (of which 85% comprised a subordinated loan with annual amortization of BGN51 million until 2017). An additional 7.4% was attributed to companies under the parent's control.
Our negative outlook on UBB reflects challenges the bank may face from the fragile economic environment in Bulgaria and our concerns as to how the Greek financial crisis could affect the bank, in view of its ownership by NBG.
Several factors could trigger a negative rating action, including:
· Contagion risk that threatened UBB's ability to fund itself, in the absence of parental or government support.
· A negative action on NBG (unless we assessed that the subsidiary was insulated from its parent's risks).
· Operating conditions starting to have a materially negative impact on the bank's financial standing, leading to a sharp deterioration of the bank's risk profile, with reported NPLs and loan losses significantly higher than the system average.
We consider a positive rating action remote over the next 12 to 18 months because we expect operating conditions to remain challenging for Bulgarian banks. Over the longer term, and assuming an improvement of economic prospects, we could revise our outlook to stable if we observed sustainable easing of asset quality deterioration and earnings pressure, and if we saw evidence of further strengthening of the bank's funding and liquidity position, which would reduce the potential contagion risk arising from UBB's lower-rated parent.”