OREANDA-NEWS. Fitch Ratings has affirmed the Long-Term Issuer Default Ratings (IDRs) of Allianz Bank Bulgaria AD (ABB), Societe Generale Express Bank AD (SGE) and Sogelease Bulgaria (Sogelease) at 'BBB+' and ProCredit Bank (Bulgaria) EAD's (PCB) Long-Term IDR at 'BBB-'. The Outlooks are Stable. Fitch has also affirmed the banks' Viability Ratings (VR). A full list of rating actions is available at the end of this rating action commentary.

The affirmation of IDRs of the three banks and Soglease reflects Fitch's opinion of a high probability that they would be supported, if required, by their respective parents. The affirmation of VRs of the three banks reflects no major changes in their financial metrics over the last 12 months.

KEY RATING DRIVERS

IDRS AND SUPPORT RATINGS OF SGE, PCB, ABB AND SOGELEASE

ABB's ultimate majority shareholder is Allianz SE (AA-/Stable) through a 66% stake in Allianz Bulgaria Holding, a direct 99.9% owner of ABB. PCB is 100%-owned by ProCredit Holding AG & Co. KGaA (PCH; BBB/Stable). SGE is a 99.7% subsidiary of Societe Generale (SG, A/Stable), while Sogelease is SGE's 100% subsidiary.

ABB's IDRs reflect a high probability of support from Allianz due to the parent's strong credit risk profile and ABB's relative small size. However, ABB's Long-Term IDR is notched four times from that of Allianz because of ABB's only limited strategic importance. This is based on the strategic focus of Allianz on the insurance business, with ABB its only banking subsidiary in central and eastern Europe (CEE), and ABB's marginal contribution to the parent group's profits. In our view, whether ABB remains in the parent group in the long term depends on its contribution to Allianz's insurance and asset management business and ABB's standalone performance.

Fitch views PCB as a strategically important subsidiary to its parent, PCH. The support considerations take into account the 100% ownership, the strategic importance of the south eastern Europe region to the group, strong integration with the parent and a track record of capital and liquidity support. At end-2015, PCB accounted for 13% of PCH's total group assets.

Fitch believes that there is a high probability that SGE would be supported, if required, by SG due to its strategic importance to the parent in light of SG's strategic focus on the CEE region. Fitch's view of SG's support propensity is reinforced by the track record of significant funding provision to the subsidiary and strong operational and management integration between the two banks. The potential cost of support would be easily manageable for SG given SGE's small size. SGE would have been rated one notch off the parent were it not for the constraint by Bulgaria's sovereign rating.

Sogelease's IDRs are equalised with those of SGE as Fitch views the leasing company as the bank's core subsidiary. Fitch believes that potential support for Sogelease, if needed, could come from SGE or flow directly from SG. Sogelease is an integral part of financial services provided by SG in Bulgaria and is strongly integrated into the parent group at both operational and funding levels.

VRS OF SGE, PCB AND ABB

The VRs of the three banks reflect their moderate risk appetite, better-than-sector asset quality, adequate capitalisation and profitability, solid funding and ample liquidity. At the same time weak market franchises (moderate at SGE) and the difficult and an unstable operating environment negatively affect their credit profiles.

Weak franchises constrain the VRs of PCB and ABB. At end-2015, market shares in total sector assets were below 3% (ABB and PCB) and about 6% (SGE). ABB and SGE run a universal banking model, while PCB is entirely focused on serving small and medium-sized enterprises (SMEs). At end-2015, the banks' share in retail deposits stood at around 7% for SGE, 3% for ABB and only 1% for PCB.

The operating environment for Bulgarian banks is likely to remain difficult in 2016 and beyond due to subdued credit demand, falling interest rates and growing competition for a limited number of borrowers in a small market. We believe that the central bank's on-going sector-wide asset quality review (AQR) and reforms to the supervisory framework should help restore public confidence in the banking sector after the bankruptcy of a large domestically-owned bank and a bank run on the largest domestic bank (First Investment Bank; B-/Stable/b-) in 2014.

The three banks' asset quality has persistently been better than the sector average because of superior risk controls and underwriting standards driven by tight parental control. The inflow of new bad debt should remain contained, assuming no economic stress. This reflects conservative origination of new loans, already seasoned legacy loans and moderate (PCB and SGE) or modest (ABB) expansion plans.

At end-2015, the official IFRS impaired loan ratios equalled about 6% (PCB), 10% (SGE) and 14% (ABB). The asset quality ratios based on the central bank's supervisory reporting were about 8% at SGE and PCB and almost 14% at ABB, compared with about 20% for the sector. Provision coverage of IFRS impaired loans was adequate at the three banks, given their large share of collateralised lending.

Capitalisation at the three banks is adequate given the challenging operating environment, moderate risk appetites, limited expansion plans (except for SGE) and muted credit demand, healthy internal capital generation and potential ordinary parental capital support. Capital buffers at the three banks are sufficient to absorb even substantial additional loan provisioning that could result from the AQR. At end-2015, Fitch core capital ratios equalled 23% (PCB), 16% (SGE) and 18% (ABB). PCB's higher ratio is commensurate with the bank's strategic focus on higher-risk SMEs. Unreserved impaired loans accounted for 28% of Fitch core capital at ABB and SGE, and 18% at PCB.

Subdued domestic credit demand, coupled with lower market interest rates, is hurting the profitability of Bulgarian banks. However, their results continue to compare well with regional peers mostly due to still wide margins and moderate risk costs. Lending activity is unlikely to recover in 2016 (especially among corporates) and margin pressure will increase since the room for further deposit rate cuts is limited.

Refinancing risk is low at the three banks because they are self-funded with stable and largely granular customer deposits, they hold ample liquidity buffers and can rely on ordinary liquidity support from their parents, in case of need. Overall funding profile is stronger at ABB and SGE while PCB has a moderately weaker deposit franchise. Fast deposit growth at the three banks in 2015 and 2014 reflected a muted appetite for investments by companies, coupled with customers' flight to quality after the domestic (2014) and the Greek banking crisis (mid-2015).

At end-2015, gross loans/deposit ratios shrank to 66% (ABB), 92% (SGE) and 105% (PCB). The higher ratio for PCB reflected long-term financing received from international financial institutions (such as EIB). The three banks' liquidity buffers (mainly cash and Bulgarian sovereign debt) relative to total customer deposits were substantially above the 20% regulatory minimum.

RATING SENSITIVITIES

IDRS, SUPPORT RATINGS

The IDRs and Support Ratings of the three banks and Sogelease would likely be downgraded in case of a downgrade of their parents' IDRs (multi-notch in the case of SG) or Bulgaria's sovereign rating (SGE, Sogelease and ABB). An upgrade of SGE, Sogelease and PCB would require a rating upgrade of the Bulgarian sovereign and their respective parents. Upside is limited for ABB.

The three banks and Sogelease could also be downgraded if Fitch believes that their strategic importance to their parents is weakened.

VR

An upgrade of ABB's and PCB's VRs would be contingent on a significant improvement of their market franchises coupled with maintaining adequate capitalisation and asset quality. SGE's VR upgrade would likely result from an improvement of the operating environment and considerable strengthening in the bank's overall credit risk profile.

Deterioration in the operating environment, which would result in a substantial inflow of new bad debts and capital erosion at the banks, could lead to their downgrade.

The rating actions are as follows:

ABB

Long-Term Foreign Currency IDR affirmed at 'BBB+'; Outlook Stable

Short-Term Foreign Currency IDR affirmed at 'F2'

Viability Rating affirmed at 'bb-'

Support Rating affirmed at '2'

PCB

Long-Term Foreign Currency IDR affirmed at 'BBB-'; Outlook Stable

Short-Term Foreign Currency IDR affirmed at 'F3'

Long-Term Local Currency IDR affirmed at 'BBB-'; Outlook Stable

Short-Term Local Currency IDR affirmed at 'F3'

Viability Rating affirmed at 'bb-'

Support Rating affirmed at '2'

SGE

Long-Term Foreign Currency IDR affirmed at 'BBB+'; Outlook Stable

Short-Term Foreign Currency IDR affirmed at 'F2'

Viability Rating affirmed at 'bb'

Support Rating affirmed at '2'

Sogelease

Long-Term Foreign Currency IDR affirmed at 'BBB+'; Outlook Stable

Short-Term Foreign Currency IDR affirmed at 'F2'

Support Rating affirmed at '2'