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PRESS RELEASE

6 November 2014

Today, 6.11.2014 on the grounds of art.36, par.2, item 2, art.103, par.1, item 1, par.2, item 25 and art.151, par. 1, first motion, of the Law on Credit Institutions and art. 16, item 15 of the Law on the Bulgarian National Bank, the BNB Governing Council has revoked Corporate Commercial Bank AD’s license for conducting banking activities. Under that decision:

1. The BNB Governing Council revoked the license for conducting banking activities granted by the BNB Governing Council’s Decision No. 24/21.01.1994, updated in compliance with the Law on Banks by the BNB Governor’s Order No. 100-00499/18.11.1999, amended by the BNB Governor’s Order No. РД 22-0440/07.09.2000, supplemented by the BNB Governor’s Order No. РД 22-0584/01.12.2000, updated in compliance with the Law on Credit Institutions by the BNB Governor’s Order No. РД 22-0859/07.05.2007, updated in compliance with the Law amendming and supplementing the Law on Credit Institutions (prom. SG No. 24 of 2009) by the BNB Governor’s Order No. РД 22-2265/16.11.2009.

2. On the grounds of art.9, par.1 of the Law on Bank Bankruptcy, the competent court of law shall be petitioned to open bankruptcy proceedings for Corporate Commercial Bank AD.

3. On the grounds of art.9, par.6 of the Law on Bank Bankruptcy, the Bulgarian Deposit Insurance Fund shall be notified of the petition filed to the competent court of law for opening bankruptcy proceedings for Corporate Commercial Bank AD, so that preparatory actions can be initiated for the appointment of an assignee in bankruptcy.

4. On the grounds of art.106, par.3 of the Law on Credit Institutions, until an assignee in bankruptcy is appointed, the conservators of Corporate Commercial Bank AD, Stanislav Georgiev Lyutov and Elena Zdravkova Kostadinchev, shall continue to exercise their powers.

Motives for the decision:

By the BNB Governing Council’s Decision No.73 of 20.06.2014, amended and supplemented by Decision No.74 of 22.06.2014, in connection with suspension of payments to clients as a result of massive withdrawal of funds, and letter outgoing Ref. No. 4098/20.06.2014 and letter outgoing Ref. No, 4099/20.06.2014 from the executive directors of KTB, on the grounds of art.115, par.1 and par.2, items 2 and 3, art.116, par.1 and par.2, items 2, 3, 6 and 7, in conjunction with art.103, par.2, item 24 of the Law on Credit Institutions (LCI) and art.16, item 16 of the Law on the Bulgarian National Bank (LBNB), KTB was placed under special supervision for risk of insolvency, for a period of three months, and conservators were appointed, the payment of all obligations of the bank was suspended, the bank’s operations were limited as the bank was banned from conducting all activities under its banking license, the members of its Management and Supervisory Boards were dismissed, and the shareholders directly or indirectly holding over 10 percent of voting shares were divested of their voting rights.

On 25.06.2014 a review of KTB’s assets was assigned and it was carried out jointly by Deloitte Audit OOD, Ernst & Young Audit OOD, and AFA OOD. The review of assets was partial and primarily covered the loan portfolio and the investment portfolio, and it took 10 days. The review was designed to assess the state and quality of 95.4 percent of KTB’s loan portfolio and 99.1 percent of its investment portfolio, and also to make a limited analysis of the bank’s liabilities. On 11 July 2014 the BNB published the outcomes of the auditors’ review. The review of KTB established that important information was missing on the financial circumstances of a category of borrowers (loans totalling BGN 3.5 billion out of the entire loan portfolio of BGN 5.4 billion) and/or on the purpose of the loans. Significant indications of credit risk were found about the repayment of credit exposures in that category of borrowers which could lead to considerable impairments, but because of the insufficient information the auditors were not in a position to comment on the amount of required additional impairments.

The BNB Governing Council’s Decision No.94 of 31 July 2014 approved a Report on KTB’s current position, submitted by the bank’s conservators under art.121 of LCI. The same decision instructed KTB’s conservators to sign additional contracts with the audit firms - Deloitte Audit OOD, Ernst & Young Audit OOD, and AFA OOD – for a thorough assessment of KTB’s assets to be completed by 20.10.2014, giving further mandatory instructions for the preparation of the credit files for the needs of the audit review, and for the signing of a legal advice contract with regard to the review of collateral items as part of the credit files preparation, etc.

With Decision No 114 of 16 September 2014, taking into consideration that as of the decision date the conditions and premises leading to KTB’s placement under special supervision were still in place with the bank continuing to experience serious liquidity shortage needed to resume its banking activities and meet its obligations to depositors and other creditors (as of September 2014 the obligations totaled BGN 6 227 521 thousand), on the grounds of art. 115, par. 1, par. 2, item 2 and par. 3 and art. 116, par. 1, in conjunction with art. 103, par. 2, item 24 of the LCI and art. 16, item 16 of the LBNB, the BNB Governing Council extended through 20.11.2014 the term of KTB’s special supervision, with the measures continuing to be applied through 20.11.2014 in accordance with items 2-7 of BNB Governing Council’s Decision No 73 of 20.06.2014, amended and supplemented with Decision No 74 of 22.06.2014, and with BNB Governing Council’s Decision No 82 of 30.06.2014. On the grounds of art. 107, par. 3 of the LCI, the KTB conservators have been instructed to submit to the BNB, by 20.10.2014 at the latest, an overall assessment of KTB’s assets conducted by the three audit firms.

On 20.10.2014, with letter No BNB-122230/20.10.2014, KTB’s conservators submitted to the BNB the reports by Ernst & Young Audit OOD, Deloitte Bulgaria OOD and AFA OOD. Over the period 05.08 – 20.10.2014 the said audit firms carried out analysis and assessment of major balance-sheet items and bank guarantees issued by KTB. The analysis and assessment were based on the recognition and assessment principles according to the applicable International Financial Reporting Standards. The assessment was done based on the assets and bank guarantees entered in the bank’s records as of 30.06.2014 while reflecting all significant events until 30.09.2014 which affect the analysis.

The audit firms’ conclusion is that KTB assets needed to be repaired by BGN 4222 million in total, subdivided into the following asset groups:

Balance-sheet item according to sample

Value according to the bank’s registers as of 30.06.2014

Value according to the bank’s registers as of 30.09.2014

Necessary impairments based on the analysis and assessment

BGN million

BGN million

BGN million

Loans granted to non-financial institutions and other clients (loan portfolio)

5 301

5 335

-4 057

Investments available for sale (investment portfolio)

380

376

-144

Securities (investments) held for trading (trading portfolio)

11

9

-0

Other assets

353

141

-3

Property owned by the bank

60

59

-18

Investment in CB Victoria

5

5

0

Total amount

6 109

5 925

-4 222

In parallel with assigning a KTB assets review to the three audit firms Deloitte Bulgaria OOD, Ernst & Young Audit OOD and AFA OOD, over the period 04.07.2014 - 14.10.2014, an on-site inspection was carried out in KTB by a team of experts from the BNB Banking Supervision Department. The inspection was carried out in three stages with a scope and goals as follows: stage I finding out the completeness of credit files – object of review during the last supervisory inspection (based on data as at 31.03.2013) and comparing with the content of the same as at 30.05.2014; stage II – assessment of the administration of credit files for loans extended after 31.03.2013, as well as credit deals outside the sample reviewed in the last supervisory inspection carried out based on data as at 31.03.2013, but included in the sample of the three audit firms conducting the asset review; stage III – tracing the cash flows related to the drawdown of funds on these loans and their servicing, the likely connectedness of borrowers from the bank’ loan portfolio, the origin of funds for the increase of the shareholders’ equity and the issue of other capital instruments included in the institution’s capital.

The findings and conclusions made in the Supervisory Inspection Report on KTB, outgoing Ref. No BNB-125089/27.10.2014, allow reaching a substantiated conclusion that the bank’s controlling and management bodies applied vicious banking and business practices by submitting misrepresenting and misleading financial and supervisory reports. That coincides with the conclusions derived from the findings in the reports of the three audit firms.

With BNB Governing Council’s Decision No 133 of 21 October 2014, the reports on the analysis and assessment conducted by Deloitte Bulgaria OOD, Ernst & Young Audit OOD and AFA OOD of Corporate Commercial Bank AD’s assets were approved. On the grounds of art. 107, par. 3 of the LCI, KTB’s conservators were instructed to undertake the necessary actions by 31.10.2014, in line with the International Financial Reporting Standards, to account for in the bank’s balance sheet the outcomes of the assessment and analysis of KTB’s assets as at 30.09.2014 and submit to the BNB KTB’s financial and supervisory statements according to ‘Commission Implementing Regulation (EU) No 680/2014 of 16 April 2014 laying down implementing technical standards with regard to supervisory reporting by institutions, according to Regulation (EU) No 575/2013 of the European Parliament and of the Council’ as follows: a) Capital Requirements (COREP) – on a solo basis, b) Common Financial Reporting Framework (CFRF/FINREP) – on a solo basis.

On 27.10.2014, a report titled ‘Events and actions undertaken in relation to Corporate Commercial Bank AD and Commercial Bank Victoria EAD” was submitted to the National Assembly of the Republic of Bulgaria in behalf of the BNB Governing Council. The report includes detailed information about the events and all actions and decisions taken by the BNB from 20 June 2014 (the date of KTB’s placement under special supervision) until the report’s date.

With a letter, incoming Ref. No BNB-126265/30.10.2014, the Bulgarian Government, the Ministry of Finance and the Bulgarian National Bank were notified of the concrete plans of a newly set up consortium comprising ЕPIC, the State General Reserve Fund of the Sultanate of Oman and Gemcorp, (the Consortium) for KTB’s restructuring. Already in the morning of 31.10.2014, with a letter, outgoing reference No BNB-12630/31.10.2014, to the Finance Minister, with a copy to the Speaker of the 43rd National Assembly and the Chairwoman of the Budget and Finance Ad Hoc Committee at the 43rd National Assembly, the Bulgarian National bank presented the contents of the letter incoming Ref. No BNB-126265/30.10.2014. In relation to the request for a State aid of up to BGN 2.3 billion, contained in the letter, the Finance Minister in his capacity of the competent national authority under the State Aid Law was asked to provide an opinion on the possibility to have a State aid provided and approved as per the manner described by the Consortium and the respective amounts, and that the presented scheme be immediately discussed routinely with the European Commission, including about its compliance with the EU legal framework for providing state aids and restructuring of credit institutions, as far as the final approval of state aid schemes is given by the Directorate General for Competition, European Commission. To date, the BNB has not received a reply from the Finance Minister.

In accordance with Communication from the European Commission on the application, from 1 August 2013, of State aid rules to support measures in favour of banks in the context of the financial crisis (2013/C 216/01), a major requirement is that state aid in the EU is provided only to solvent and economically viable banks, and more specifically in the cases of liquidity support schemes, the latter should be used only for banks with no capital shortfall, which circumstance should be certified sufficiently categorically and undisputably by the competent supervisory authority.

At its session of 31.10.2014, the National Assembly considered the report Events and Actions Undertaken in Relation to Corporate Commercial Bank AD and Commercial Bank Victoria EAD submitted by the BNB. The National Assembly did not approve the motion made by the Budget and Finance Ad Hoc Committee for adoption of legislative amendments, which would obligate the BNB to take actions for the recovery of banks with negative own funds.

On 4.11.2014, in pursuance with Decision No. 133 of the BNB Governing Council, with letter Incoming Ref. No. BNB-127892/04.11.2014, the conservators at KTB submitted to the BNB the financial and supervisory reports of KTB as of 30.09.2014, as follows: Capital Requirements (COREP) – on a solo basis, Common Financial Reporting Framework (CFRF/FINREP) – on a solo basis.

Based on the financial and supervisory reports of KTB as of 30.09.2014, submitted on 4.11.2014, the BNB Governing Council established that KTB’s own funds, determined in accordance with Regulation (EU) No. 575/2013, have a negative value of minus BGN 3,745,313,000, and that the bank does not meet the capital requirements under Art. 92 of Regulation (ЕU) No. 575/2013.

The Common Equity Tier 1 capital ratio (-188.03 %), Tier 1 capital ratio (-188.03 %) and total capital ratio (capital adequacy ratio) (-180.18 %) reported by the bank are in violation of the capital requirements under art. 92 of Regulation (ЕU) No. 575/2013.

In addition, with letter Incoming. Ref. No. BNB-127951/05.11.2014 the conservators at KTB notified the BNB that notifications of cessions of receivables concluded between the bank’s customers, and declarations of intention to set off liabilities to the bank with receivables from it acquired under cession agreements, were received after the date of placing the bank under special supervision until 31.10.2014 inclusive. The conservators informed that as of 31.10.2014, the receivables transferred under cession agreements amounted to BGN 1,183,714,000 in total, and the declarations of intention for setoffs amounted to BGN 779,055,000. Even if all cession and setoff notifications are reflected in the bank’s accounting books, the financial result of KTB as of 30.09.2014 would improve by only BGN 161,468,000 owing to impairments that would be eliminated (respectively reversed) as a result of liabilities to the bank that have been fully or partially repaid under the declarations of intention for setoffs of the above-mentioned amount. As a result, KTB’s own funds, measured in accordance with Regulation (ЕU) No. 575/2013, would remain a negative value.

According to art. 36, par. 2, item 2 of the Law on Credit Institutions, the Bulgarian National Bank should mandatorily withdraw a bank’s license due to insolvency, where it has found that the amount of the bank’s own funds is negative.