OREANDA-NEWS. Fitch Ratings has affirmed Bulgarian-based First Investment Bank AD's (FIBank) Long-Term Issuer Default Rating (IDR) at 'B-'. The Outlook on FIBank's Long-Term IDR is Stable. A full list of rating actions is available at the end of this rating action commentary.

KEY RATING DRIVERS
IDRS AND VR
The IDRs of FIBank are driven by its standalone financial strength, as expressed by its Viablity Rating (VR).

The bank's VR reflects weak capitalisation relative to significant concentrations in the loan book, and low reserve coverage of a large stock of impaired exposures, resulting in significant unreserved impaired loans relative to Fitch Core Capital (FCC). The rating also reflects a high share of impaired exposures and repossessed assets on FIBank's balance sheet as well as weak, albeit improving profitability.

At the same time, the ratings also reflect positive changes in the bank's corporate governance and risk management framework; and a recovery in the funding base and liquidity position, allowing the bank to fully repay debt on schedule the liquidity support it has received from the Bulgarian State.

Fitch considers FIBank's capitalisation a rating weakness. Its capitalisation is negatively impacted by large concentrations in the loan book (at multiples of FCC at end-2015). The bank is targeting a reduction of large exposures, but this will take time given the long-term nature of many of these loans and only gradual amortisation.

Despite significant impairment charges booked in 2015 (equivalent to 5.2% of average gross loans) the growth of impaired loans, which almost doubled over the same period, resulted in a fall in the reserve coverage ratio to around 52% (2014: around 70%). The unreserved portion of impaired loans accounted for a high 93% of FCC at end-2015 (2014: 32%), negatively impacting the bank's loss absorption capacity and ultimately Fitch's view of FIBank's capitalisation.

Asset quality is another rating weakness. The reported impaired loans-to-total gross loans ratio more than doubled to close to 24% at end-2015, above the 20.4% average for the sector. The increase was, in Fitch's view, driven by a more conservative and consistent application of impairment triggers rather than abrupt deterioration of underlying asset quality. Exposures more than 90 days overdue were much lower relative to impaired loan levels, although still high at 14.8% of total gross loans (2014: 10.9%) and were 54% covered by specific provisions (83% including provisions for all impaired exposures and provisions for incurred but not reported losses (IBNR).

On top of the large stock of impaired exposures, FIBank carries on its balance sheet a significant amount of repossessed assets (BGN932m, equivalent to around 1.3x FCC), mostly in the form of real estate. These do not generate recurring income, negatively impacting profitability, and are likely to be monetised only gradually.

Pre-impairment profitability is adequate; however, large impairment charges resulted in negative operating profitability in 2015 and 2014. The bottom-line has been supported by large one-offs gains over the last two years (in 2015 due to a revaluation of investment property), allowing FIBank to post positive net income for the year. Results for 1Q16 are encouraging with sound pre-impairment profitability and modest net impairment charges, the latter supported by rather significant recoveries. Based on 1Q16 results, the bank could incur annual net impairment charges equivalent to around 4% of gross loans without denting its capital.

In line with its restructuring plan approved by the European Commission following the state aid extended to FIBank in 2014, some of the key weaknesses in corporate governance were addressed with the introduction of CFO and CRO functions and their appointment to the management board, the introduction of an experienced independent member to the Supervisory Board and clearer segregation of duties. Changes in risk appetite and the risk management process at both the origination and underwriting stage as well as during the monitoring process were also introduced.

Fitch believes that the implementation of these changes is likely to have a positive impact on the risk profile of the newly underwritten exposures and lead to better control over the legacy portfolio. Nevertheless, a positive impact on FIBank's risk profile will require a longer record of consistent application of the new governance framework.

Liquidity has recovered and stabilised following the deposit outflows in 2014, which had triggered the extraordinary liquidity support from the sovereign. The bank is on track with the scheduled repayment of state deposits. The final repayment, comprising a small amount, is expected by end-May 2016.

The bank enjoys a fairly granular deposit base with a large share of retail deposits. These, however, are mostly term deposits that are more expensive than current account balances. Fitch believes that a strengthening of customer relationships, as evidenced by a larger share of current accounts in retail deposits, would be positive for funding costs and margins, and further improve the stability of the deposit base.

SUPPORT RATING AND SUPPORT RATING FLOOR
The bank's Support Rating of '5' and Support Rating Floor of 'No Floor' reflect Fitch's opinion that potential sovereign support for the bank cannot be relied upon. This is underpinned by the EU's Bank Recovery and Resolution Directive (BRRD), transposed into Bulgarian legislation, which provides a framework for resolving banks that is likely to require senior creditors participating in losses, if necessary, instead of or ahead of a bank receiving sovereign support.

RATING SENSITIVITIES
IDRS AND VR
The bank's IDRs and VR could be downgraded in case of (i) a further marked deterioration in FIBank's loan performance or underlying asset quality, resulting in increased pressure on the bank's capitalisation; or (ii) renewed and sustained pressure on the bank's liquidity, if this is not offset in a timely fashion by external liquidity support.

Upside potential for the VR is limited in the short- to medium-term given that the potentially positive impact of actions taken under the restructuring plan, including stronger internal capital generation, will take time to feed through and affect the capitalisation, while legacy issues are going to weigh on the bank's risk profile.

SUPPORT RATING AND SUPPORT RATING FLOOR
Any upgrade to the SR and upward revision to the SRF would be contingent on a positive change in the sovereign's propensity to support its banks. While not impossible, this is highly unlikely in Fitch's view.

The rating actions are as follows:

First Investment Bank AD
Long-term IDR: affirmed at 'B-'; Outlook Stable
Short-term IDR: affirmed at 'B'
Viability Rating: affirmed at 'b-'
Support Rating: affirmed at '5'
Support Rating Floor: affirmed at 'No Floor'

Contact:

Primary Analyst
Artur Szeski
Senior Director
+48 22 3386292
Fitch Polska S.A.
Krolewska 16,
00-103 Warsaw

Secondary Analyst
Agata Gryglewicz
Associate Director
+48 22 330 6970

Committee Chairperson
James Watson
Managing Director
+7 495 956 6657

Media Relations: Elaine Bailey, London, Tel: +44 203 530 1153, Email: elaine.bailey@fitchratings.com.

Additional information is available on www.fitchratings.com

Applicable Criteria
Global Bank Rating Criteria (pub. 20 Mar 2015)

Additional Disclosures
Dodd-Frank Rating Information Disclosure Form
Solicitation Status
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