First Investment Bank to accumulate BGN 206m capital buffer post AQR and stress test results, according to Bulgarian National Bank announcement after completing a full banking system asset quality review (AQR) and stress test.

BSE-listed First Investment Bank, 3rd largest bank in the country, passed the AQR and stress test with the biggest balance sheet correction – BGN 419m adjustment to Dec. 31 2015 position due to loan provisioning and BGN 285.5m correction after taking into account June 30th 2016 operating results. The bank posted 11.3% CET1 ratio pre-AQR which fell drastically to 5% post-AQR. With regards to the main stress test results, under the regulator’s baseline scenario the bank’s CET 1 ratio stood at 9.9% and was a negative 8.7% under the adverse scenario.

Measures to be implemented by First Investment Bank

To fill the capital gap the bank and the regulator have agreed on a set of measures. These include profit retention, further exposure de-risking and portfolio diversification, sell-off of non-core, foreclosed and fixed assets and a capital raise by April 2017. In a statement, the bank announced it “will take necessary actions to arrange external capital raise on the financial markets in presence of favorably conditions”. Overall, post AQR adjustments value the bank’s equity at c. 466m as of June 2016 or 1.8x above current market cap of BGN 250m.

Nevertheless, the AQR did not assess banks’ related party exposure which was the main issue with regards to the collapse of Corporate Commercial Bank in June 2014.

No adjustments for public Central Cooperative Bank

No adjustments for BSE-listed Central Cooperative Bank  post AQR, according to Bulgarian National Bank announcement after completing a full banking system AQR and stress test. Net AQR adjustments due to loan provisioning stood at BGN 18k and post AQR CET 1 ratio remained unchanged at 11.6%. Main results from the stress test revealed a 13.9% CET 1 ratio under the baseline scenario and 6.5% CET 1 ratio under the adverse scenario.

Scope of AQR and stress test

The AQR and ST covered all 22 banks licensed by the BNB excluding the 6 foreign bank branches operating in Bulgaria. The AQR consisted of 9 work blocks and was conducted between 15 February and 30 June 2016. Total assets of BGN 84.2 billion as at 31 December 2015, or 96% of the banking system were subject to asset quality review. Over 3,400 individual credit files were reviewed, equivalent to BGN 21.6 billion or 75% of the banks’ corporate and large SME loan books.
The ST was conducted in July 2016 with a purpose to assess the resilience of the banks in Bulgaria to absorb shocks from hypothetical negative financial and macroeconomic developments.

BNB report key findings

The banking system remains well capitalized, after reflecting the results of the AQR, with a CET1 capital ratio of 18.9%, well above the 4.5% regulatory minimum. Furthermore, the individual bank results indicate that the capital adequacy of all banks remains above the required regulatory minimum. The results from the ST confirm the strong capital position and resilience to potential shocks of the banking system. The individual bank results vary and are not intended to be compared against pre-set numerical thresholds. Some banks shall be required to maintain the existing capital buffers while others shall aim to restore the coverage of their capital buffers, taking into account the AQR adjustments. Whereas the ST results are based on hypothetical scenarios and as such they do not imply direct capital adjustments, these results will feed into the supervisory review and evaluation process and the banks’ capital planning.

Full BNB report