Банкеръ Weekly

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LONG-TERM RATINGS ON THREE BULGARIAN BANKS RAISED

OUTLOOK ON FIRST INVESTMENT BANK REVISED TO POSITIVEOn November 28 the credit rating agency Standard Poors raised its long-term counterparty credit and certificate of deposit ratings on BULBANK and United Bulgarian Bank (UBB) to 'BB-' from 'B+' and on Municipal Bank to 'B+' from 'B'. The outlooks on the three banks have been revised to 'stable' from 'positive'. At the same time, Standard Poors affirmed its 'B' short-term counterparty credit and certificate of deposit ratings on the three banks.The credit rating agency also revised the outlook on First Investment Bank (FIB) to 'positive' from 'stable' and affirmed its 'B' long-term counterparty credit and certificate of deposit rating on the bank. The rating actions primarily reflect the positive developments in the Bulgarian banking system in recent years. Although state banks dominated the sector in the mid-1990s, privatisation of the two largest local banks - BULBANK and UBB - was completed in 2000, with foreign investors acquiring them. The influx of foreign banks has opened up the system to competition and in helping the modernization process. Furthermore, they bring risk-management experience and support the development of new products and services. Bulgarian banks are also benefiting from the high interest margins and a steady growth in the economy.Recent advancements and good prospects that the new Government will extend structural reform over the next few years were demonstrated in the upgrade of the ratings on the Republic of Bulgaria (foreign currency, BB-/Stable/B; local currency, BB/Stable/B). The Government's political commitment to prudent fiscal and financial policies has thus far been demonstrated by its resolve to adopt a strict budget for 2002. In addition, its strong cooperation with the International Monetary Fund and pledge to strengthen integration with the European Union ensure that Bulgaria will credibly tackle any remaining structural reform. Nevertheless, Bulgaria still has significant structural economic weaknesses. Restructuring of manufacturing and reorientation of trade are still at a relatively early stage and an insufficient level of financial intermediation had hindered investment activity, and makes the financing of the economy reliant on confidence-sensitive capital flows. Thus, the ratings of the Bulgarian banks continue to primarily reflect the high-risk economic environment.The ratings of BULBANK reflect its 85.2% ownership by UniCredito Italiano SpA (UniCredito: A+/Positive/A-1). BULBANK's strong liquidity and capitalization and currency low-risk asset profils are also positive rating factors. BULBANK intends to build on its existing strengths, including a powerful deposit base, a nationwide branch network, and a leading position in trade finance. UniCredito is bringing additional expertise to many areas of BULBANK's strategy and operations. UniCredito is faced with a challenge transforming the bank into a modern commercial operation, however, given the bank's historic roots as a government body.The ratings of UBB reflect its 89.9% ownership by the National Bank of Greece (NBG) S.A. (NBG: BBB+/Stable/A-2). Good commercial positions, strong liquidity and capitalization are also positive rating factors.Although UBB benefits from its leading position in the retail business, its profitability is moderate, and its large branch network and high number of employees translate into a high cost structure. As the high interest margins currently enjoyed by Bulgarian banks become eroded through competition, there will be greater emphasis on efficiency.The ratings of Municipal Bank primarily refelect its close relationship with its majority owner - the City of Sofia (foreign currency rating BB/Stable/B); its strong position in the municipal sector in Bulgaria, and adequate liquidity. Negative rating factors, however, include the bank's limited size and low profitability. Standard Poors believes that there is a strong likelihood that Sofia would support Municipal Bank if necessary, owing to the close commercial and managerial links between the city and the bank. Potential support could be limited, however, by restrictions arising from the municipal budget.The largest depositors in Municipal Bank are Sofia and its related entities. The bank's capital ratios are high, and its capitalization is small (about USD11MN at June 30, 2001). On the positive side, however, one of the main objectives of the shareholders is to build the bank's capital base through retained profits and capital increase. Accordingly, Municipal Bank's capital will be increased by BGL10MN before the year-end.The rating of FIB reflects the financial institution's commercial dynamism and flexibility, quality of staff, adequate asset quality, and successful development of its retail business. Aggressive loan growth since the bank's inception (except for a brief period during the Russian and Kosovo crises) has left FIB vulnerable to deterioration in asset quality in the event of a downturn. On the positive note, FIB has managed to maintain adequate asset quality, reflected in the low level of problem loans. Nonperforming credits were about 4% of the total at June 30, 2001, and were well covered by provisions. The rapid growth of the credit portfolio also puts pressure on the bank's funding. Its ratio of loans to deposits regularly stands at above 100 per cent. On a positive note, the bank's deposit base is supported by the successful development of its retail business. FIB has been able to rapidly enlarge its retail customer base through a modern and dynamic commercial policy. Increasing volumes, high margins, strong efficiency, and relatively low loan provisions have resulted in FIB reaching high levels of profitability.

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