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Fitch Ratings has affirmed First Investment Bank AD's (FIBank) Long-term Issuer Default Rating (IDR) at 'BB-' with a Stable Outlook and Viability Rating (VR) at 'b-'. A full list of rating actions is at the end of this comment.KEY RATING DRIVERS: IDRS, SUPPORT RATING AND SUPPORT RATING FLOORThe affirmation of FIBank's IDRs are based on Fitch's view that there continues to be a moderate probability of support from the Bulgarian authorities in case of need, which is reflected in the Support Rating of '3' and Support Rating Floor (SRF) of 'BB-'. Bulgaria's Long-term foreign currency IDR is 'BBB-' with a Stable Outlook.
Fitch views the propensity of the Bulgarian authorities to support FIBank as quite strong due to the bank's systemically important bank status, its almost exclusively deposit funding and representations previously made to the agency by the Bulgarian authorities. At end-H113, FIBank was the third-largest bank in Bulgaria with a total assets market share of 8%, and the second-largest retail deposit taker with a 13% market share. Fitch does not expect any changes in terms of support as a result of the proposed acquisition of MKB Unionbank (MKBU, BBB+/Rating Watch Negative/b+), as the latter has a small market share of 2% (see 'Fitch: No Immediate Rating Actions Following FIBank's Planned Acquisition of MKBU' dated 23 August 2013 at http://www.fitchratings.com).
At the same time, Fitch believes the Bulgarian authorities have sufficient financial flexibility to support FIBank due to the country's low government debt and significant available fiscal reserves. FIBank's total liabilities were equal to a moderate 8.4% of GDP at end-2012, and 80% of FIBank's customer accounts are covered by deposit insurance, meaning that the bank's uninsured liabilities, with respect to which the authorities' would take the decision on support, comprised a low 23% of total liabilities (about 1.9% of GDP) at end-H113. Furthermore, 95% of these uninsured liabilities are customer deposits, which Fitch understands have been placed primarily by domestic clients.
However, in Fitch's view, weaknesses in the bank's corporate governance and potentially high related party and relationship lending, could result in somewhat greater uncertainty about the authorities' readiness to support the bank in all circumstances.
RATING SENSITIVITIES: IDRS, SUPPORT RATING AND SUPPORT RATING FLOORFIBank's IDRs, SR, SRF are sensitive to a change in Fitch's assumptions about the availability of sovereign support for the bank. A downgrade of the Bulgarian sovereign rating would likely result in a downward revision of the SRF and therefore a downgrade of the Long-term IDR as it would indicate Fitch's view of a decline in the authorities' ability to provide support.
On 11 September 2013, Fitch outlined its approach to incorporating support in its bank ratings in light of evolving support dynamics for banks worldwide (see "The Evolving Dynamics of Support for Banks" and "Bank Support: Likely Rating Paths" , at http://www.fitchratings.com). FIBank's SRF and SR could come under downward pressure if Fitch concluded that potential sovereign support for banks in Bulgaria, as a member of the European Union, had materially weakened relative to its previous assessment.
KEY RATING DRIVERS: VR FIBank's VR reflects continued deterioration in asset quality combined with weak reserve coverage, pressuring capitalisation. The VR also considers weaknesses in corporate governance, potentially high related party and relationship lending, high loan concentrations and weak performance. On the other hand, the VR also considers FIBank's broad and stable to date deposit base.
FIBank's regulatory non-performing (NPL) ratio, increased to 12.2% at end-H113 compared with 5.8% at end-2011. This was mainly as a result of large loans becoming NPLs, emphasising the risks associated with the high borrower concentrations. Furthermore, reserve coverage of NPLs was low at 32% and only increased to 39% if specific provisions (deducted from the capital base according to Bulgarian National Bank regulations) are added.
At end-H113, exposure to the largest 20 borrowers stood at a significant 3.6x Fitch core capital (FCC). Amortisation of these loans is very limited, and some borrowers have been granted additional facilities, further increasing concentrations. Within the largest borrowers, there are already loans that are classified as NPLs.
In Fitch's view, the risk of related party and relationship lending is high, given the two founding shareholders' interest in capital-intensive projects in the tourist industry, incomplete disclosure of the shareholder structure, and the quite high-risk nature of some loan exposures.
Unreserved NPLs and watch loans (H113: 4.5% of total loans) equalled a very high 123% of FCC. In Fitch's view, this undermines the quality of capital, while the Tier 1 and total capital ratios, at 11.1% and 12.7%, respectively, at end-H113, were only slightly above the regulatory required and/or recommended minimums. Pre-impairment profit is moderate, supported only by sound fee and commission income. However, it is limited in terms of strengthening the bank's solvency through internal capital generation.
The VR is supported by FIBank's strong retail deposit franchise and the absence of refinancing risk. Liquid assets in unconsolidated accounts (as per Bulgarian National Bank definition which includes 100% of mandatory reserves) were equal to an adequate 26.6% of deposits at end-H113 (17.9% if mandatory reserves are excluded).
Fitch does not expect an impact on FIBank's VR from the potential merger with MKBU due to MKBU's moderate size (23% of FIBank's total assets at end-2012) and the limited difference between the two banks' VRs. However, the acquisition could be negative for FIBank's standalone profile if it results in a significant reduction in capital ratios or liquidity. The impact on these metrics will depend on the financial terms of the transaction, the details of which have not yet been made available to Fitch.
RATING SENSITIVITIES: VR The VR could be downgraded further in case of continued deterioration in FIBank's loan performance and underlying asset quality, resulting in increased pressure on the bank's capitalisation. The VR could be upgraded if the bank is recapitalised. However, Fitch does not expect this given the absence of equity injections in recent years.
The rating actions are as follows: Long-term IDR: affirmed at 'BB-', Outlook StableShort-term IDR: affirmed at 'B'Viability Rating: affirmed at 'b-'Support Rating: affirmed at '3'Support Rating Floor: affirmed at 'BB-' Fitch Ratings
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