FITCH AFFIRMS RUSSIA'S PROMSVYAZBANK AT 'BB-'; OUTLOOK STABLE

Mon Nov 12, 2012 10:38am EST

Nov 12 () - Fitch Ratings has affirmed Russia's Promsvyazbank's 
(PSB) Long-term foreign currency Issuer Default Rating (IDR) at 'BB-' with a
Stable Outlook. The agency has also assigned PSB Finance S.A.'s USD400m
subordinated loan participation notes (LPN) a Long-term rating of 'B+'. A full
list of rating actions is provided at the end of this commentary.

RATING ACTION RATIONALE AND DRIVERS - IDRs, VR AND SENIOR DEBT RATING
The ratings affirmation reflects limited recent changes in PSB's credit profile
and prospects. The rating level reflects the bank's weak capitalisation, some
higher-risk exposures in the loan book and uncertainties arising from the rapid
growth strategy in more risky market segments. However, the ratings also take
account of the reasonably diversified funding franchise and the track record of
comfortable liquidity management.

PSB's corporate loan quality remains average for its rating category. Corporate
non-performing loans (NPLs) were a moderate 4% at end H112 after sizable loan
sales and write-offs in 2010-H112, while restructured exposures were, however,
more significant. Accrued interest which has not been received in cash was a
sizable RUB12bn, or 23% of equity, in the bank's end-9M12 statutory accounts.
Accrued interest is generally larger under IFRS, although IFRS accruals have
been declining in recent periods.

In Fitch's view, PSB's rather concentrated loan portfolio, combined with the
presence of some restructured and poorly performing exposures among the top 20
loans, creates a risk of lumpy losses and potential capital erosion. Fitch
believes that some more risky exposures are weakly provisioned, however,
reported corporate NPLs were 129% covered by loan impairment reserves at
end-H112.

Reported related-party exposures have been stable relative to the capital base
in recent periods (2009-H112: around 20% of Fitch core capital (FCC)). Related
parties' solid positions in their respective markets (IT, real estate, and
media), and their association with PSB, have broadened financing options for
them and somewhat alleviated pressure on the bank's capital. However, in Fitch's
view, the funding reliance on the bank of some related parties (in particular in
IT and real estate) may grow in future considering their significant leverage
and moderate net cash flows.

PSB's real estate exposure, including loans and other on-balance sheet
investments, markedly declined in 2011 but was still a material 2x Fitch Core
Capital (FCC) at end-H112. Among the key non-core assets was part of an office
building in the Moscow City business district where construction was only 70%
complete (this asset is valued at 19% of FCC). There is little certainty about
the completion timeline, although the agency believes the building's current
balance-sheet valuation is reasonable given the premium location.

PSB aims to expand its retail and SME lending in the coming years to improve its
overall performance. Retail lending at end-H112 comprised a moderate 9% of total
loans. In Fitch's view, this strategy could be threatened by a lack of expertise
in retail lending, the bank's weak previous track record in the segment, growing
competition in the market and rising household leverage. PSB's retail business
performance continued to improve but remained loss-generating in H112 due to a
lack of scale.

PSB's liquidity position is comfortable, with a reasonable cushion being held
against the rather concentrated corporate funding base. Liquid assets were
maintained in the range of 15%-20% of total assets over the past two years, and
stood at 16% at end-9M12. Some of the largest corporate clients, however, are
state-owned companies, whose balances could be less stable at privately owned
banks, especially in a stress scenario. Wholesale debt is material (end-H112:
24% of liabilities), but maturities are not concentrated.

Fitch views capital as weak given moderate reported ratios, weak provisioning of
some loan exposures, significant accrued interest, some uncertainty in respect
to how recent equity injections/share purchases have been financed, and the
moderate ability of the bank's majority shareholders to inject new capital, if
needed. The Basel I Tier I and total capital adequacy ratios (CARs) were 9.9%
and 13.2%, respectively, at end-H112, and the regulatory CAR was 10.6% at
end-9M12, only marginally above the minimum 10% level. Fitch estimates the
recent USD400m subordinated debt issue should result in the latter increasing to
a still tight 11.1%.

Following the recently postponed IPO, PSB will continue to examine the
possibility of placing equity privately. However, in Fitch's view, internal
capital generation is the most likely source of equity. Profitability was modest
in 2009-2011 (5% average return on average equity), but increased in H112 (14%),
mainly as a result of lower impairment charges. Brothers Alexey and Dmitriy
Ananiev own an 88.25% stake and the EBRD 11.75%.

RATING SENSITIVITIES - IDRs, VR AND SENIOR DEBT RATING
The Long-term IDRs and Viability Rating (VR) could be downgraded if weaker asset
quality and/or rapid growth increase pressure on capital. An upgrade would
require a strengthening of the bank's capitalisation. Successful implementation
of the bank's growth strategy without significant credit impairment would also
be positive for PSB's profile.

RATING ACTION RATIONALE, DRIVERS AND SENSITIVITIES - SUBORDINATED DEBT RATINGS
PSB's subordinated debt securities issued under the USD3bn loan participation
notes (LPN) programme via Luxemburg-domiciled special-purpose vehicle PSB
Finance S.A. are notched down once from the Long-term IDR due to weaker recovery
prospects. The rating would likely change in tandem with the Long-term IDR.

The USD400m series 7 subordinated LPNs mature in November 2019 and pay a 10.2%
semi-annual coupon. There are no call or put options. PSB Finance S.A. will use
the proceeds for the purpose of financing a subordinated loan PSB. Subsequently,
the SPV will receive and transfer to noteholders the principal and interest
accrued on the loan.

RATING ACTION RATIONALE, DRIVERS AND SENSITIVITIES - SUPPORT RATING AND SUPPORT
RATING FLOOR
The Support Rating Floor and Support Rating have been affirmed at 'B' and '4',
respectively, reflecting PSB's notable role in the Russian banking system as the
third-largest privately owned commercial bank with a significant deposit
franchise. Acquisition of the bank by a financially stronger institution could
lead to a positive rating action on Support Rating.

The rating actions are as follows:

Long -term foreign currency IDR: affirmed at 'BB-'; Outlook Stable
Short-term foreign currency IDR: affirmed at 'B'
Long -term local currency IDR: assigned at 'BB-'; Outlook Stable
Short-term local currency IDR: assigned at 'B'
VR: affirmed at 'bb-'
Support Rating: affirmed at '4'
Support Rating Floor: affirmed at 'B'
Senior debt rating: affirmed at 'BB-'
Subordinated debt rating: affirmed at 'B+'

Contact:

Primary Analyst
Roman Kornev
Analyst
+7 495 956 7016
Fitch Ratings CIS Ltd
26 Valovaya Street
Moscow 115054

Secondary Analyst
Alexander Danilov
Senior Director
+7 495 956 2408

Committee Chairperson
James Watson
Managing Director
+7 495 956 6657

Media Relations: Julia Belskaya von Tell, Moscow, Tel: +7 495 956 99 08, Email:
julia.belskayavontell@fitchratings.com; Hannah Huntly, London, Tel: +44 20 3530
1153, Email: hannah.huntly@fitchratings.com.

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 Rating Criteria', dated 15
August 2012, are available at www.fitchratings.com.

Applicable Criteria and Related Research:
Global Financial Institutions Rating Criteria

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