TEXT-Fitch affirms Liberty Bank, VTB Bank (Georgia)'s IDRs

Wed Aug 1, 2012 11:33am EDT

Aug 1 - Fitch Ratings has affirmed VTB Bank (Georgia)'s (VTBG) Long-term
Issuer Default Ratings (IDR) at 'BB' and Liberty Bank's (LB) Long-term IDR at
'B', both with Stable Outlooks. At the same time, the agency has upgraded LB's
Viability Rating (VR) to 'b' from 'b-'. A full list of rating actions is at the
end of this rating action commentary.

RATING ACTION RATIONALE: LIBERTY BANK'S VR AND IDRS
The upgrade of LB's VR reflects the strengthening of the bank's capitalisation
and the extended track record of sound performance under new management since
the takeover in 2009.

The affirmation of LB's Long-term IDR reflects the fact that it was already 'B'
as a result of the bank's 'B' Support Rating Floor (SRF), and so is not impacted
by the VR upgrade. Following the change in the VR, LB's Long-term IDR is now
driven by its VR, while still being underpinned at its current level by the SRF.

RATING DRIVERS: LIBERTY BANK'S VR AND IDRS
LB's VR and IDRs reflect the bank's sound recent performance in terms of both
pre-impairment profitability and the quality of non-legacy loans, its solid
capitalisation, currently comfortable liquidity, the absence of debt funding,
the predominantly local currency balance sheet and good standards of management,
governance and disclosure.

At the same time, the ratings also consider inherent risks in LB's rapid loan
growth in the relatively high-risk operating environment, the bank's still
rather narrow franchise, significant concentrations in the deposit base and some
reliance on government and municipal funding.

Capitalisation has improved as a result of equity injections and earnings
retention, which have increased the bank's Fitch core capital/risk-weighted
assets ratio to 13.0% at end-Q112 (end-2010: 8.3%). The regulatory capital
ratios are significantly lower (Tier 1 8.5%; total 10.9% at end-H112), mainly as
a result of the non-inclusion of fixed assets revaluations in capital. The bank
is still reliant on a waiver from the National Bank of Georgia, exempting it
from minimum capital requirements (Tier 1 8%; total 12%) until September 2012.
Fitch believes retained earnings should be sufficient to ensure regulatory
compliance by the time the waiver expires, but potential conversion of a
GEL18.8m contingent capital facility (subscribed mainly by LB's main
shareholder; mandatory conversion into ordinary shares in case of
non-compliance), would also strengthen capital ratios by approximately 3ppts.

The bank's earning capacity is improving on the back of rapid net loan growth
(104% in 2011; 20% in H112), which has improved scale efficiencies, reasonable
asset quality, and a wide net interest margin, which is supported by the bank's
focus on mass retail banking. Non-performing loans in the non-legacy loan book
were a moderate 3.0% at end-Q112, while a large majority of exposures in the
pre-acquisition legacy book (10% of loans at end-Q112) were impaired.

Positively, and in contrast to other rated Georgian banks, LB's funding is
predominantly GEL-denominated (83% of H112 customer deposits), as a result of
which the majority of customer loans are also issued in local currency. LB's
liquidity position is also comfortable, with highly liquid assets (cash,
interbank assets and unpledged government securities) covering 32% of customer
funding at end-H112. However, significant reliance on government and municipal
funding (54% of customer deposits at FYE11, including some large balances), can
make funding levels somewhat volatile.

RATING DRIVERS: LIBERTY BANK'S SUPPORT RATING AND SRF
LB's '4' Support Rating and 'B' SRF reflect Fitch's view of the moderate
probability of government support given the bank's important social function of
providing banking services in remote parts of the country and its role in
distributing pensions and public sector salaries, as well as the track record of
government support in 2008-2009.

RATING SENSITIVITIES: LIBERTY BANK
LB's VR and Long-term IDR could be upgraded if the bank builds a further track
record of sound performance and gradually strengthens its franchise, while
maintaining adequate levels of capital and liquidity. Further improvements in
the Georgian operating environment could also support an upgrade.

A marked deterioration in asset quality as the bank continues its rapid growth,
or significant negative shocks for the Georgian economy, could result in
downward pressure on the VR. However, this would only result in a downgrade of
the Long-term IDR if Fitch also downgraded the bank's Support Rating and SRF.
The latter is possible if there is a sovereign downgrade or a marked reduction
of LB's social importance/agency role, neither of which are currently
anticipated by Fitch.

RATING ACTION RATIONALE AND DRIVERS: VTBG'S SUPPORT RATING AND IDRS
The affirmation of VTBG's Long-term IDR at 'BB'/Stable, and its Support Rating
at '3', reflects Fitch's continued view of the likelihood of shareholder support
from its 96%-owner, JSC Bank VTB (VTB, 'BBB'/Stable), the state-controlled,
second-largest bank in Russia. In Fitch's view, VTB would have a high propensity
to support its Georgian subsidiary, given VTBG's small size, the significant
amount of funding VTBG receives from VTB, the track record of capital support
from its parent and the banks' common branding. At the same time, VTBG's ability
to receive and utilise parent support could be restricted by transfer and
convertibility restrictions, the risk of which is reflected in Georgia's Country
Ceiling ('BB').

RATING SENSITIVITIES: VTBG'S SUPPORT RATING AND IDRS
VTBG's Long-term IDR could be upgraded or downgraded if there was a similar
change in Georgia's Country Ceiling and sovereign ratings. The rating could also
be downgraded if there was a multi-notch downgrade of VTB, or any clear
indication that Russian government support for VTB would not be allowed to flow
through to its foreign subsidiaries, neither of which is currently anticipated.

RATING ACTION RATIONALE AND DRIVERS: VTBG'S VR
The affirmation of VTBG's VR at 'b-' reflects the bank's small size and modest
franchise, concentrated balance sheet, limited track record of reasonable credit
underwriting and significant proportion of foreign currency lending. However,
the rating also considers the bank's return to profitability in 2011 as a result
of significantly lower impairment charges and an increase in cheaper parent
funding, and currently acceptable capitalisation and liquidity.

RATING SENSITIVITIES: VTBG'S VR
An extended track record of better performance and credit underwriting could
result in an upgrade of the VR. Further relapses in risk management and asset
quality could result in a downgrade.

LB was the fourth-largest bank in Georgia, holding 6.6% of system assets at
end-Q112. At end-2011, it was 76.5% owned by Liberty Capital LLC, with a
majority of the remainder held by institutional investors through the bank's
unlisted GDR programme. VTBG held 3.4% of end-Q112 banking sector assets.

The rating actions are as follows:

JSC Liberty Bank:
Long-term Foreign Currency IDR affirmed at 'B'; Outlook Stable
Short-term Foreign Currency IDR affirmed at 'B'
Viability Rating: upgraded to 'b' from 'b-'
Support Rating: affirmed at '4'
Support Rating Floor: affirmed at 'B'

JSC VTB Bank (Georgia):
Long-term Foreign Currency IDR affirmed at 'BB'; Outlook Stable
Short-term Foreign Currency IDR affirmed at 'B'
Viability Rating: affirmed at 'b-'
Support Rating: affirmed at '3'


Additional information is available on www.fitchratings.com. The ratings above
were solicited by, or on behalf of, the issuer, and therefore, Fitch has been
compensated for the provision of the ratings.

Applicable criteria, 'Global Financial Institutions Ratings Criteria' dated 16
August 2011, 'Evaluating Corporate Governance' dated December 2011 are available
at www.fitchratings.com.

Applicable Criteria and Related Research:
Global Financial Institutions Rating Criteria
Evaluating Corporate Governance
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