“To prepare a realistic plan for additional capital support in order to ensure the sustainability of the equity of the Bank.”

This is one of the recommendations in the classified report on First Investment Bank (FIB) of “Supervision Inspection” of BNB in 2012. And it is something that was never done, but BNB kept silent until the results of the stress tests.

The reasons for the capital shortages are listed and explained in great detail, including the concentration of loans to connected parties and to offshore companies with unclear ownership. This is proof that BNB inspectors have been fully aware of what was happening in that Bank. There was no need of external auditors and stress tests, but a simple application of the existing laws and regulations of the central bank. Apparently, the cause for not doing so is political reasons and corruption.

The inspectors who prepared and signed the report under order RD 22-0301 / February 16, 2012 of the former Head of Banking Supervision, Rumen Simeonov, are Todor Buzolov Nina Kirilova, Sylvia Slavcheva and Dimitar Petrov.

Bivol consulted the contents of the report with banking experts, who were unanimous – the inspectors have worked conscientiously, comprehensively and have done high quality work. Therefore, the criticism and the findings about the failure of BNB’s “Banking Supervision” should be entirely directed to the political leadership. There is capacity, but there is no will to end the abuses.

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The fact that the text of the report has been coordinated with the Director of BNB Directorate “Supervisory Monitoring of Credit Institutions”, Tsvetan Gunev, is an important detail.

Tsvetan Gunev and Rumen Simeonov are currently defendants in the case with the collapsed Corporate Commercial Bank (CCB). The prosecutors are accusing them of inaction, after a similar critical report in 2010 found violations in the failed bank, but Banking Supervision executives failed to undertake anything.

Similar and even more serious violations are listed in the report on FIB, but both BNB and the Prosecution have not done a thing. To this day they continue to conceal the drastic misuse of the money of depositors.

Bivol is now publishing the next part of the report (p. 10-22), which includes the inventory of violations from previous inspections, recommendations from previous inspections, analysis of credit risk and concentration risk. The first part – p. 1 – 9 – can be seen here.


Page 10 VIOLATIONS FROM PREVIOUS INSPECTIONS

  • Article 5, Paragraph 1 of Regulation №9 of the central bank (Bulgarian National Bank, BNB) – the Credit Committee does not to apply all criteria for evaluation and classification of risk exposures provided for in the Regulation.

This violation was established by the current inspection as well.

  • Article 5, Paragraph 1, in conjunction with Articles 9, 10 and 11 of Regulation №9 of BNB – the Bank (First Investment Bank, FIB) cannot report as “regular” the following loans because of arrears: “Mining Company” Ltd; “Trial Bulgaria” Ltd; “Calista 2004” Ltd; “New Express Finance” Ltd.; “Pat Engineering – M” JSC (Road Engineering); “Remontno-vyzstanovitelno predpriyatie Kione”JSC (Repair-restoration Enterprise Kione); “Patni stroezhi” JSC (Road Construction); “ZHP Consult” Ltd; (Railway Consult) “Transdiskont” Ltd; “Latis” Ltd; “Bagra” Ltd; “Burgaski korabostroitelnitsi” JSC (Burgas Shipyards); “Holding Patishta” JSC (Holding Roads); “Correct Property” Ltd; “Brikel”; “Bulgarska Morska kompaniya PF” Ltd (Bulgarian Maritime Company PF). The loans must be reclassified to the correct classification group.

This is partially fulfilled. The Bank reclassified into a higher-risk group the loans of Kioene, Transdiskont and Bagra. Correct Property and Latis have no exposures.

  • Article 5, Paragraph 1 in conjunction with Article 3, paragraph 2 of Regulation №9 of BNB – the Bank must reclassify to the correct classification group, based on connectivity of loans, to the following: “Vagledobivna companiya” Ltd (Coal Company), “Vagledobiv Bobov Dol” Ltd (Coal Company Bobov Dol) “Port flot Burgas” Ltd (Port Fleet Burgas), “Portovi flot 99” Ltd (Port Fleet 99), “EAZ” JSC, “Draft” Ltd. “Toplofikatsiya Pleven” JSC (Heating Utility Pleven) “Megalink” JSC, “Zhelezopatna infrastruktura” Holding (Railway Infrastructure) “Argus Real Estate” JSC, “DPS-1” JSC, “TPP Maritza 3” JSC, “Natsionalen izsedovatelski institut po transporta” Ltd (National Transport Research Institute), “Intercount Investments” Ltd.

Not fulfilled, some exposures were reclassified at a later stage on the basis of individual assessment.

  • Article 13, Paragraph 4 of Regulation №9 of BNB – the exposures of “Nadine Metal” JSC; “Nadine Commerce” Ltd; “Nadine Trans” Lt.; “Tower Sofia” Ltd.; “Regent Balkan” Ltd and “BH Air” Ltd have been restructured, but continue to be reported as “regular”. The loans must be reclassified to the correct classification group.

Partially fulfilled; only the exposure of Regent Balkan has been reclassified.

  • Article 12 and paragraph 1 of Regulation №9 of BNB – for part of the reviewed exposures, the Bank incorrectly reported as “acceptable” collaterals which do not meet the criteria for such and incorrectly calculated the risk value of exposures, respectively the amount of specific provisions.

Not fulfilled.

 

Page 11 RECOMMENDATIONS OF PREVIOUS INSPECTIONS

 

Credit Risk

 

  1. Undertake measures to enforce all criteria for evaluation and classification of risk exposures set by the Credit Committee.

 

The recommendation remains in force.

 

  1. Measures should be taken for automatic reclassification by the bank’s system, based on days of arrears and for corporate loans.

 

The recommendation remains in force.

 

  1. Limit the practice of repeated annexations of credit agreements without actually receiving repay on them.

 

The recommendation remains in force.

 

  1. When drafting proposals to the competent authorities to include a written opinion on the risk assessment of transactions by the “Risk Management” Directorate.

 

The recommendation remains in force.

 

  1. Remedy violations of the regulatory framework.

 

The recommendation remains in force.

 

  1. The “Risk Management” Directorate should participate effectively in the loan process by written coordination of credit transactions or by preparing a written opinion on them.

 

The recommendation remains in force.

 

  1. As part of the regular financial analysis, in addition to the analysis of balance sheet data, to perform analysis of the business performance of companies-borrowers and connected parties, of the sectors in which they operate, and their ability to service their credit obligations regularly.

 

The recommendation remains in force.

 

  1. The Credit Committee to apply all criteria laid down in Regulation №9 of BNB for the assessment and classification of risk exposures.

 

The recommendation remains in force.

Liquidity Risk

  1. To update in accordance with the current regulatory framework the “Rules and Procedures for Managing Liquidity” in the “Plan for Liquidity Management of the Bank in Case of Liquidity Crisis”;

The recommendation is implemented.

  1. To update the scenario of the prepared liquidity stress test – the “liquidity crisis” scenario by the “Risk Management” Directorate. The inspectors are of the opinion that the assumptions for the outflow of funds of citizens are not sufficiently conservative.

The recommendation has not been implemented. The assumptions about withdrawals of resources are not sufficiently conservative, especially for retail deposits.

Page 12

  1. In managing liquidity risk, to analyze the level and diversification of liquid assets, concentrations in funding and compliance with internal bank limits.

The recommendation is implemented.

Capital

  1. To remove existing inaccuracies and irregularities in the preparation of the report under Regulation №8 of BNB.

This recommendation can be considered as largely fulfilled.

  1. To improve the process of internal analysis of capital adequacy and the management of the capital position.

The recommendation remains in force.

  1. To draw up a realistic plan for additional capital support in order to ensure the sustainability of the equity of the Bank.

The recommendation remains in force.

Internal audit

  1. The Specialized Internal Audit Department to use a risk-based approach in its activities, focusing on the areas of highest risk for the Bank. In this connection, to raise the priority of the audit process in assessing credit and concentration risk and regulatory compliance.

The recommendation remains in force.

  1. As part of its internal control function in the Bank, the Internal Audit Department should be acquainted with the findings of supervisory inspections and should monitor the removal of the established violations.

The recommendation remains in force.

 

Page 13 CREDIT RISK; CONCENTRATION RISK

The credit risk is underestimated and its actual reporting and provisioning would deteriorate significantly the basic indicators for:

– Assessment of asset quality;

– Ability to generate profit;

Capital position of the institution;

The Inspection has reviewed a sample of 140 loans to 49 corporate borrowers with a gross value of 1,355,822 thousand levs, representing 38.86% of all corporate loans and 32% of all gross loans.

After summarizing the information, the Inspection has found that exposures with a gross value of 1,002,842 thousand levs (74% of the sample) did not meet the criteria of Regulation №9 for the group in which they were classified by the Bank, and in each case they appear in a lower-risk group:

  • Loans with a gross value of 320,699 thousand levs (23.65% of the sample), classified as “regular”, are eligible for the group “under observation”;

 

  • Exposures amounting to 682,143 thousand levs, mainly classified as “regular” (50.30% of the sample), are eligible for the groups “non-performing loans” (NPL) and “loss”;

After establishing the violations, the Inspection changed the key indicators of credit risk:

The amount of the generally classified assets grew 2.25 times after the addition of the exposures classified by the Inspection;

There is a need of over 200 million levs in additional specific provisions for credit risk;

NPL loans reached 928,096 thousand levs or 21.72% of gross loans, while the Bank reported 246,053 thousand levs (5.76% of gross loans);

Concentrations of exposures to several large groups of corporate clients with various indications of connectivity have increased pressure on its capital position.

A study of the loan portfolio of the Bank and the review of the examined sample established the existence of several groups of exposures to corporate clients (formally unrelated) with various indications of connectivity. These groups are a big part of the corporate loan portfolio (about 60%) and were created under the following features:

  • Companies involved in the purchase of the assets of the steel mill Kremikovtzi JSC, dealing with the processing of scrap metal and other sectors of the economy (the amount of these exposures exceeds over 1.5 times the capital base reported by the Bank);
  • Companies with main activity in mining and energy (over 50% of the capital base);
  • Companies with business focused mainly on road construction and infrastructure, shipbuilding and others (over 40% of the capital base);
  • Companies operating in the real estate sector (project financing), whose obligations for interest and principal will be repaid at maturity mainly from the sale of property purchased with loans (nearly 40% of the capital base);
  • Companies with interests in tourism and hotel business, operation of aircraft and others (about 25% of the capital base);
  • Companies with main activity processing, import and trade of sugar, real estate trade (about 20% of the capital base);

Page 14

  • Companies with main activity in the sector of extraction and processing of non-ferrous metals (over 12% of the capital base).

Significant problems in servicing their obligations were established for the majority of borrowers in these groups. In most of these exposures, concessions are made to customers through multiple debt restructurings which significantly reduce the actual repayments. If the effect of supervisory adjustments is to be included, the amount of these groups compared to the adjusted capital base increases significantly.

The processes of research and establishment of concentrations in the loan portfolio, their control and reporting are not effective.

  • Significant omissions are allowed in the systems for identifying large internal exposures to connected parties by different types (legal and economic) and in the control of these activities. Both, the connectivity related to large exposures and internal loans are not reported correctly in the report under Regulation №7 by December 31, 2011(see violations of Article 44 and Article 45 of the Credit Institutions Act, CIA);

 

  • The Bank continues to allow omissions in reporting economic connectivity (see violations of §1, item 5 of the Supplementary Provisions of CIA);

 

  • Cases of reporting loans to persons presenting joint risk in different classifications persist (see violations of Article 3, Paragraph 2 of Regulation №9);

The Bank still does not examine and analyze concentrations by informal signs.

  • The connectivity to customers on the base of joint collaratelisation is not taken into account. The granting of the so-called “conditional” credit that provides collateral to the exposures of one or more borrowers is not always the reason, according to the institution, to report them as connected. By December 31, 2011, the Bank has authorized 369 “conditional” loans worth 1,713,167 thousand levs as the “acceptable” collateral for them amounts to about 441,798 thousand levs. These loans exceed more than three times the capital base of the Bank;

Connectivity of customers based mutual indebtedness is not taken into account.

Much of the credit portfolio is formed by loans granted to companies with offshore and foreign registration or local companies with owners of such registration, which hampers greatly the establishment of connectivity, respectively the occurrence of concentrations and exposes the Bank to a great risk.

  • Borrowers with offshore owners have loans with a gross value of 1,026,934 thousand levs (29.45% of the corporate portfolio), while there is almost no information about the owners of offshore companies in the files;

 

  • The loan portfolio in the Cyprus Branch registers an annual growth rate of nearly 40% and reached 299,211 thousand levs (54% of the capital base). These loans are not recorded in the Central Credit Register (CCR), the information about them is concentrated in a separate unit within the Bank, which completely manages the credit process;

 

  • Loans to companies registered abroad (not including borrowers in the Cyprus Branch) amount to 258 million levs, 47% of the capital base; they are granted by the corporate banking in the head office of the Bank and are partly recorded in the CCR;

 

  • The two groups together – loans in the Cyprus branch and loans to companies registered abroad – have a total value exceeding the capital base of the bank (556,880 thousand levs) and should be subject to special monitoring by the management;

Page 15 – 17 Reported concentrations by sectors and products in the loan portfolio are within the limits specified by the Bank.

  • Loans in the commercial sector retain the highest share (29.54%) of the loan portfolio before impairment and only this portfolio exceeds the limit prescribed by the Bank (25%);

 

  • The manufacturing industry (11.75%) and professional activities and scientific and technical research (7.13%) are next by share of the portfolio;

 

  • The limit of 50% of the gross portfolio for loans to individuals (18.11%) is not reached.

The Bank continues to allow violations of regulatory requirements for classification of risk exposures – a significant portion of its receivables is not adequately assessed and provisioned.

  • Exposures with arrears, corresponding to groups “under observation”, “non-performing” and “loss” are reported in more a favorable classification group, most commonly as a “regular” (listed in the chapter Violations);

 

  • Exposures with entirely overdue debt (principal and interest), classified by the Bank as such for more than 180 days, continue to be reported as “under observation”;

 

  • Exposures based on a bad financial situation, lack of real cash, permanent shortage of money and others are not reclassified (over 33% of the sample);

 

  • Exposures to connected parties, presenting joint risk, are reported in different classification groups (described in the violations of Article 3, Paragraph 2 of Regulation №9);

 

  • Loans amounting to 47,547 thousand levs, arising from off-balance sheet commitments are recorded as “regular”;

 

  • Loans to bankrupt companies (ABV 2004 JSC) are not recorded in the correct classification group;

 

  • Loans to one borrower are reported in various classification groups (Bill to Overseas Trading Ltd., Port Investment DEVELOPMENT – Bulgaria 2 Ltd, etc.);

 

  • Unauthorized overdrafts that the Bank enters as credit are not classified in the group of the other loans of the borrowers when they fail to pay the required fees and commissions;

 

  • Restructured exposures continue to be reported as “regular”;

 

  • Collaterals within the meaning of Regulation №9, which do not qualify as such, are documented as “acceptable”;

 

  • As a consequence of the above violations, the amount of specific provisions for credit risk is incorrectly determined;

The Bank applies various techniques to delay the manifestation of credit risk, thereby improving the performance levels of asset quality, reducing expenses for impairment and the amount of specific provisions.

  1. The majority of these techniques are associated with multiple changes of conditions of loans to enterprises, which delays the manifestation of the really existing credit risk:

Negotiating very extended repayment periods for interest and / or principal and subsequent multiple annexations of the contracts to provide new grace periods, deferring payments, meanwhile the debt continues to be reported “regular”. This type of loans is a significant part of the corporate segment of the Bank (95% of the sample) and is the largest and riskiest exposure;

One time maturity of the principal, and, in many cases, of the interest on the loan. From the loans reviewed in the sample, 37% have an agreed initially or at a later stage payment of debt at maturity. These are mainly large corporate loans to finance investment projects to purchase real estate and construction, with the repayment depending entirely on the implementation of the projects. The loans with one time repayment at maturity amount to 235,319 thousand levs (5.53% of all gross loans) and are all classified as “regular”;

Postponement of the due date in order to maintain the group;

Repayment of principal and interest with a newly-granted credit by the Bank to the same company or a person connected with the borrower;

Multiple annexations of contracts in order to reschedule overdue payments on loans and to reduce / reset defaults (43% of the sample) – this practice is often combined with extended grace periods, which gives the Bank formal reasons to report such exposures as “regular” or “under observation”;

The Bank allows debt repayments through interbank accounts of borrowers whose accounts have been frozen by State organizations or other banks and they continue to be reported as “regular” exposure (TPP Maritsa 3 JSC, Holding Roads JSC, Mining Company Ltd, etc.). ;

Loans with a large amount of accrued interest (indicating frequent rescheduling of debt due to problems with repayments) and lack of “acceptable” collateral are reported as “regular”;

  1. Artificially enhancing the quality of the loan portfolio is achieved by transferring (assigning) problematic exposures to legal entities that purchase these exposures with credit granted by the Bank (Sirius Corporation Plc, Sikinos Trading Ltd, Outdoor Advertising Media Corp.).
  2. Incorrect reporting of restructured loans as “regular”.

With the expiry of the recognition of collateral of some exposures as “acceptable”, by the middle of 2012, the Bank will have to charge a significant amount of SPKR.

Additional pressure on the Bank’s capital is exerted by exposures whose deadline for recognition of collateral as “acceptable” expires in coming months (mainly Port Investment Development – Bulgaria 2 – over 69 million levs) and additional specific provisions for credit risk should be calculated  (Article 12, Paragraph 4 of Regulation №9 and Paragraph 1, Item 1).

The Inspection expresses reservations about the practice used by the Bank to recognize “acceptable” collateral, constituted as such for a “conditional” loan, as “acceptable” for real exposures secured by “conditional” loans.

  • Such practice of “automatic recognition” would be inappropriate from a regulatory standpoint, as the provision by the Bank with the collaterals in question and starting a procedure for their liquidation are neither unconditional nor are they clearly stated in the contracts of the actual exposures. In case of default of actual exposures, they are replaced with exposures arising in connection with the absorption of funds under the “conditional loan”. However, this does not imply immediate claim of the credit in question or immediate action to implement the collateral provided by the “conditional” loan.

 

  • The credit relationship between the Bank and a borrower with real credit does not include a legal possibility to treat and report the collateral under the contract for “conditional” loan (mortgaged real estate in favor of the Bank) as collateral on real credit as because in fact a mortgage listing for that exposure does not exist. The strictly formal nature of the procedure to register a mortgage requires it to be established individually on certain properties and for a certain amount of money. The law postulates comprehensively all elements of such registration, where, in addition to the individualization of the property and the amount of the secured receivable of the debtor and the creditor, the procedure of registration should also include submitting the contract from which the receivable of the creditor derives. The Bank is treating as “acceptable collateral” in the so-called “real deal” part of the value of the property mortgaged under the so-called “conditional loan”, leaving it unclear what would be the legal instrument, which in this case would prove the existence of an “established first mortgage” in accordance with the requirements of Regulation №9. In view of the above, we believe that there are no grounds for the implemented by the Bank’ treatment of collateral provided under the contract for “conditional” loan as “acceptable” collateral for other loans to the same borrower or third parties.
  • Along with the above statement, regarding the supervisory treatment of collateral, it should, however, be taken into account that the contract for the “conditional” loan provides for its early collectability in case of a default by the borrowers in the so-called “real deals”, which indicates that in such case there are no contractual obstacles for the Bank to duly proceed with the settlement of its receivable from the established collaterals under the “conditional loan”.

The Inspection is of the opinion that the unused for collateralization part of the “conditional” loan must be considered off-balance sheet credit commitments and be accordingly indicated in supervisory reporting in accordance with the regulations and instructions to them.

The collateralization of corporate loans with “acceptable” collateral is not high.

36% of the gross corporate loan portfolio is covered with “acceptable” collateral within the meaning of Ordinance №9, according to information provided by the Bank.

For retail exposures that share is 48% and 69% for vehicles, which provides a greater degree of protection for the Bank against problems in their repayment.

The level of provisioning is one of the lowest in the banking system and does not correspond to the quality of the loan portfolio.

Maintaining low provisioning (impairment and SPKR), significantly below the average levels for the banking system is typical for the Bank and that does not match the quality of the loan portfolio. The coverage for losses from credit risk in the loan portfolio is 3.25% (against a 10.25% average for the banking system) and the rate of provisioning of assets is 2.23% (7.11% for the system).

Page 18 The retail exposure risk is underestimated – some of it is not adequately classified and provisioned which violates regulatory requirements.

By December 31, 2011, the retail exposures were 770,847 thousand levs and represented 18.04% of the loan portfolio and 12.37% of its gross assets.

The Bank allows significant gaps in the classification and provisioning of retail exposures. The Inspection reached this conclusion after examining consumer and mortgage loans in the Bank’s system (with indications of higher risk than the one reported by the Bank). It found the following violations:

  • According to the established repayment plans, a considerable part of the examined loans is not served on time and there are arrears of over 180 days without the exposures been classified as “loss”;
  • There are cases where loans are classified in the correct classification group, but the necessary amount of provisions is not allocated (without having “acceptable” collateral).

These identified cases of incorrect classifications and provisioning warranted the assessment of the automated system for reclassification and provisioning of retail exposures, used by the Bank, as unreliable and in need of improvement especially in carrying out the process of automatic reclassification of loans based on accumulated past due days.

The reference provided by the Bank for the distribution of loans by product type by December 31, 2011, shows that consumer loans with mortgage and residential mortgage loans have the poorest quality within the portfolio of retail exposures.

The collateral for all mortgage loans to individuals is insured at the expense of the Bank with ZAD “OZK – Insurance” JSC. By December 3, .2011, these insurance policies amounted to a total of 432,983 thousand levs.

By December 31, 2011, the Bank has issued to the Ministry of Finance of the Republic of Bulgaria letters of guarantee for 36 foreign individuals (there were six foreign individuals during the previous Inspection) that these citizens dispose of a sum of 511,292 thousand euro in a personal deposit account with First Investment Bank. The availability of these deposits, according to the Inspection, is maintained on the basis of loans granted by the Bank to those persons. These loans are with the same contractual parameters – in the amount of 511,292 euro, 4% interest for a period of five years, with a cash deposit, equal to the amount of the loan and in the same currency, as collateral.

Pages 19 – 21 By the end of 2011, the Bank has been very actively restructuring loans in retail exposures in order to improve the quality of this portfolio.

The decision taken by the Board of the Bank on November 22, 2011, to improve the quality of the credit portfolio of the “Retail Banking” Department by restructuring past due mortgage loans and overdrafts leads to an artificial improvement of the quality of this portfolio.

  • As a result, in December 2011, a significant portion of past due retail exposures was restructured;

 

  • In most cases, when past due loans were restructured, the Bank granted new loans that refinanced outstanding exposures and those new loans were classified as “regular”;

 

  • According to the Inspection, these restructured loans should not be reported by the Bank as “regular” while they are in period of relief payment and should be classified at least in the group “under observation”.

The portfolios of securities and receivables from banks don’t carry a substantial credit risk for the institution.

  • By December 31, 2011, the securities portfolio amounted to 708,172 thousand levs (11.61% of balance sheet assets), and the main part of it (653,158 thousand levs, 92.23%) consists of discount vouchers to the French and Belgian governments and Bulgarian government securities (DCK). The rest of the debt instruments are bonds of credit institutions, the most risky ones are those of Hypo Real Estate Bank (nominal value – 2 million euro and book value – 471 thousand levs). The total book value of the equity instruments is 9,173 thousand levs, of which 4,225 thousand levs are shares in BORICA Bank Service and 1,867 thousand levs are in the form of shares in mutual funds – Avant guard FIB, FIB Garant and FIB Classic.

 

  • Receivables from credit institutions (3.70% of balance sheet assets) are mainly short-term loans and advances to foreign banks with high credit rating. By December 31, 2011, the resources provided by FIBank to UniBank, Skopje amounted to 4.4 million euro (8,660 thousand levs) in the form of subordinated debt.

 

  • The management of troubled assets is jointly organized with the business units and is implemented centrally.

 

  • The management of troubled assets is centralized for corporate loans and loans to SMEs. It is s performed by the “Impaired Assets and Provisioning” Directorate, together with experts who have granted the loans. Despite the structural and functional changes in order to optimize the process, we believe that there are problems in the monitoring of problem loans:
  • There are cases where loans that are not provisioned in full are classified as “loss”;
  • The Directorate does not prepare reports on its activities, which would assist the management in making decisions and tracking the process of collection of problem debts;

 

  • The number of companies against which there are legal proceedings has increased by 42, compared to the previous year (over loans to enterprises with a net book value of 3,672 thousand levs). There is legal judgment in favor of the Bank for 643 loans to businesses with a total debt of 16,788 thousand levs. Proceeds from sales of collateral by the date of the inspection amounted to 476 thousand levs.

Credit risk management and identification systems and controls are unsatisfactory and in need of significant improvement.

The Inspection found no significant improvements in processes and systems for assessing credit risk as the most important problems are:

  • The policy of the management (Supervisory Board and Management Board) and established practices to provide great relief to some borrowers, without affecting the assessment of risk for these exposures;

 

  • The activity of the Credit Committee in assessing the credit risk on the level of individual transaction and the classification of risk exposures are ineffective. An improvement of the process of drafting and compiling the necessary information upon which to perform an adequate classification and provisioning of exposures is needed:
  • The recommendation of several supervisory inspections for automatic reclassification of arrears for all credit exposures is not followed, resulting in infringements;
  • The repayment schedules are not updated in a timely manner in the information system, which affects the number of past due days;
  • The information on the status of the exposures, provided by the business units (Directorates “Corporate Banking” “Vehicles” and “Management of Loan Portfolios of Foreign Companies”) to the Credit Committee, contains serious flaws. The Inspection found several unreported to the Credit Committee cases of loans with arrears and / or poor financial condition which should be classified in a higher-risk group, leading to systemic deficiencies and violations of supervisory regulations. Connectivity between borrowers, especially the economic one, is not analyzed correctly and it is not reflected in the system which lowers the credibility of the supervisory reports. A study to identify the owners of offshore companies-borrowers has not been conducted, making the process of granting and monitoring credit transactions opaque and risky;
  • The “Impaired Assets and Provisioning” Directorate is not implementing sufficiently effective control for proper reporting of “acceptable” collateral of the riskiest exposures in its portfolio. There have been cases of incorrect reporting of “acceptable” collateral which does not meet the requirements for such – mainly for the period of realization. This automatically leads to erroneous determination of the amount of specific provisions for credit risk;
  • The procedures, the rules and control of the implementation of decisions taken by the Credit Committee to restructure the loans need to be improved in order to properly reflect the classifications and provisions in the accounts of the Bank.

The activity of “Risk Management” Directorate shows no improvement:

  • The unit prepares a risk assessment before allowing the individual exposure of a corporate client or subsequent changes in contractual conditions (annexation), but it is not responsible for the ongoing monitoring of the risk of the exposure. It is recommended that the Directorate be involved in such monitoring, so that the information on worsening exposures, supplied monthly by the business units to the Credit Committee, is checked and adjusted if necessary. This would contribute to the improvement of the processes of classification and provisioning, earlier identification and reporting of risk and restricting gaps;

 

  • The process of analysis, evaluation and control of credit risk for individual exposures and the Bank as a whole is not effective and it is not adequate to the risk profile of the institution;

 

  • The analysis, evaluation and control of concentration risk in the Bank’s assets carried out by the “Risk Management” Directorate is incomplete and focuses on concentrations that are not the riskiest for the Bank.

 

FIB Report Footnotes

Page 10, note 1

1Violations in exposures below have not been remedied after receipt by the Bank of the report from the previous Inspection and of an order of the Deputy Governor in charge on Banking Supervision. Some of these exposures were not subject to this review and therefore we cannot assess their condition at the time of Inspection. For the sampled exposures, their classification is given in the section “Violations” of this Inspection.

Page 12, notes 2, 3, 4

2-70% of the “regular” loans included in the sample were classified by the Inspection in a higher-risk group.

3The gross classified assets reported by the Bank by December 31, 2011, were 650,377 thousand levs (15.22% of the gross loans), together with reclassified by the Inspection “regular” exposures of corporate customers in the amount of 813,120 thousand levs, their total value becomes 1,463,497 thousand levs or 34.25% of all gross loans and 23.48% of all gross assets (10.44% reported by the Bank).

4Assuming the favorable for the Bank treatment of “acceptable” collateral for “conditional” loans as “acceptable” collateral for exposures secured by these “conditional” loans.

Page 14, note 5

5″Conditional” loan (the term is the Bank’s own) – credit that can be absorbed under certain conditions and serves for securing balance and off-balance receivables of the Bank to one or several customers. All real collaterals are established under the “conditional” loan, as the maximum and maximum amounts are determined for it, i.e. covering the amount of all collateralized exposures and their term. Collateral is not established for the loans that are really absorbed, and, as stated in the contract, “payments under them are collateralized with funds provided by the conditional loan”. In general, when there is non-payment for any of the loans, the “conditional” loan must be absorbed.

Page 15, notes 6 – 11

6Pretsis (Precise) Inter Holding, Stenstroy Engineering Ltd, Bagra, V Estate Ltd. and others.

7DSP 1 JSC, Argus Properties JSC, ABV-2004 JSC, Tower Sofia Ltd., EAZ JSC, Regent Balkan Ltd, Gondol Ltd. Coal Company Ltd, Coal Company Bobov Dol Ltd, Litex Property Ltd, Outdoor Advertising Media JSC, Railway Infrastructure-Holding Company JSC, Bolsa Ltd. V Estate Ltd., Burgas Shipyards JSC Holding Roads JSC and others.

8Elix Ltd., VMP Ltd. Mega Power Ltd, Lead and Zinc Complex JSC, Camilla Ltd., Alpha Brands Ltd., SSF Style Shipping and Forwarding JSC. and others.

9Port Investment Development – 2 Bulgaria LTD and others.

10Tower Sofia Ltd., EAZ JSC, Road Engineering – M JSC, DSP 1 JSC, Argus Properties JSC, Coal Company Ltd, KBS Petroleum (Middle East) Ltd., Leza Ltd., Railway Infrastructure-Holding Company JSC and others.

11Holding Roads JSC, Argus Properties JSC and others.

Page 16 notes 12 – 14

12EAZ JSC, Railway Infrastructure-Holding Company JSC, Road Engineering – M JSC, Sofia Tower Ltd., Regent Balkan Ltd, Gondol Ltd., KBS Petroleum (Middle East) Ltd., Sigmatura Ltd., Leza Ltd., Eltrade Company Ltd. Valpet Consult Ltd. , Nadin Metals Trade Ltd. and others.

13DSP 1 JSC, Argus Properties JSC, Tower Sofia Ltd., EAZ JSC, Road Engineering- M JSC, Coal Company Ltd, Outdoor Advertising Media JSC, Regent Balkan Ltd, Gondol Ltd., Leza Ltd., Eltrade Company Ltd. Valpet Consult Ltd., Nadine Metals Trade Ltd. and others.

14Sikinos Trading Ltd. (principal 16 million levs, current interest 7 million levs), Mamonas Services Ltd. (principal 21 million levs, current interest 2 million levs), Sigmatura Ltd. (principal 18 million levs, current interest 1 million levs), Eco Farms Ltd. (principal 12 million levs, current interest 10 million levs), Sidegrave Investment Ltd. (principal 13 million levs, current interest 11 million levs) and others.

Page 17, notes 15 and 16

15The Inspection also has reservations about the reporting of “acceptable” collateral, corresponding to Paragraph 1, Item 1a, of Regulation №9 as credit protection in the report under Regulation №8.

16By accepting that the favorable for the Bank deliberation that the “acceptable” collateral for a “conditional” loan can be considered “acceptable” collateral for exposures secured with this “conditional” loan.

Page 18, notes 17 – 21

17The share of residential mortgage loans to individuals is 44.68%, and of consumer loans (including credit cards) it is 55.32% of the retail portfolio of the Bank. Classified retail exposures are 98 415 thousand levs or 12.77% of this portfolio. The quality of consumer loans is better – the share of classified loans in this sub-portfolio is 10.86% (the share of classified consumer loans is 7.2% and of classified credit cards – 15.3%). The share of classified exposures in mortgage loans to individuals was 15.13% as of December 31, 2011.

18The review of the consumer and mortgage loans was made through a sample of exposures with indications of a higher risk than the one reported by the Bank (substantial arrears classified in a lower-risk group, insufficient provisions, lack of “acceptable” collateral within the meaning of Regulation №9 and etc.).

19 For nine of the reviewed loans to individuals in the system of the Bank, it was established that they were not classified in the correct classification group.  Loans of Veliko Petrov, Kamelia Kostadinova, Matey Stefanov Markov, Angelina Orlinova Chausheva, Assen Vergilov Velizarov Nikolay Tsvetanov Motkov Maria Yordanova Tsoncheva were classified as “under observation”, however, based on the arrears, they must be classified as “loss”. Loans of Nadezhda Zlatanova Pesheva and Dimo Plamenov Dimitrov, who have large arrears and should be classified „loss“, are reported as “regular”.

20 For two of reviewed loans to individuals in the system of the Bank, it was established that they were correctly classified in the group “loss”, but with definitely smaller than required provisions without having considered “acceptable” collaterals. These are exposures to Kiril Mihalev Kirchev and Radoslav Petrov Petrov.

21These loans are a standard product of the Bank for loans to foreign customers. They are granted to foreign citizens to invest in Bulgarian government securities in order to apply for Bulgarian citizenship. According to information from the Bank, it reported each of these foreign nationals to the National Security Agency (DANS) and received a response that none of them had participated in criminal schemes.

Page 19, notes 22 and 23

22With its decision from November 22, 2011, the Managing Board of FIB tasked Directorates “Retail Banking” and “Impaired Assets and Provisioning” with improving the quality of the retail loan portfolio by the end of 2011 and authorized them to:

 offer a grace period for interest and principal to a maximum of six months to borrowers with:

  • mortgage loans and overdrafts with 180 days arrears;
  • mortgage loans and overdrafts with over 180 days arrears in which the collateral value is at least equal to the amount of the debt;

 in the renegotiation, the overdue principal is to be added to the regular one, while the current interest rate for the grace period and overdue interest are to be distributed in the next installments until the end of the maturity of the loan;

 in restructuring with providing a grace period for overdraft, the latter is to be transformed into a loan;

 in the renegotiation of loans with interest base rate EURIBOR, it is to be transferred to interest BIR and minimum BIR +3%;

 until December 31, 2011, the Credit Committee had the right to decide on the restructuring of exposures to individuals in excess of 100,000 levs;

With a decision of the Managing Board of FIB from January 10, 2012, the term for restructuring overdue mortgage loans and overdrafts in the retail portfolio is extended to March 31, 2012, under the above conditions.

23Agromah Ltd, Meat Processing Plant Letnitsa Ltd., TVL Group Ltd;

Page 20, note 24

24The main responsibility of the Supervisory Board is concentrated on setting limits (for exposures of over 2 million levs) at levels of competence to grant, renegotiate and restructure loans.

 

 

 

 

 

 

 

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