Fitch gives MKB-owned Bulgarian bank BBB+, Rating Watch Negative rating

Hungary's MKB Bank owns 94% of MKBU. Germany's Bayersiche Landesbank, in turn, owns MKB Bank. 

Fitch said on Monday that it has also assigned MKBU a Viability Rating of 'b+' and a Support Rating of '2'.

MKBU's Issuer Default Rating (IDR) and Support Rating are based on the high probability of support that MKBU could expect, if required, from MKB Hungary ultimately provided by BayernLB. The IDRs are not constrained by Bulgaria's Country Ceiling of 'BBB+' and any positive revision of the Country Ceiling would not trigger similar rating action on the IDRs.

The Rating Watch Negative reflects the pending decision of the European Commission (EC) in respect to a restructuring plan for BayernLB, which in Fitch's opinion could include a sale of the East European business, including the whole MKB Group. The EC's decision is expected to be announced in Q311. If BayernLB is required to sell MKBU or MKB Hungary, Fitch will review its assessment of support. The ultimate sale of MKBU could result in a multi-notch downgrade of the bank should a new owner be significantly less able to provide support.

MKBU's Viability Rating reflects the bank's satisfactory profitability and adequate liquidity, as well as its reliance on parent funding, somewhat weaker asset quality compared to peer banks and some loan book concentrations. Capitalisation is currently acceptable.

MKBU's financial performance in 2010 and H111 was supported by moderate loan growth and lower funding costs. In Fitch's opinion, profitability will be challenged in 2011 by still high provisions, given that operating difficulties persist for MKBU's main client segment, SMEs. In addition, MKBU plans to improve reserve coverage, which was lower than at comparable banks at end-2010.

The bank's asset quality ratios at end-2010 were slightly weaker than at peer banks, reflecting less loan book diversification and more exposure to sectors such as real estate and construction. However, the asset quality ratios were still slightly better than banking sector averages, with loans overdue by 90 days of 12.1% of gross loans compared to 13.5% for the banking sector at end-H111.

MKBU's funding from MKB Hungary is significant (28% of non-equity funding at end-H111), and no major change in the funding structure is expected. Liquidity is supported by cash and balances with the central bank and government securities (17% of the non-equity funding).

Fitch views capitalisation as moderate given expectations of continued loan impairment charges. In June 2011, the bank benefited from BGN42.6 million of new equity from its shareholders, which was used to prepay its subordinated debt (BGN40 million). Tier 1 capital and total capital ratios stood at 13.5% at end-H111.