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Rating Action:

Moody's downgrades First Investment Bank's deposit ratings to B3; outlook negative

01 Aug 2019

Limassol, August 01, 2019 -- Moody's Investors Service (Moody's) has today downgraded First Investment Bank AD's (FIBank) long-term deposit ratings to B3 and changed the outlook to negative from stable. Moody's also downgraded the bank's Baseline Credit Assessment (BCA) and Adjusted BCA to caa1 from b3, its long-term Counterparty Risk Ratings (CRR) to B1 from Ba3 and the Counterparty Risk (CR) Assessment to Ba3(cr) from Ba2(cr). The short-term deposit rating and CRR were affirmed at NP and the short-term CR Assessment at NP(cr).

Today's rating action follows the publication of the results of a comprehensive assessment of six Bulgarian banks by the European Central Bank (ECB) on 26 July 2019, which included an asset quality review (AQR) and stress tests based on 31 December 2018 carrying values, and reflects: (1) Moody's view that the quality of FIBank's credit portfolio could pose a more significant risk to its solvency than initially estimated, as highlighted by the information provided by the AQR; and (2) the magnitude of the capital shortfalls identified for FIBank, along with measures already taken and expected to be taken by FIBank to address them. The Bulgarian National Bank (BNB), which supervises FIBank, has stated that it endorses the comprehensive assessment results, and that, on the basis of the AQR results and post reference date developments it estimates that each of the six banks included in the exercise meet the own funds requirements of the European Union's Capital Requirements Regulation.

The negative outlook reflects that any potential additional loans classified as IFRS 9 stage 3 and stage 2, and resulting provisions, could impact the bank's financial performance over next 12-18 months at a time when FIBank is working to improve the quality of its loan portfolio, including through recoveries, foreclosures, write-offs and sales of problematic exposures, and improve its solvency buffers.

The full list of the affected ratings and assessments can be found at the end of this press release

RATINGS RATIONALE

-- RATING DOWNGRADE REFLECTS POTENTIAL HIGHER RISK IN THE BANK'S CREDIT PORTFOLIO

Today's downgrade mainly reflects the potential higher credit risk in FIBank's portfolio than previously estimated and therefore the higher risk to solvency from problematic exposures. Namely, Moody's considers that the AQR-adjusted nonperforming exposures (NPEs under the expanded European Banking Authority definition), which are significantly higher than those disclosed as of year-end 2018, could pose potential material additional risk to the bank's capital, as well as its profitability, than previously assumed.

The AQR, which is a prudential rather than an accounting exercise, included 78% of the bank's entire credit portfolio and 95% of the corporate portfolio and the AQR-adjusted NPE ratio for the bank's overall credit exposures was 44.1%, compared to the unadjusted NPE ratio of 19.1% as of year-end 2018. The additional NPEs were mainly identified in the corporate portfolio, where the AQR-adjusted NPE ratio was 56.2%, compared to 20.9% as of year-end 2018, and resulted in an upward adjustment in provisions needed for this portfolio.

Moody's already considered the risk to capital from a high level of problem loans and a significant amount of repossessed assets (mainly foreclosed properties) as the key driver for the FIBank's standalone assessment. However, this assessment was previously based on the last audited consolidated financials, whereby problem loans (stage 3 loans under IFRS 9) to gross loans were 21.9% as of end-2018 and coverage of problem loans (stage 3) by stage 3 provisions was modest at 44.5%. Higher problematic exposures, such as those identified in the AQR, mandate additional provisions, impacting profitability, and pose a further risk to capital in the interim.

FIBank's BCA continues to reflect its relatively strong preprovision earnings power and recovering bottom-line profitability with a net income to tangible assets of 1.8% in 2018 from 1% in 2017 and its predominantly deposit-based funding structure and sizeable liquidity buffers, which continue to be counterbalanced by its evolving corporate governance practices and the concentration of the bank's ownership that may give rise to key man risk issues.

A secondary driver for today's action are the capital shortfalls identified in the comprehensive assessment exercise, also considering actions already taken by FIBank and to be taken to shore up capital buffers along with a supportive macroeconomic environment in Bulgaria.

The AQR identified a capital shortfall of €125 million, mainly from the previously mentioned AQR-estimated additional provisions for corporate exposures. This exercise was complemented by hypothetical baseline and adverse stress test scenarios for the years 2019 to 2021. The capital shortfall for the baseline scenario was €136 million and €263 million from the adverse. A common equity tier 1 (CET1) capital ratio threshold of 8% threshold was used for the AQR and the stress test's baseline scenario, and a 5.5% CET1 ratio threshold was used for the adverse scenario. FIBank's 15.7% CET1 ratio as of the end of 2018 was used as a starting point.

According to FIBank's own disclosures, the bank had already secured €130 million in additional capital as of 30 June 2019, including €65 million in preprovision income in the first half of 2019, and that it plans to take measures to address the remaining €133 million through operating profit, de-risking of its corporate portfolio and other measures.

-- LOSS GIVEN FAILURE ANALYSIS DOES NOT RESULT IN ANY UPLIFT

Owing to the bank's relatively small proportion of loss-absorbing junior depositors (the bank is predominantly funded by retail deposits) and limited hybrid debt, the bank's deposit rating does not benefit from rating uplift as a result of the application of Moody's Loss Given Failure (LGF) analysis.

-- MODERATE LIKELIHOOD OF GOVERNMENT SUPPORT

FIBank's B3 long-term deposit ratings continue to incorporate Moody's assessment of a moderate likelihood of government support in case of need for the bank, which results in one notch of rating uplift. This support assumption is in line with the rating agency's approach of assigning government support to European banks with systemic importance despite the introduction of the Bank Recovery and Resolution Directive (BRRD), which limits a government's ability to support banks.

FIBank was the fourth-largest bank by assets and deposits in Bulgaria as of the end of 2018. The reported market share of deposits in Bulgaria was 9.6% as of end-2018. Furthermore, Moody's support assessment is backed by the track record of support for FIBank, which received liquidity support from the authorities in 2014.

-- NEGATIVE OUTLOOK REFLECTS UNCERTAINTIES IN THE BANK'S FINANCIAL PERFORMANCE

The negative outlook reflects that any additional IFRS stage 3 or stage 2 loans recognised in the bank's accounts may require further provisions and impact the bank's financial performance over the next 12-18 months, including dampening net income and the pace of the de-risking of the credit portfolio.

WHAT COULD CHANGE THE RATING UP/DOWN

Given the negative outlook on FIBank's deposit ratings, there is currently limited upward rating pressure. The outlook could change to stable, however, if FIBank is able to address the capital shortfalls identified through private means, while significantly reducing asset risk in its portfolio through a material decline in problem loans and real estate assets, and significantly improved provisioning coverage of problematic exposures.

A change in the bank's liability structure, such as through the issuance of senior or subordinated and low-trigger hybrid debt, could lead to changes in Moody's LGF analysis, resulting in an uplift to the deposit ratings.

The bank's ratings could be downgraded if the bank does not address the additional capital buffers identified within the coming quarters and if its problem loans do not decline and the provisioning coverage on problematic loans does not improve materially during this period. A deterioration in the bank's capital levels and profitability, or a decline in liquidity and deposit outflows would also lead to a rating downgrade.

Changes in the bank's liability structure, mainly from an increased reliance on secured funding, could result in a downgrade of the deposit ratings. Finally, a lower likelihood or capacity of the Bulgarian government to support FIBank, in case of need, may also result in a downgrade of the deposit ratings.

PRINCIPAL METHODOLOGY

The principal methodology used in these ratings was Banks published in August 2018. Please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

FULL LIST OF ALL AFFECTED RATINGS

Issuer: First Investment Bank AD

..Downgrades:

.... Adjusted Baseline Credit Assessment, Downgraded to caa1 from b3

.... Baseline Credit Assessment, Downgraded to caa1 from b3

.... Long-term Counterparty Risk Assessment, Downgraded to Ba3(cr) from Ba2(cr)

.... Long-term Counterparty Risk Ratings, Downgraded to B1 from Ba3

.... Long-term Bank Deposits, Downgraded to B3 from B2, Outlook Changed To Negative From Stable

..Affirmations:

.... Short-term Counterparty Risk Assessment, Affirmed NP(cr)

.... Short-term Counterparty Risk Ratings, Affirmed NP

.... Short-term Bank Deposits, Affirmed NP

..Outlook Action:

....Outlook Changed To Negative From Stable

REGULATORY DISCLOSURES

For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security 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 credit rating action on the support provider and in relation to each particular credit 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 credit rating action, and whose ratings may change as a result of this credit 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.

Alexios Philippides
Vice President - Senior Analyst
Financial Institutions Group
Moody's Investors Service Cyprus Ltd.
Porto Bello Building
1, Siafi Street, 3042 Limassol
PO Box 53205
Limassol CY 3301
Cyprus
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454

Sean Marion
MD - Financial Institutions
Financial Institutions Group
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454

Releasing Office:
Moody's Investors Service Cyprus Ltd.
Porto Bello Building
1, Siafi Street, 3042 Limassol
PO Box 53205
Limassol CY 3301
Cyprus
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454

No Related Data.
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