Bulgarian National Bank statement on Corporate Commercial Bank AD (KTD) audit

Bulgarian National Bank press release:

On 21.10.2014 the BNB Governing Council examined a report on the analysis and assessment of Corporate Commercial Bank AD (KTB) assets, conducted by the audit firms Ernst & Young Audit OOD, Deloitte Bulgaria OOD, and AFA OOD.

In the period 05.08.2014 – 20.10.2014 the above audit firms analysed and assessed major balance sheet items and bank guarantees issued by the bank. The analysis and assessment were based on the principles of recognition and assessment in compliance with the applicable International Financial Reporting Standards (IFRS). The assessment was based on the assets and bank guarantees entered in the bank’s records as at 30.06.2014, reflecting all significant events by 30.09.2014 that affect the analysis.

As at 30.09.2014 the total assets of the bank amounted to BGN 6 662 million. The audit firms concluded that assets of the bank needed to be impaired by BGN 4 222 million in total. Detailed information on the bank’s balance sheet and the conclusions drawn from the analysis and assessment of assets can be seen here.

On the basis of the bank’s balance sheet and the outcomes of the analysis and assessment of major balance sheet items (including loans, an investment portfolio, securities, other assets, real estate) and bank guarantees issued by the bank, the following conclusions can be made:

The bank’s management has not followed prudent and conservative banking practices. Many omissions were found out after the bank was placed under special supervision, but made before that:

– In the lending process no detailed checks of loan applicants were made, with incomplete analyses of business plans and estimates for the projects to be funded.

– There was no control over the establishment and ongoing oversight of the agreed collateral. The analysis indicated that a significant number of collateral items had been established with ommissions or were non-existent which made them impossible to sell. The coverage ratio of the bank’s loan portfolio with valid collateral is around 13 percent.

– There is no ongoing surveillance and control over the borrowers’ businesses and the purposeful use of the granted loans. Loans were repeatedly renegotiated without evidence of substantiating the need for that.

– The documentation kept in the credit files is not maintained in a way to allow the bank to manage its receivables so as to obtain the economic benefits from them.

– The bank followed unconventional to the banking system wrong business practices, carrying out complex operations with the aim to conceal the nature of deals and transactions. One such example is the specific lending intermediated by ‘special purpose vehicles’, holding companies, and other similar companies in order to finance the purchase of assets, which is inconsistent with the sound and standard banking practices.

– The financial and supervisory reports submitted by the bank’s management to the BNB Banking Supervision Department before the bank was placed under special supervision were untruthful and misleading.

For the above reasons the BNB will send the auditors’ reports to the attention of the Sofia City Prosecutor’s Office.

The BNB Governing Council instructed the conservators to make the accounting records for the fully compliant with the IFRSs estimates and by 31.10.2014 to submit to the BNB the relevant supervisory reports needed for taking decisions as provided in the Law on Credit Institutions.

Other solutions, such as KTB restructuring and/or recovery, will be possible only if the National Assembly, within its competencies, would find it appropriate and would forthwith adopt amendments and supplementations to the current law, including with regard to the required provision of resources.

In order to assist the work of the Members of Parliament and to take an informed decision on the KTB case, on 27.10.2014, the first working day of the 43rd National Assembly, the BNB Governing Council will submit summarised information on the events and all decisions taken by the BNB about the KTB Group from 20 June 2014 (the day when KTB was placed under special supervision) to date.