Moody’s cuts Bulgaria banking ratings to negative

Moody's Investors Service has cut the credit outlook for Bulgaria's banking system to ‘negative’ from ‘stable’ and lowered to negative from stable the outlook on the Bank Financial Strength Ratings (BFSRs) and long-term local currency deposit ratings of DSK Bank PLC and Raiffeisenbank (Bulgaria) EAD.
The outlook on all ratings of First Investment Bank and MKB Unionbank has been changed to negative from stable. The outlook on all ratings of International Asset Bank has also been changed to stable from positive.
"The change in the ratings reflects the weakening operating environment in Bulgaria and expectations that it will have a severe impact on the banks' financial fundamentals, mainly profitability and asset quality," said Elena Panayiotou, Moody's lead analyst for Bulgarian banks. The rating agency expects the domestic economic growth and activity to slow down significantly in the short-to-medium-term, mostly due to anticipated lower levels of foreign direct investment in the country — mainly in the construction and the real estate sectors — a reflection of the global financial conditions which affects investor behaviour.
"The performance of the export industry and the tourism sectors is expected to deteriorate further, while private consumption is also likely to decline. Subsequently, such weakening economic conditions in Bulgaria are likely to have an impact on the growth prospects and the financial performance of banks operating in the country," added Panayiotou.
Furthermore, the financial difficulties faced by the foreign parents of Bulgarian banks in their home countries is expected to impact the level of funds channelled from the parent banks to their Bulgarian subsidiaries but also elevate the costs of these funds. Fierce competition for customer deposits in Bulgaria is likely to continue to put further pressure on the banks' funding costs, their interest rate margins and hence their profitability levels.
The rating agency notes that the rapid credit expansion that has been taking place in Bulgaria over the recent years, together with the rising levels of consumer indebtedness in the country, has raised concerns about the future performance of the banks' credit portfolios once loans start to season and go through an economic cycle. As Bulgaria's economic environment is expected to weaken and unemployment levels to increase further, Moody's believes that the banks' asset quality metrics will deteriorate, exerting a downward pressure on the banks' earnings, capital cushion and therefore their ratings.