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Rating Action:

Moody's downgrades Corporate Commercial Bank's deposit ratings to B1; outlook negative

11 Sep 2013

Limassol, September 11, 2013 -- Moody's Investors Service has today downgraded Corporate Commercial Bank's (Corpbank) long-term local and foreign-currency deposit ratings to B1 from Ba3, and also lowered its baseline credit assessment (BCA) to b2 from b1, which is equivalent to the E+ standalone bank financial strength rating (BFSR). The short-term deposit ratings of Not-Prime are unaffected by today's rating action. The deposit ratings carry a negative outlook.

Moody's says that today's rating action is driven by (1) Corpbank's continued rapid credit expansion in the context of Bulgaria's challenging operating environment, which raises concerns over potential asset quality pressures; (2) modest capital buffers, particularly in light of Corpbank's high credit concentration; and (3) continued downward pressure on profitability. These factors are only partially offset by the bank's solid liquidity buffers and its growing, and increasingly diversified, deposit base in Bulgaria.

RATINGS RATIONALE

--- BULGARIA'S CHALLENGING OPERATING ENVIRONMENT AND CORPBANK'S CONTINUED RAPID CREDIT EXPANSION RAISE CONCERNS OVER ASSET QUALITY PRESSURE

The first driver of today's action is Corpbank's continued rapid credit expansion within the context of Bulgaria's challenging operating environment. For the first six months of 2013, Corpbank's loan book grew by 16% compared to a -0.3% contraction for the system, and this follows an annual average growth rate of 39% between 2010-12, compared with 3% growth rate for the system. Moody's says that although the bank's loan-book quality has so far remained more resilient than its peers, with non-performing loans (NPLs) at 1.8% of gross loans as of June 2013, the stock of NPLs expanded by 141% in absolute terms between December 2012 and June 2013, from BGN 32.8 million to BGN79.0 million. Also, as a reflection of the recent rapid growth, a significant portion of the loans are unseasoned and exposed to the effects of Bulgaria's subdued economic conditions. In Q1 2013, Bulgaria's real GDP grew by a modest 0.8% (according to the National Statistics Institute (NSI)), while unemployment increased to 13.8% (approximately double the levels recorded in Q1 2009). Although Moody's anticipates that Bulgaria's economic performance will improve slightly in the coming years, the rating agency expects that growth rates will remain well below pre-2008 levels of around 6% annual GDP growth.

--- MODEST CAPITAL BUFFERS, ESPECIALLY IN LIGHT OF CORPBANK'S HIGH CONCENTRATION LEVELS

The second driver for today's action is Corpbank's high concentration levels in the loan portfolio. Despite the bank's significant balance sheet growth in recent years, loan concentrations have not been declining and continue to expose the bank to downside risks if a large borrower becomes impaired. These concerns are particularly acute given Corpbank's modest capitalisation metrics, with a Tier 1 ratio of 9.8% as of June 2013, and a capital adequacy ratio (CAR) of 12.2% as of June 2013, just above the 12% regulatory minimum. Although the bank raised new equity in Q2 2013 and plans to raise additional capital in Q3 2013, Moody's expects that Corpbank's Tier 1 ratio will remain well below the banking system Tier 1 ratio of 15.6% as of June 2013, and continue to provide the bank with limited capacity to absorb unexpected losses.

--- CONTINUED DOWNWARD PRESSURE ON PROFITABILITY

The third driver is the continued downward pressure on Corpbank's profitability, with the annualised return on average assets ratio at approximately 0.9% in H1 2013, compared with a 1.2% ratio in 2012 and 3.1% in 2010. The pressure on profitability stems from: (1) compressed interest-rate margins, largely reflecting higher funding costs, as the bank continues to diversify its funding base; and (2) increasing loan-loss provisioning charges, which absorbed 39% of pre-provision income in the first half of 2013. Bulgaria's persistently challenging operating conditions indicate that provisioning charges will remain elevated, sustaining pressure on the bank's profits.

--- GOOD LIQUIDITY BUFFERS PROVIDE SOME CUSHION

Despite the aforementioned negative drivers, Moody's also recognises that Corpbank's standalone profile continues to be supported by its sound liquidity buffers and by its growing and increasingly diversified deposit base. As at end-June 2013, liquid assets as a percentage of total assets were estimated at 28.5%, while total deposits grew by 10% in H1 2013, supporting the longer-term upward trend in total deposits, which grew by an annual average rate of 42% between 2010-12. Also, Moody's notes that the bank managed to diversify its deposit base with retail deposits constituting 66% of total deposits at end-June 2013, compared to a 41% ratio at end-2010.

RATIONALE FOR THE NEGATIVE OUTLOOK

The negative outlook on the bank's long-term deposit ratings reflects Moody's view of the risk that the seasoning of the loan portfolio may lead to further asset-quality and profitability pressures, which in turn could weaken the bank's capital levels.

WHAT COULD MOVE THE RATINGS DOWN/UP

Downward pressure might develop on the ratings if the bank's asset quality, capitalisation and profitability levels were to weaken beyond current expectations. Although upward pressure on the bank's ratings is currently limited, the outlook could be revised to stable if profitability metrics stabilise and loan concentrations are reduced.

PRINCIPAL METHODOLOGY

The principal methodology used in this rating was Global Banks published in May 2013. Please see the Credit Policy page on www.moodys.com for a copy of this methodology.

Headquartered in Sofia, Bulgaria, Corpbank reported total unconsolidated assets of BGN6.3 billion (EUR3.2 billion), according to the bank's unaudited financial statements ending June 2013.

REGULATORY DISCLOSURES

For ratings issued on a program, series or category/class of debt, this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the rating action on the support provider and in relation to each particular rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this rating action, and whose ratings may change as a result of this rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

Elena Panayiotou
Asst Vice President - Analyst
Financial Institutions Group
Moody's Investors Service Cyprus Ltd.
Kanika Business Centre
319 28th October Avenue
PO Box 53205
Limassol CY 3301
Cyprus
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

Yves J Lemay
MD - Banking
Financial Institutions Group
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

Releasing Office:
Moody's Investors Service Cyprus Ltd.
Kanika Business Centre
319 28th October Avenue
PO Box 53205
Limassol CY 3301
Cyprus
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

Moody's downgrades Corporate Commercial Bank's deposit ratings to B1; outlook negative
No Related Data.
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