Bulgarian DSK Bank rating affected by parent’s downgrade

Moody's Investors Service has placed on review for possible downgrade ratings of two Bulgarian financial institutions: DSK Bank AD and First Investment Bank Ltd. This action reflects a review of stresses arising from the current crisis and the increasing convergence between the government's ability to support the banks and its own debt capacity. In the same action, Moody's downgraded DSK Bank's long-term local currency deposit rating due to the downgrade of its parent bank's (OTP Bank of Hungary) ratings.
Moody's downgraded DSK Bank's long-term local currency deposit rating to Baa2 from Baa1 and placed it on review for further downgrade. It also placed the D+ bank financial strength rating (BFSR, which maps to a Ba1 baseline credit assessment — BCA) and the Prime-2 short-term ratings on review for possible downgrade.
The downgrade follows Moody's downgrade of OTP Bank (Hungary), DSK Bank AD's parent bank. DSK Bank's deposit ratings incorporate an uplift reflecting a very high probability of support from its parent OTP Bank. Therefore, the downgrade of OTP's BFSR to D+ (mapping to a BCA of Baa3) from C+ (mapping to a BCA of A2) resulted in the downgrade of DSK Bank's deposit rating.
Moody's placed on review for possible downgrade First Investment Bank’s D bank financial strength rating, Ba1 long-term local and foreign currency deposit ratings, as well as the Ba1 and Ba2 ratings for senior and subordinated debt assigned to its EMTN programme.
The review of the two banks' BFSR will focus on the likely deterioration of the Bulgarian operating environment and its potential impact on the banks' financial fundamentals. Although currently the system's capitalisation level appears to be adequate, Moody's believes that, with the Bulgarian economy entering recession, the likelihood of corporate defaults is rising and that this is expected to lead to increased losses on the banks' corporate loan portfolios. Moreover, delinquencies in the Bulgarian banks' retail portfolios are also expected to rise, reflecting higher unemployment levels and a likely decline in housing prices — primarily resulting from reduced foreign investor demand in the country's real estate segment.
Moody's has refined its assessment of systemic support available from the Bulgarian state to capture the impact of the erosion of the local economy's underlying credit fundamentals and the low policy flexibility, due to the currency board, on the government's ability to support the banking sector.
DSK Bank AD is headquartered in Sofia and reported consolidated total assets of BGN 8.67 bln (EUR 4.43 bln). First Investment Bank Ltd. is also headquartered in Sofia and reported consolidated total assets of BGN 4.27 bln (EUR 2.18 bln) at the end of December 2008. (www.financialmirror.com)