TEXT-Fitch affirms OTP Hungary, and Russian subsidiary
Jan 9 - Fitch Ratings has affirmed OTP Bank Plc's (OTPH) Support Rating at '3' and its Russian subsidiary OJSC OTP Bank's (OTPR) Long-term Issuer Default Ratings (IDRs) at 'BB' and National Rating at 'AA-(rus)' and revised the Outlooks to Stable from Negative. Simultaneously, the agency has upgraded OTPR's Viability Rating to 'bb-' from 'b+'. A full list of rating actions is at the end of this comment. RATING ACTION RATIONALE: OTPH's SUPPORT RATING The affirmation of OTPH's Support Rating reflects Fitch's opinion that the Hungarian government would likely have a high propensity to support OTPH if needed, in light of its systemic importance in the banking sector. However, Fitch believes that OTPH is unlikely to require such support in the short to medium term given the bank's generally sound and stable credit profile. At end-Q312, OTPH was the largest bank in Hungary and accounted for about 25% of sector assets and almost 30% of retail deposits. RATING ACTION RATIONALE AND DRIVERS: OTPR's IDRS, NATIONAL RATING, SUPPORT RATING OTPR's Long- and Short-term IDRs and Support Rating are driven by potential support from OTPH. Fitch believes that the parent would have a high propensity to support OTPR in light of the ownership, quite high level of integration, and the Russian subsidiary's important contribution to the group's results (34% of group's 9M12 net income). The revision of the Outlook to Stable reflects the stabilisation of OTPH's asset quality metrics and of the macroeconomic environment in Hungary. The Outlook revision also takes into account Fitch's recent revision of the Hungarian sovereign's Outlook to Stable, driven by progress in reducing the budget deficit and stabilising government debt along with improved fiscal and external financing conditions (see ' Fitch Affirms Hungary at 'BB+', Revises Outlook to Stable ' dated 20 December 2012 at www.fitchratings.com). RATING ACTION RATIONALE AND DRIVERS: OTPR's VIABILITY RATING The upgrade reflects OTPR's solid profitability, strong capital and liquidity positions, moderate refinancing risk and sizeable pre-impairment results, which provide a considerable buffer to absorb loan losses. At the same time, the rating is weighed by high credit risks inherent in OTPR's unsecured consumer lending in the highly cyclical Russian economy, very rapid recent loan growth, increasing loss rates and intensifying competition in the sector. Profitability has remained solid (annualised ROAE of 27.6% in 9M12) thanks to strong operating efficiency and adequately priced credit risks. However, intensifying competition is likely to weigh on the net interest margin both through more expensive retail funding and tighter loan yields. In addition, the bank may be forced to seek other distribution channels from the traditional POS network to sustain growth, which may put pressure on costs. In common with other Russian consumer banks targeting the lower mass market clientele, OTPR is exposed to high credit risk, although so far this has been well compensated by high loan rates. There was a moderate deterioration of asset quality in 9M12, reflected in an increase in the ratio of originated non-performing loans (NPLs, more than 90 days overdue) to performing loans to 9.2% (annualised) from 7.9% in 2011, although this is significantly below the Fitch-estimated break-even rate of about 18%. Capitalisation is a rating strength with a Fitch core capital ratio of 20.2% at end-Q312 and regulatory capital ratio of 16.7% at the same date. The latter allows provisions to be increased to 25% from 16% of the loan book before breaching regulatory requirements. Liquidity is linked to the stability of the retail deposit base (44% of total liabilities at end-Q312), which is price-sensitive and potentially flighty. Withdrawal risk is mitigated by substantial coverage of deposits by liquid assets (32% at end-November 2012) and the loan book's strong liquidity. Loan repayments of about RUB8.3bn per month (equal to 7.4% of end-Q312 total liabilities) provide an additional safety buffer. Refinancing requirements have been deferred, but are rather concentrated, with RUB13.5bn (12% of end-9M12 liabilities) potentially coming due in H114. RATING SENSITIVITES: OTPH's SUPPORT RATING OTPH's Support Rating could be upgraded or downgraded if there was a multiple notch upgrade or downgrade of the Hungarian sovereign rating. However, Fitch currently views this as unlikely. RATING SENSITIVITES: OTPR's IDRS, NATIONAL RATING, SUPPORT RATING OTPR's ratings could be upgraded or downgraded if OTPH's credit profile improved or deteriorated. The ratings could also come under pressure if Fitch reassesses the parent's propensity to provide support, although this appears unlikely at present. RATING SENSITIVITES: OTPR's VIABILITY RATING OTPR's Viability Rating could come under pressure if credit losses increase significantly due to portfolio seasoning and/or worsening of macro environment. An upgrade is unlikely at present, given the challenges of the almost saturated POS market and the expected increase in competition as state-owned banks roll out their mass-market lending. The rating actions are as follows: OTPR Long-term foreign currency IDR: affirmed at 'BB'; Outlook revised to Stable from Negative Short-term foreign currency IDR: affirmed at 'B' Long-term local currency IDR: affirmed at 'BB'; Outlook revised to Stable from Negative National Long-term rating: affirmed at 'AA-(rus)'; Outlook revised to Stable from Negative Viability Rating: upgraded to 'bb-' from 'b+' Support Rating: affirmed at '3' Senior unsecured debt long-term rating affirmed at 'BB' Senior unsecured debt National rating affirmed at 'AA-(rus)' OTPH Support Rating: affirmed at '3' Additional information is available at www.fitchratings.com. OTP Bank Plc's ratings were unsolicited and have been provided by Fitch as a service to investors. OJSC OTP Bank's 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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