Limassol, July 30, 2012 -- Moody's Investors Service has today downgraded Raiffeisenbank (Bulgaria)'s long and short-term local and foreign-currency deposit ratings to Ba1/Not Prime, from Baa3/Prime-3, and standalone bank financial strength rating (BFSR) to D-, mapping to a standalone credit assessment of ba3, from D+/ba1. All ratings carry a stable outlook.
This rating action reflects (i) Bulgaria's challenging operating environment; (ii) Raiffeisenbank's asset-quality deterioration and Moody's expectation of further deterioration given the bank's exposures to the construction and real-estate sector and high concentrations (although collateralized and within regulatory limits); and (iii) subsequent pressure on the bank's profitability, stemming from relatively high provisioning requirements and subdued loan growth.
Today's rating actions conclude the review initiated on Raiffeisenbank's deposit ratings initiated on 21 February 2012, and extended to all ratings on 17 May 2012.
--DOWNGRADE OF STANDALONE BANK FINANCIAL STRENGTH RATING
Moody's says that the downgrade of the standalone BFSR reflects both the recent deterioration in financial performance, owning to the challenging operating environment, and Moody's expectations that the weak economic prospects will constrain the bank's ability to stabilise and improve its asset-quality and profitability metrics.
Weak operating environment
The continued weak economic recovery has negatively affected the bank's financial performance. Moody's expects economic growth to decelerate to 0.9% in 2012, from 1.7% in 2011 (in Q1 2012 Bulgaria's real GDP grew by 0.5% year-on-year, according to the National Statistics Institute (NSI), compared with 2.8% in Q1 2011). The weak economic prospects reflect the country's high dependence on external demand for exports and private-sector capital inflows that render it vulnerable to the deepening economic slowdown in the euro area, an important trading partner. Although Moody's expects Bulgaria's economic performance to improve in the coming years, the rating agency anticipates that growth rates will likely remain well below the levels reported before 2008 (around 6% GDP growth per year), which will continue to result in subdued credit growth, lower revenues and asset-quality pressures for Raiffeisenbank.
Within the context of subdued economic growth, the rating agency notes that large concentrations in Raiffeisenbank's loan portfolio (although collateralized and within regulatory limits), and high exposures to the construction and real-estate sector, expose its balance sheet to the risk of large corporate defaults. According to 2011 financial statements, Raiffeisenbank's impaired loans have grown to 15% of gross loans in December 2011, from approximately 9% in December 2010, mainly due to delinquencies in a small number of large construction and real-estate loans. The performance of this lending segment, which accounted for approximately 15% of the bank's gross loans in December 2011 (according to the bank's 2011 financial statements), is under pressure as real-estate prices remain depressed and foreign direct investment (FDI) remains well below pre-crisis levels.
Profitability metrics remain under pressure
Moody's also notes that Raiffeissenbank's profitability remains under pressure, stemming from the need to build provisioning coverage, which has declined to 50% of impaired loans as of December 2011, from 73% in December 2010, according to the bank's 2011 financial statements. Going forward, Moody's also expects that subdued lending opportunities and provisioning charges will dampen profitability.
The stable outlook on Raiffeisenbank's ratings reflects the bank's strong franchise, solid capital levels and adequate liquidity. First, the rating agency recognises that Raiffeisenbank benefits from a good domestic franchise as the fourth-largest institution in Bulgaria, with strong brand recognition and a good presence in the corporate sector. Second, the bank maintains sound capitalisation buffers, with a Tier 1 ratio of 16% as of December 2011, according to the bank's 2011 financial statements -- which provides a cushion to absorb losses. Third, Raiffeisenbank benefits from a growing deposit base in Bulgaria which underpins its adequate liquidity levels.
-- PARENTAL SUPPORT UPLIFT
Raiffeisenbank's Ba1 deposit rating incorporates two notches of uplift based on Moody's view of the high likelihood of parental support from Raiffeisen Bank International AG (RBI) (A2, stable outlook, D+/ba1, stable outlook). RBI provides the bank with operational, supervisory and funding support. Raiffeissenbank is a strategically important subsidiary and is well-integrated within the RBI group. These considerations, together with Moody's view of RBI's commitment to the Bulgarian market, underpin the rating agency's assumptions of high parental support for the bank, which result in a two-notch rating uplift from the current ba3 standalone credit assessment.
WHAT COULD MOVE THE RATINGS UP/DOWN
Upwards pressure on the ratings could stem from sustainable improvements in Bulgaria's operating environment, which would in turn allow Raiffeisenbank to stabilise and improve asset quality and profitability.
Downwards pressure on the ratings could stem from greater-than-expected deterioration in asset quality as a result of a prolonged economic contraction in the euro area, which would itself constrain Bulgaria's economic growth. In addition, a reduced commitment and/or ability of the parent bank to support its Bulgarian subsidiary could exert downwards pressure on Raiffeisenbank's ratings.
The principal methodology used in this rating was Consolidated Global Bank Rating Methodology published in June 2012. Please see the Credit Policy page on www.moodys.com for a copy of this methodology.
Headquartered in Sofia, Bulgaria, Raiffeisenbank reported total consolidated assets of BGN6.45 billion (EUR3.3 billion), as of end-December 2011, according to the bank's 2011 financial statements.
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