TEXT-Fitch affirms Bystrobank at 'B-'
Nov 12 () - Fitch Ratings has affirmed JSC Bystrobank's (Bystrobank) Long-term foreign currency and local currency Issuer Default Ratings (IDRs) of 'B-' and National Long-term rating of 'BB-(rus)'. The Outlooks are Stable. A full list of rating actions is at the end of this comment. RATING ACTION RATIONALE AND DRIVERS - IDRs, VIABILITY RATING AND NATIONAL RATING The ratings reflect Bystrobank's small size, its concentrated corporate loan book dominated by unsecured short-term loans to IT trading companies, risks of planned rapid growth of unsecured retail lending, where there is limited history of reasonable performance, and weak capitalisation. The ratings also acknowledge the bank's principal market position in the small Udmurtia region, its adequate liquidity profile and the recently announced entrance of IFC as a minority shareholder, which should benefit the bank's corporate governance and money market access. Retail lending (61% of gross end-H112 loans) is potentially risky due to rapid growth (22% in H112 and 42% in 2011) and poor past performance. Before the crisis, the bank applied rather loose origination policies which, coupled with seasoning and historically low write-offs, resulted in high non-performing loans (NPLs) of 8.0% at end-H112 and a further 4.8% of restructurings. Retail loans were weakly reserved by only 4.1% at end-H112. The revised issuance standards and more favourable economic environment support the more recent vintages, with an annualised NPL origination rate of only 2.4% in H112. However, given the limited history of such a decent performance and the rapid past and planned (115% in 2013) retail lending growth, the risks are still elevated, in Fitch's view. Corporate lending (33% of gross end-H112 loans) practices are also of concern to Fitch due to high exposure to IT companies (45% of top-25 loans; the latter in turn made 81% of total corporate loans) mainly being of a relationship-based nature, reflecting the shareholders' connections and interests in this business. Within the overall IT exposure, loans to related parties amounted to RUB0.5bn or 16% of Fitch Core Capital. Also most corporate loans (72% of top-25 loans) are unsecured, exposing the bank to borrowers' business risks. Currently there are no corporate NPLs and the reserve rate is only 2.4%, which does not provide much comfort. The bank is planning to reduce the concentration by increasing SME lending, including under EBRB funding, but has limited expertise in that area. This loan book is small (RUB0.7bn at end-Q312), but management plans to grow it to RUB2.8bn or 10% of the total loan book at end-2013. Bystrobank is mainly customer funded, with retail deposits contributing 61% of total funding and 18% coming from corporates at end-Q312. Retail deposits proved to be relatively stable during the 2008-2009 crisis, with a maximum outflow of 5%, followed by a quick recovery. However, Fitch does not consider Bystrobank to be immune to deposit outflow risk, which is aggravated by regional concentration, with 87% of retail deposits coming from the Udmurtia region. Mitigating liquidity risk to an extent, the bank had about RUB2.2bn of liquid assets at end-Q312 - sufficient to withstand a 19% outflow of customer funding. Profitability is moderate with annualised return on equity (ROE) of 9% as per H112 IFRS accounts. According to management, profitability should improve as the bank grows, but maintenance of low credit risk would be crucial in achieving that. Fitch considers Bystrobank's capitalisation - regulatory capital adequacy ratio (CAR) of 12.1% and Basel CAR of 20% at end-Q312 - as weak given the bank's relatively high credit risks and ambitious growth plans. Fitch estimates that after the upcoming (should be completed in Q113) RUB550m capital injection from IFC, Basel and regulatory capital ratios should moderately improve to, respectively, 25% and 15%, but the effect may be temporary due to growth plans. Bystrobank was acquired in 2007 by a group of Moscow-based former shareholders of OJSC Orgresbank (sold to Nordea AB; 'AA-'/Stable). Fitch believes Bystrobank to be a mid-term financial investment for them, implying that they would have limited propensity to support the bank in case of need. That stated, they injected over RUB300m (USD9.5m) of new capital into the bank during the Q308 downturn. RATING SENSITIVITIES - LONG-TERM IDRs AND VIABILITY RATING A sustained control of credit risks while growing rapidly and a considerable diversification of corporate lending, especially reduced concentration of IT industry and improved collateral policy, should be positive for the bank's credit profile. A significant deterioration in asset quality and/or a deposit outflow would put pressure on the bank's ratings. The rating actions are as follows: Long-term IDR: affirmed at 'B-'; Stable Outlook Short-term IDR: affirmed at 'B' National Rating: affirmed at 'BB-(rus)'; Stable Outlook Viability Rating: affirmed at 'b-' Support Rating: affirmed at '5' Support Rating Floor: affirmed at 'No floor' Additional information is available at 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