Moody's affirmed Municipal Bank’s long-term deposit rating at Ba3 and changed the outlook to negative from stable

Moody’s Investors Service (Moody’s) affirmed Municipal Bank’s Ba3 deposit rating, reflecting the view that the bank's standalone profile continues to be driven by high reported capital metrics, a deposit based funding structure and high liquidity, balanced against high problem loans and a material amount of real estate on its balance sheet, as well as by the bank's poor profitability, efficiency and competitive positioning. The negative outlook on Municipal bank's deposit ratings was driven by the significant execution risks that the bank faces in its strategy to reposition its balance sheet to deliver higher sustainable profitability by expanding the higher return retail and corporate lending business. Moody's also considers that the bank's new strategy and risk appetite unproven. Municipal bank returned to profitability in 2018, with a net income of BGN 6.8m after posting a loss of BGN 0.6m in 2017. However, income for 2018 was boosted mostly by one-off gains. The outlook may be changed back to stable after a sustained improvement in profitability and competitiveness, along with improvement in the bank's asset-quality or a reduction in problem loans and real estate assets, and conservative underwriting of new loans. Municipal bank's ratings could be downgraded if the bank's competitive position does not sustainably improve and the bank is not able to improve its asset quality. Deterioration in the bank's solvency or a higher risk appetite resulting from the bank's new strategy would also have negative rating implications.