Rating agency Moody’s said it has downgraded Bulgaria’s First Investment Bank (FIBank) due to high level of non-performing loans (NPLs) that pose risks to the capital base.

FIBank is among six banks that are undergoing a comprehensive analysis by the European Central Bank (ECB) along with UniCredit Bulbank, DSK Bank, United Bulgarian Bank (UBB), Central Cooperative Bank and Investbank.

FIBank and Investbank had to build up additional capital buffers, of BGN205.7mn (€105.2mn) and BGN33.3mn respectively, according to the previous asset quality review (AQR) and stress test of the banks in Bulgaria, carried out by Bulgaria’s central bank the BNB in 2016.

Moody’s downgraded FIBank’s long-term deposit rating to B2 from B1, maintaining the stable outlook. The baseline credit assessment (BCA) and Adjusted BCA were downgraded to b3 from b, the long-term Counterparty Risk Rating (CRR) was downgraded to Ba3 from Ba2 and the long-term Counterparty Risk (CR) Assessment to Ba2(cr) from Ba1(cr). The short-term deposit rating and CRR were affirmed as Not-Prime and the short-term CR Assessment at NP(cr).

“Today's rating action reflects Moody's view that the bank's high level of problem loans and significant repossessed assets, predominantly foreclosed properties, continue to pose a risk to the bank's capital base, and that this risk is more compatible with a b3 BCA,” Moody’s said in a press release.

It added that the previous assessment has incorporated an expectation that these nonperforming assets would have already declined to a materially lower level.

FIBank’s ratio of loans overdue more than 90 days to gross loans declined to 13% as of the end of 2018, from 17.5% at the end of 2017 thanks to the bank’s restructuring efforts, recoveries and foreclosures, and write-off and sales of problematic exposures.

“However, in contrast, under the expanded European Banking Authority nonperforming exposure definition (stage 3 loans under IFRS 9), problem loans to gross loans were slightly up to 21.9% as of end-2018 as the bank transitioned to the new IFRS 9 accounting standard, compared to 21.7% at end-2017,” Moody’s noted.

The ratio of problem loans-to-tangible common equity (TCE) and aggregate loan loss reserves was 91% as of end-2018 versus 83% at end-2017, while adding repossessed assets to the numerator brings the ratio to 143% (end-2017: 148%), the rating agency also wrote.

“Moody's considers that the risk to the bank's capital from its stock of problem loans not covered by provisions, along with the exit risk from the bank's significant real estate portfolio, remains high, and that these characteristics are better aligned with a b3 BCA,” the statement reads.

It also noted that “the bank's corporate governance practices are still evolving and are weaker than global best practices” and that the concentration of the bank's ownership in the hands of two individuals “may give rise to some key man risk issues”.

FIBank’s stable outlook reflects Moody's expectation that the downside risks relating to the bank's nonperforming assets, will be balanced by an adequate financial performance, thanks to the improving operating environment in Bulgaria.