Fitch: No Surprises in Bulgarian Bank Asset-Quality Review
The foreign-owned banks performed particularly well, as we predicted in July, when we said that capital buffers at these banks were sufficient to absorb even substantial additional loan-loss provisioning resulting from the AQR.
The AQR only uncovered sizeable adjustments for two banks both of which are domestically owned: First Investment Bank (FIB) and Investbank, which we do not rate. FIB's capital weaknesses are already reflected in its 'B-' rating.
FIB's post-AQR common equity Tier 1 (CET1) capital ratio more than halved to 5% from 11.3% at end-2015. According to FIB, this would have reached 8% had net income for the six month period to end-June 2016 been included. But in any event, the impact on capital ratios including AQR adjustments was sizeable because additional loan-loss reserves were required. This adjustment is broadly in line with our view - FIB's weak asset quality has a high influence on its rating.
The bank has a high stock of unreserved impaired loans and concentration risk is significant. The regulator recommended that FIB should strengthen capital by BGN206m (EUR105m), about a fifth of its equity at end-June 2016, by end-June 2017.
However, the bank says that the ultimate capital strengthening is likely to be smaller because there are differences between AQR calculations and IFRS accounting principles, and that it plans to cover capital shortfalls largely through internal capital generation and potentially through the issue of new shares. In our opinion, this is achievable, considering that BGN90m of net income was generated in 1H16.
The published AQR results do not disclose details of how capital adjustments are calculated, which limits transparency. Neither do they disclose how adjustments to loan quality were reached, which limits comparability between banks.
The good performance of the foreign-owned banks under the AQR reflects, in our view, their superior risk controls and underwriting standards driven by tight parental control. All other Fitch-rated Bulgarian banks performed well and needed only minor adjustments to loan and other asset portfolios.
This suggests that the bulk of loans and asset exposures requiring reclassification, revaluation and additional reserves were addressed before the review. Total sector adjustments were modest, reaching BGN665m (EUR340m), equivalent to 1.3% of risk-weighted assets or 0.8% of total assets at end-2015. Adjustments at FIB represented about 60% of total sector adjustments.
Post-AQR sector CET1 ratio fell to 18.9% from 20% at end-2015. Results of a banking sector stress test, conducted at the same time, showed the CET1 capital ratio falling to 14.4%. This is still well above the local minimum CET1 ratio of 10%.
The relatively high capital adequacy ratios reported by the Bulgarian banks should be viewed against a stockpile of unreserved impaired loans equivalent to half the sector's CET1 capital at end-March 2016. This reflects high volumes of legacy bad debts and slow progress made with NPL resolution compared with other central and eastern European countries.