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Rating Action:

Moody's takes actions on four Bulgarian banks' ratings

27 Nov 2009

Limassol, November 27, 2009 -- Moody's Investors Service today took rating actions on four Bulgarian banks following its reassessment of the vulnerability of their earnings and capital positions to increased credit losses arising from the deepening recession in Bulgaria. The affected banks are: First Investment Bank AD, DSK Bank, Raiffeisenbank (Bulgaria) EAD and MKB Unionbank AD. Details of the rating actions and the rationale are provided below.

First Investment Bank AD (FIB): The bank financial strength rating (BFSR) was downgraded to D- from D. The bank's long-term local and foreign currency deposit ratings were also downgraded to Ba2 from Ba1. All ratings carry a negative outlook.

DSK Bank: The D+ BFSR (previously on review) was confirmed but the outlook was changed to negative. The bank's local currency deposit ratings were downgraded to Baa3/Prime-3 from Baa2/Prime-2. The foreign currency deposit ratings were affirmed at Baa3/Prime-3. The bank's local and foreign currency deposit ratings carry a negative outlook, to reflect the negative outlook on the BFSR.

Raiffeisenbank (Bulgaria) EAD: The D+ BFSR and Baa3/Prime-3 local and foreign currency deposit ratings were all affirmed with their existing negative outlook.

MKB Unionbank AD: The D- BFSR and Ba2/Not Prime local and foreign currency deposit ratings were all affirmed with their existing negative outlook.

RATING ACTIONS ON BULGARIAN BANKS

Moody's rating actions on the banks were prompted by its reassessment of the vulnerability of their earnings and capital position to increased credit losses arising from the deepening recession in Bulgaria, which has resulted in higher corporate defaults, rising unemployment levels and lower disposable income for individuals.

More specifically, the corporate sector's financial performance in the country has weakened significantly, mostly due to lower demand for Bulgaria's exports from its main export partners and from the declining foreign direct investment. At the same time, the retail sector has also been pressurised by the deteriorating labour market, which has led to a decline in disposable income and, in turn, to lower consumer demand. Although the banking sector continues to remain profitable, strongly capitalised and has good liquidity levels, Moody's notes that the above conditions led to increased credit losses in the system, with total systemic non-performing loans growing to 5.63% of total loans as at end-September 2009, up from 2.41% at end-2008.

In view of the above and given the negative pressure on the Bulgarian banks' asset quality and profitability due to the weakened operating environment in the country, Moody's analysis focused on determining whether the banks' stand-alone ratings, i.e. their BFSRs, were appropriately placed at their current level.

"Given that asset quality metrics lag behind macroeconomic indicators by several months, it is crucial that the banks' current ratings incorporate Moody's expectations of their future losses," says Elena Panayiotou, lead analyst at Moody's for the Bulgarian banks.

RATING ACTION ON DSK BANK

Regarding DSK Bank, today's rating action concludes the review of the bank, which was initiated in May 2009. Moody's decision to confirm the bank's BFSR at D+ and assign a negative outlook captures the impact of the deteriorating operating environment on the bank's financial fundamentals, which remain at healthy levels. The rating agency notes that the bank continues to generate good profitability levels on its loan book, despite lower growth in business volumes, and has sufficient capital buffer to absorb credit losses as per our expected scenario and maintain its ratings at the current level.

The negative outlook that was assigned on the BFSR reflects Moody's expectation that future credit losses may rise, which could impact profitability and future capitalisation, though this is to be monitored within the credit cycle.

The downgrade of DSK Bank's local currency deposit ratings was driven by Moody's revision of its approach to systemic support. The changes implied by the revision are being implemented globally, affecting 50 banking systems, including Bulgaria. Moody's explains this new assessment of systemic support in detail in the Special Comment "Financial Crisis More Closely Aligns Bank Credit Risk and Government Ratings in Non-Aaa Countries", published in May 2009.

The rating agency continues to believe that most governments are likely to support their nation's banks to avoid a crisis in the local payments system. The probability of such support is an important part of Moody's credit analysis and provides an uplift to debt and deposit ratings from a bank's standalone level of strength. However, Moody's also believes that the capacity of a country and its central bank to support its financial sector is now more closely aligned with the government's own creditworthiness.

Moody's new systemic support indicator for Bulgaria is at Baa2, which is one notch above the government's Baa3 local currency bond rating and replaces the previously used Baa1 local currency deposit ceiling as the support input.

RATING ACTION ON FIRST INVESTMENT BANK

With regard to FIB's ratings, the downgrades conclude the rating review initiated on 26 May 2009. Moody's decision to downgrade FIB's ratings and assign a negative outlook captures the impact of the deteriorating operating environment on the bank's credit quality and profitability levels, which have been impacted by lower growth in business volumes and reduced interest rate margins compared to earlier years. Moreover, given the challenging funding conditions in Bulgaria and the absence of a strong foreign shareholder in the bank's capital, FIB's funding costs have risen, reflecting the bank's diverse but expensive deposit base, which impacts its profit levels. Expectations of a modest recovery in the Bulgarian economy in the next two years and a negative outlook in the labour market suggest that future credit losses will continue to rise, impacting further the bank's profitability and its capital levels. Moreover, given the fierce competition in Bulgaria for raising customer deposits and in view of the absence of a strong foreign parent bank from FIB's capital, Moody's expects the bank's funding costs to remain relatively high, pressuring the interest rate margins and profitability levels. The negative outlook captures the above and is to be monitored within the coming months.

AFFIRMATION OF RAIFFEISENBANK'S RATINGS

The decision to affirm Raiffeisenbank's BFSR and local and foreign currency deposit rating, with a negative outlook, captures Moody's view that the bank is well-placed at the D+ rating level -- at the highest level of BFSR assigned to Bulgarian banks -- and reflects the bank's good revenue generation, solid funding profile and ample capital buffer to absorb future losses. However, the negative outlook also reflects expectations that future credit losses may rise, which could impact profitability and future capitalisation, though this is to be monitored within the credit cycle.

AFFIRMATION OF MKB UNIONBANK'S RATINGS

The decision to affirm MKB Unionbank's ratings captures Moody's view that, although the bank is well-placed at the D- rating level, there is negative pressure on the bank's financial fundamentals due to the weakened operating environment in Bulgaria. According to the rating agency, the bank is currently strongly capitalised and benefits from funding support from its parent bank -- MKB Rt (Hungary) -- which supports its business growth and provides relatively low-cost funds to the Bulgarian institution. Nevertheless, Moody's expectations that future credit losses on the bank's loan portfolio may rise, impacting profitability and future capitalisation, are captured in the negative outlook.

Moody's will continue to closely monitor the ongoing economic crisis and cautions that if the deterioration in the asset quality of any of the Bulgarian institutions exceeds its current expectations for 2010, resulting in higher-than-anticipated credit losses, it could downgrade the ratings of those Bulgarian banks that exhibit weakened financial strength.

In a recent Special Comment entitled "Moody's Approach to Estimating Bulgarian Banks' Credit Losses" (published in November 2009), Moody's explained that all the rated Bulgarian banks currently have sufficient loss absorption capacity -- comprising capital, existing provisions and ongoing profit generation capacity -- and are expected to withstand a likely further deterioration in asset quality in accordance with Moody's expected scenario.

Following today's rating actions, ratings of the affected issuers are as follows:

DSK Bank AD

- D+ BFSR

- Baa3/Prime-3, long-term and short-term local and foreign currency deposit rating

- All ratings carry a negative outlook

First Investment Bank AD

- D- BFSR

- Ba2 long-term local and foreign currency deposit ratings

- All ratings carry a negative outlook

Raiffeisenbank (Bulgaria) EAD

- D+ BFSR

- Baa3/P-3 long-term and short-term local and foreign currency deposit ratings

- All ratings carry a negative outlook

MKB Unionbank AD

- D- BFSR

- Ba2 long-term local and foreign currency deposit ratings

- All ratings carry a negative outlook

The last rating action on DSK Bank was on 26 May 2009 when Moody's placed the bank's BFSR and local currency deposit ratings on review for possible downgrade. The rating action reflected Moody's review of stresses arising from the ongoing crisis and the increasing convergence between the government's ability to support the banks and its own debt capacity. At the same time, Moody's also downgraded DSK Bank's long-term local currency deposit rating due to the downgrade of the ratings of its parent bank, OTP Bank of Hungary.

The previous rating action on First Investment Bank was on 26 May 2009 when Moody's placed the bank's BFSR, long-term local and foreign currency deposit and the ratings assigned to its EMTN program on review for possible downgrade.

The previous rating action on Raiffeisenbank (Bulgaria) EAD was on 1 April 2009 when Moody's downgraded the long-term and short-term local currency deposit ratings of the bank to Baa3/Prime-3 from Baa1/Prime-2, with a negative outlook.

The previous rating action on MKB Unionbank was on 21 May 2009 when Moody's downgraded the long-term local and foreign currency deposit ratings of the bank to Ba2 from Ba1, with a negative outlook.

The principal methodologies used in rating these banks were Moody's Bank Financial Strength Ratings: Global Methodology, published in February 2007, and Moody's Incorporation of Joint-Default Analysis into Moody's Bank Ratings: A Refined Methodology, published in March 2007, which are available on www.moodys.com in the Rating Methodologies sub-directory under the Research & Ratings tab. Other methodologies and factors that may have been considered in the process of rating these issuers can also be found in the Rating Methodologies sub-directory on Moody's website.

At the end of September 2009, DSK Bank had total assets of BGN8.688 billion (EUR4.440 billion), Raiffeisenbank (Bulgaria) EAD had total assets of BGN6.815 billion (EUR3.484 billion), First Investment Bank had total assets of BGN 4.031billion (EUR2.061 billion) and MKB Unionbank had total assets of BGN1.592 billion (EUR813.98 million). All the banks are headquartered in Sofia, Bulgaria.

Limassol
Mardig Haladjian
General Manager
Financial Institutions Group
Moody's Investors Service Cyprus Limited
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

Limassol
Elena Panayiotou
Analyst
Financial Institutions Group
Moody's Investors Service Cyprus Limited
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

Moody's takes actions on four Bulgarian banks' ratings
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