Pitch or Ditch for the Bulgarian Credit Ratings?

Abstract

Credit rating agencies apply the same set of core principals to analyze banks in Bulgaria, Germany or North America, but the relative importance between factors differs. This article contributes to an understanding of the dynamics in formation of a bank’s business franchise, and assessing its performance in one of the European emerging markets. A short review on the recent economic history elucidates constituents of the currency board and current fiscal regime. Bulgaria has still to achieve market maturity, so assignment of higher financial strength ratings is still to come. The unique Bulgarian combination of currency board and a very preferential tax regime, frequently explains the will of local politicians to deviate from the strategic European vision of cohesion, a sense of common purpose, shared identity and unity. Privatization and deregulation in Bulgaria occurred during the period of 1993–2003. Country had chosen centralized method for privatization, entirely focused on selling state-owned banks to foreign strategic partners. Prior privatization there was a demonstrated lack of prudent credit risk models and business-wise decisions. Gradually foreign strategic investors introduced culture of adhering to regulations and professionalism. However post 2004, banks exposed to local use and controls were involved in ensuring financial support to other business endeavors of their owners. The narrow local market and interrelated business environment encouraged all material bank owners to participate in varieties of other financial and non-financial businesses. Retail banking and investment banking overlapped, having no clear borderline between related and non-related businesses. This resulted in the construction of the local financial leaders, possible regulatory imperfections and political crises.

10.10 Appendices

Dynamics of Credit Ratings and Outlooks Assigned to Bulgaria (Table 10.4)

Table 10.4 Dynamics of credit ratings and outlooks assigned to Bulgaria

Banks in Bulgaria Ranked by Total Assets as of Year-end 2013 (Table 10.5)

Table 10.5 Year-end 2013 ranking of Bulgarian banks by total assets. Source BNB

Boom and bust of the Group of Corporate Commercial Bank AD (CCB) (Tables 10.6 and 10.7)

Table 10.6 Main business and political developments as related to the group of Corporate Commercial Bank AD. Sources BNB, “Capital” and “Banker” newspapers

Table 10.7 Main data from consolidated and audited financial statements published in respective annual reports of the Corporate Commercial Bank AD