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No Capital Shortfall for Investbank after the Asset Quality Review

July 31, 2019

The analysis of the ECB’s Asset Quality Review results showed that Investbank JSC has no Capital Shortfall after the AQR, with a minimum required threshold of 8.0% the AQR adjusted CET1 Ratio is 10.01%, which is a very good result and fully covers the regulatory capital requirements under Art. 92 of Regulation (EU) No 575/2013 of the European Parliament. The Bank has no recommendations regarding its internal policies, rules and procedures.

The credit file review did not show inaccuracy in the classification of exposures, which is also observable from the minimal volume of reclassified exposures leading to the need for additional provisions.

In July 2018, Investbank JSC successfully acquired bank Victoria EAD. This operation had a positive effect on the capital position, with an absolute amount of the effect from negative goodwill of BGN 22.577 million. However, the acquired loan portfolio had a negative effect on the results of the stress tests, as 95% of the acquired loans were impaired. In both scenarios (baseline and adverse), the credit risk deterioration and increase in provisions are historically used to assess the credit risk. The loans from bank Victoria EAD were treated as newly acquired impaired loans and this had a negative impact on the stress test results, especially in the adverse scenario, where the shock of the projected deterioration of risk exposures is 2.5 times heavier compared to baseline scenario. Idiosyncratic shock was additionally applied in adverse scenario, which in combination with the retention and/or reduction of operating income on a static balance, had a negative impact on the projections of the financial result and capital position respectively. The effect of the idiosyncratic shock for a bank of the size of Investbank had a significant impact in interest rate expenses projections.

In 2018 the main shareholder, Festa Holding provided capital support to the Bank by increasing the share capital with a cash contribution of BGN 10 million based on a resolution of the General Meeting of Shareholders on 19.06.2018.

Investbank JSC has TIER1 indefinite hybrid instruments of EUR 20 million, which in accordance with the methodology are not included in the calculation of the capital ratios for AQR and Stress tests. After the baseline scenario stress test, the lowest ratio for Common Equity Tier 1 (CET1) is 5.67%. After a conversation to CET1 of existing hybrid instruments, the capital shortfall in the baseline scenario, whose highest value is EUR 14 million, is fully covered and the capital ratio reaches 9.03% with a minimum required threshold of 8.0%.

To cover the capital shortfall in the adverse scenario, which is hypothetical and unlikely to happen, Investbank JSC would need to ensure an additional capital buffer of EUR 51.8 million, which is fully covered by the existing hybrid instruments for EUR 20 million, financial result, disposal of assets and repaid loans.

The measures and recommendations that were identified in relation to the findings from 2016 Comprehensive Assessment were fully implemented, as reported in Investbank’s 2017 Annual Financial Statements, where the financial result is negative due to the full adjustments made in respect to the 2016 Asset Quality Review.

The six Bulgarian banks included to the Asset Quality Review and Stress Tests conducted in 2019 are the first to be evaluated using the revised AQR methodology. The methodology is designed to assess systemically important institutions which exclude Investbank. However, thanks to the timely launch of an IFRS 9 implementation project (the project started from the beginning of 2017) and the implementation of a comprehensive IT solution to assess credit risk, the Bank performed very well. The information required for the stress test calculations is very detailed, but this helps to establish whether the requirements of IFRS 9 are correctly applied.

The Bank’s moderately conservative risk management policy has been successful in the recent years, and Investbank will continue to apply good banking standards.

Supplement to: Investbank successfully passed the asset quality review under the ECB’s methodology