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Public relations section
Fitch Ratings - Warsaw - 14 Jul 2022: Fitch Ratings has upgraded KBC Bank Bulgaria EAD's (KBCBG; formerly Raiffeisenbank (Bulgaria) EAD) Long-Term Issuer Default Rating (IDR) to 'A-' from 'BBB-' and its Short-Term IDR to 'F1' from 'F3'. The ratings have been removed from Rating Watch Evolving (RWE). The Outlook is Positive.
The bank's 'bb+' Viability Rating (VR) has been placed on Rating Watch Negative (RWN). A full list of ratings is below.
The rating actions follow the acquisition of KBCBG by KBC Bank NV (KBC, A+/Stable/a) from Raiffeisen Bank International AG on 7 July 2022. The upgrade of the IDRs and resolution of the RWE reflects our view of a stronger probability of support for KBCBG under the new owner. The Positive Outlook on the IDR reflects that on the Bulgarian sovereign IDR.
The RWN on the VR reflects our view that KBCBG's post-merger standalone credit profile is likely to be weaker when combined with KBC's other Bulgarian subsidiary United Bulgarian Bank AD (UBB; A-/Positive/bb), resulting in a one-notch downgrade to 'bb'. We expect to resolve the RWN on completion of the legal merger with UBB, which we expect within the next six months
KEY RATING DRIVERS
Support-Driven IDRs: KBCBG's Long-Term IDR is driven by its 'a-' Shareholder Support Rating (SSR), reflecting our view of a very high probability that KBC would support its Bulgarian subsidiary in case of need. In our view a default by KBCBG would represent considerable reputational risk for KBC given their common regulator, the European Central Bank, and resolution authority, the Single Resolution Board, and also due to KBCBG now being part of KBC's single point-of-entry (SPE) resolution group.
Parent IDR as Anchor: The parent's resolution strategy underpins our use of KBC's IDR as an anchor for KBCBG's IDR, given our view the Bulgarian subsidiary's senior creditors would benefit from the parent's build-up of significant and sustainable junior debt buffers. In our view, any required support for KBCBG would be immaterial relative to the parent's ability to provide it.
IDR Constrained by Country Ceiling: KBCBG's IDR is capped by Bulgaria's Country Ceiling of 'A-', two notches above the Bulgarian sovereign IDR (BBB/Positive).
Short-Term Rating: KBCBG's Short-Term IDR of 'F1' is the higher of two options corresponding to a Long-Term IDR of 'A-', as we deem the transfer and convertibility risks in Bulgaria materially lower in the short term than in the long term. This is supported by the sovereign's solid liquidity profile and our view that given the country's planned admission to the eurozone, risks of imposing capital controls are materially lower in the short term.
Near-Term Economic Challenges: Near-term challenges arising from the economic effects of the war in Ukraine and accelerating inflation will lead to pressure on Bulgarian banks' asset quality and earnings. Nonetheless, we believe that continuing economic recovery supported by EU funds and the prospect of accession to the eurozone are positive drivers for Bulgarian banks' operating environment in the medium- to long-term. Fitch expects Bulgaria's real GDP growth to slow in 2022 to 3%, and moderately recover to 3.8% in 2023.
Risk Profile Convergence: KBCBG's risk-profile score at 'bb+' reflects our view of the consistency and strength of the bank's underwriting standards that, supplemented by satisfactory risk controls, are superior to Fitch-rated domestic peers'. However, our negative outlook on the factor score reflects its expected post-merger convergence with UBB's risk-profile score at 'bb'.
Weaker Post-Merger Asset Quality: KBCBG's credit quality is one of the strongest among Bulgarian banks' but will be challenged in the near term by a weaker macroeconomic environment. Its impaired loans ratio of 2.8% at end-2021 was considerably below the 6.5% industry average but will rise moderately when combined with UBB's weaker-quality portfolio.
Rising Risks to Profitability: We see risks that current macro-economic challenges caused by the war in Ukraine and higher inflation could delay an improvement to KBCBG's post-merger profitability. The negative outlook on the factor score reflects our expectation that we will lower the score to 'bb-' on completion of its merger with UBB.
Stronger Franchise on Merger: The acquisition of KBCBG has materially strengthened KBC's market position in the Bulgarian banking market. The planned merger will create a market leader with a share of about 19% of the Bulgarian banking sector's assets. KBCBG's share was around 8% at end-2021.
Satisfactory Capital; Stable Funding: KBCBG's capitalisation remains satisfactory with a moderate capital buffer above regulatory minimum requirements, supported by its conservative risk profile. Its common equity Tier 1 (CET1) ratio was 16.2% at end-2021. KBCBG is self-funded with stable and granular customer deposits. Liquidity is healthy as reflected in its high-quality liquid assets covering more than 30% of customer deposits at end-2021.
Factors that could, individually or collectively, lead to negative rating action/downgrade:
IDRS AND SSR
We will withdraw KBCBG's IDRs and SSR on completion of the merger with UBB. In the meantime, negative rating action could stem from a downgrade of the Bulgarian Country Ceiling, a perceived weakening of the parent's propensity to support UBB, or a multi-notch downgrade of KBC's IDR. However, we view these scenarios as unlikely.
We expect to downgrade KBCBG's VR to 'bb' and then withdraw it following the merger with UBB.
Factors that could, individually or collectively, lead to positive rating action/upgrade:
IDRS AND SSR
An upgrade of the Long-Term IDR and SSR prior to the merger would be subject to an upgrade of the Bulgarian Country Ceiling, provided the probability of support from KBC remains very high.
VR upside is unlikely prior to the merger as reflected in the RWN.
The 'bb' business profile score is above the 'b' implied score due to the following adjustment reason: group benefits and risks (positive)
BEST/WORST CASE RATING SCENARIO
International scale credit ratings of Financial Institutions and Covered Bond issuers have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of three notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of four notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from 'AAA' to 'D'. Best- and worst-case scenario credit ratings are based on historical performance. For more information about the methodology used to determine sector-specific best- and worst-case scenario credit ratings, visit https://www.fitchratings.com/site/re/10111579
REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING
The principal sources of information used in the analysis are described in the Applicable Criteria.
PUBLIC RATINGS WITH CREDIT LINKAGE TO OTHER RATINGS
KBCBG's IDR and SSR are directly linked to KBC's IDR and Bulgaria's Country Ceiling.
Unless otherwise disclosed in this section, the highest level of ESG credit relevance is a score of '3'. This means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. For more information on Fitch's ESG Relevance Scores, visit www.fitchratings.com/esg