On 13 December the
rating agency Standard & Poor's issued an announcement regarding its
sovereign credit ratings for Bulgaria. Below are excerpts from the S&P
announcement.
Rating Action
On Dec. 13, 2012 , Standard & Poor's
Ratings Services affirmed its long- and short-term foreign and local currency
sovereign credit ratings on the Republic of Bulgaria
Rationale
[...]
In our view, the banking system appears well-capitalized, with a capital
adequacy ratio of 16.7% and core Tier I ratio of 15.2% at end-June 2012. With
an increase in the domestic savings rate matched by robust growth in domestic
deposits over the past three years, banks have paid down their external debt, largely
owed to parent banks, by $4.7 billion between 2008 and 2011. The banking system
is predominantly foreign-owned and problems that affect foreign parent banks, such
as dislocations in the financial sectors of other European economies, may have
knock-on effects on their Bulgarian subsidiaries in our opinion. Greek-owned
banks own slightly less than one-quarter of banking system loans; however, we
note that the regulatory and prudential frameworks have been strengthened so as
to mitigate the risk of a funding or capital withdrawal by parent banks. In
terms of asset quality, the ratio of gross nonperforming loans (NPLs) to total
loans is still high at 16.9% at end-June 2012 (NPLs net of loan loss provisions:
11.3%) and we expect asset quality deterioration to peak and reverse by end-2013.
[...]
Also on 13 December,
the International Monetary Fund issued a public information notice and a
country report on Bulgaria
C. Financial Sector: Fortifying
Resilience
Background
30. The financial system is stable but
operating in a challenging low-growth environment (Table 8, Figure 6). The banking
system-wide capital adequacy ratio is high (16.7 percent in June 2012) with all
banks meeting the 12 percent regulatory minimum. Strong deposit growth and
subdued credit demand boosted liquidity (coverage ratio of 26 percent) and
allowed external funding to decline, although the stock of parent funding in
some banks remains sizeable. The difficult economic environment has taken a
toll on asset quality and profitability.
31. Rising asset
impairment could impede the recovery. NPLs were 16.9 percent of total loans in June 2012 and still
rising (Figure 7), but there is a high degree of dispersion across the system.
Weak growth, high corporate indebtedness, and a depressed real estate market
continue to pressure asset quality. A large stock of NPLs may constrain credit
availability once the recovery gains traction and savings and related deposit
growth ease, and it may also undermine the efficiency of credit intermediation
by locking in resources.
32. Tight supervisory policies have
reinforced buffers. The
BNB is closely monitoring banks, including through frequent onsite inspections,
high frequency reporting, and enforcing higher capital and liquidity buffers in
the relatively weaker pockets of the system that could be potentially exposed
to spillovers from the on-going euro-area crisis and where NPLs are higher.
Coverage of NPLs by accounting provisions stands at 45 percent, but additional
capital in the form of specific provisions (22 percent of NPLs) could be used
to cushion impairments (Box 1).
Box 1. Provisioning Regulations
In Bulgaria, banks must set up accounting
and specific provisions. The distribution between accounting and specific
provisions is uneven across banks depending on their provisioning practices.
– Accounting provisions follow
International Financial Reporting Standards (IFRS), reflect an incurred loss
assessment, and are booked as expenses, thus reducing profits.
– Specific provisions are calculated
according to a BNB methodology that embeds an expected loss model and are
deducted from regulatory capital. Specific provisions build additional capital
buffers which can be used to absorb losses, including from NPLs, provided that
minimum capital adequacy requirements are not breached.
33. The institutional framework to discuss
financial stability matters is working well. The Financial Stability Advisory Council meets quarterly
and provides a platform of cooperation among the BNB, the Ministry of Finance,
and the Financial Supervision Commission. The BNB also consults closely with
foreign supervisors, but does not participate in the Vienna II Initiative. The
Deposit Guarantee Fund has resources equivalent to 4.7 percent of the covered
deposits.
Policy Issues
34. A comprehensive strategy to address
NPLs would allow banks to better support the recovery. Banks should be encouraged to resolve
non-performing assets by loan restructuring, assets disposals, and write downs.
The process should be closely monitored by the BNB, which should press for
conservative provisioning, fair valuation of collateral, and strict recognition
of interest income on NPLs, based on certainty of cash inflows. Accumulated
buffers will be helpful in the resolution process.
35. Broader
measures would facilitate balance sheet repair of both banks and corporates. Introduction of a fast-track court
approval procedure for pre-agreed reorganization plans could help. This would
combine the efficiency of out-of-court negotiations with an expeditious bind-in
of dissenting creditors, thereby reducing costs and delays compared to recovery
proceedings. Out-of-court debt restructuring guidelines could also be explored,
which in other countries have facilitated speedy, cost-effective, and
market-friendly settlements, especially in cases involving multiple creditors.
36. Continued vigilance through close bank monitoring
and strong safety nets remain priorities. The BNB should continue to closely monitor banks and intervene
preemptively through targeted requirements to reinforce capital and liquidity
buffers in the relatively weaker pockets of the system. Plans to strengthen the
BNB’s bank resolution framework by introducing “purchase and assumption” and
“bridge bank” options should proceed quickly in line with the proposed EU
directive on bank recovery and resolution and the Financial Stability Board’s
indications.
37. The authorities consider
the banking system, with high buffers and increased domestic funding, well
placed to cope with risks. They
assess the risks to the recovery posed by NPLs as low since credit demand
remains subdued, liquidity high, and buffers adequate. With high deposit growth
and a lack of evidence of parent banks’ forcibly deleveraging, the authorities
see existing cooperation with foreign supervisors and EU colleges working well.
They see merit in fast-track court approval for corporate reorganizations while
they view existing out-of-court debt restructuring as satisfactory.
Source:
Mark Pleas
[contact]
