Fitch Affirms OJSC MTS Bank at 'B+'; Outlook Stable

Tue Nov 19, 2013 11:18am EST

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(The following statement was released by the rating agency) MOSCOW/LONDON, November 19 (Fitch) Fitch Ratings has affirmed OJSC MTS Bank's (MTSB) Long-term Issuer Default Rating (IDR) at 'B+' with a Stable Outlook. A full list of rating actions is at the end of this comment. KEY RATING DRIVERS - IDRS, NATIONAL LONG-TERM RATING, SUPPORT RATING MTSB's IDRs, and National Long-term and Support Ratings reflect Fitch's view of the limited probability of support that the bank may receive, if needed, from its parent, Sistema Joint Stock Financial Corp. (Sistema; BB-/Stable) and/or its subsidiaries. In assessing Sistema's propensity to provide support, Fitch considers its full ownership, the track record of capital support, including RUB5.1bn contributed in April 2013 by OJSC Mobile TeleSystems (MTS, BB+), a major operating subsidiary of Sistema, the brand association; and the significant risks of reputational and market access damage for the group in case of MTSB's default. Fitch also considers the cost of any potential support as moderate relatively to the size and financial ability of the broader group. At the same time, Fitch views the probability of support from the parent as only limited, given MTSB's weak performance to date and the bank's limited strategic importance and synergy within the group. KEY RATING DRIVERS - VIABILITY RATING (VR) MTSB's 'b-' VR reflects currently poor asset quality and further risks stemming from rapid recent (and therefore unseasoned) and planned growth of unsecured high margin retail lending, its moderate, but vulnerable capitalisation due to poor profitability, and the low transparency and potential regulatory risks related to subsidiary East-West United Bank (EWUB). However, on the positive side the VR also considers MTSB's reasonable liquidity position. At end-1H13, MTSB on a standalone basis (excluding EWUB) reported 9.8% loans overdue by more than 90 days (non-performing loans, NPLs) and a further 2.3% of rolled-over loans. Corporate NPLs were a high 10.7% of the standalone loan book at end-1H13, but were fully covered by reserves. However, Fitch's review of the largest corporate exposures (accounting for roughly 33% of end-1H13 standalone corporate loans) revealed that many of these, although not technically NPLs, are nevertheless risky as they are extended to highly leveraged borrowers, which could be particularly vulnerable to economic stresses. Retail lending (49% of the standalone loan book) quality is dragged down by the poor performance of unsecured loans (57% of total retail loans), with respective NPL origination (calculated as net increase in NPLs plus write-offs divided by average performing loans) at a high 20.4% (annualised) in 1H13, which is also above the sector average (see "Russian Consumer Finance Sector: Risk of Overheating Mitigated by Significant Buffers at Some Banks" dated 30 October 2013 at www.fitchratings.com). On a risk-return basis, Fitch estimates that the bank is currently slightly above breaking even on its retail loans. Although MTSB's capital position improved following the recent equity injection (Basel 1 capital adequacy ratio of 21.5% at end-1H13), it is potentially vulnerable due to planned 20% growth of unsecured retail lending in 2014 and weak overall performance (ROAE was moderately negative in 1H13) dampened by significant loan impairment charges. The quality of capital could also be weakened by two interbank placements (31% of end-1H13 Fitch core capital), which in Fitch's view may be of a fiduciary nature. MTSB's liquidity position is adequate with a solid level of highly liquid assets (cash, non-restricted short-term bank placements and repoable securities) sufficient to cover around 30% of MTSB's standalone customer deposits at end-3Q13. Fitch also continues to have concerns about the low transparency of the operations of Luxembourg-based EWUB, which accounted for 29% of total assets at end-1H13. EWUB is primarily engaged in extending cash-backed loans to foreign-domiciled entities with roots in CIS, which Fitch understands are mainly for regulatory purposes or tax considerations. The bank should not be taking significant financial risks on the loans, but reputational and regulatory risks could be high, in the agency's view. RATING SENSITIVITIES - IDRS, NATIONAL LONG-TERM RATING, SUPPORT RATING Positive rating actions on MTSB's parent could create upside potential for the bank's support-driven ratings, although if MTSB fails to improve its performance and provide meaningful synergies to the group, it may weaken Sistema's propensity to support it and therefore constrain ratings upside. Any clear indication that Sistema's commitment to MTSB had weakened, or failure of the parent to provide timely support, if needed, could result in the downgrade of the support-driven ratings. RATING SENSITIVITIES - VR Downward pressure on MTSB's VR could arise from material asset quality deterioration and/or capital pressure. The VR could mainly benefit from improvements in assets quality, resulting in stronger financial performance. The rating actions are as follows: Long-term IDR affirmed at 'B+'; Outlook Stable Short-term IDR affirmed at 'B' National Long-term Rating affirmed at 'A-(rus)'; Outlook Stable Viability Rating affirmed at 'b-' Support Rating affirmed at '4' Senior unsecured debt affirmed: 'A-(rus)' Contact: Primary Analyst Sergey Popov Associate Director +7 495 956 9981 Fitch Ratings CIS Ltd 26 Valovaya Street Moscow 115054 Secondary Analyst Dmitri Vasiliev Associate Director +7 495 956 5576 Committee Chairperson James Watson Managing Director +7 495 956 6657 Media Relations: Julia Belskaya von Tell, Moscow, Tel: +7 495 956 9908, Email: julia.belskayavontell@fitchratings.com; Hannah Huntly, London, Tel: +44 20 3530 1153, Email: hannah.huntly@fitchratings.com. Additional information is available at www.fitchratings.com. 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 here Additional Disclosure Solicitation Status here ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.

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