Fitch: Weaker Rouble, Markets May Pressure Russian Bank Capital

Fri Mar 7, 2014 10:33am EST

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(The following statement was released by the rating agency) MOSCOW, March 07 (Fitch) Falls in the rouble and local securities have been manageable for Russian banks so far, but further losses could put strain on some institutions' capital, Fitch Ratings says. We estimate banks' Tier 1 ratios may have fallen by 10bp-50bp on average since 1 February from rouble depreciation and lower stock and bond prices. This mainly reflects the rouble's 3% fall against the US dollar - following a 7% depreciation in January - which inflates risk-weighted assets and can generate losses on open currency positions, and may also increase the cost of currency hedges. Capital ratios will also have come under moderate pressure as a result of declines in equities of 9% and bonds of an estimated 0.6%. Larger banks typically have enough headroom in their Tier 1 ratios and decent internal capital generation, so the recent decline in market values is less of a risk. If there were a further and sharper market downturn (an additional 20% rouble devaluation, 20% share and 5% bond price declines) we estimate that Tier 1 ratios would suffer bigger declines of 40bp-200bp. The main negative impact would be from revaluation of bonds, we estimate, while currency and equities would still have a moderate influence. The most vulnerable rated banks in such a scenario would be Russian Standard, due to already low capitalisation, and Probusiness, due to its large bond book. The sector as a whole should have benefitted slightly from the revaluation of open currency positions, as it was moderately long in foreign currency (+8% of equity) at end-January. This is true for most Fitch-rated banks, although a few reported moderately short net positions, including Bank Saint Petersburg (-8% of equity, but narrowed in February), Otkrytie (-4%) and Unicredit (-4%). Potential losses for these banks would be small even if the rouble devalues sharply, due to the moderate size of the positions. But some banks use hedges to manage their positions and may be exposed to repricing risk, as the tenors of these contracts are typically short term. Banks that use foreign-currency funding to issue rouble loans would be especially exposed, as it could become significantly more expensive to hedge the positions in case of market volatility. Some of the most exposed banks by short foreign-currency open balance sheet position, but before hedges, are Promsvyaz (108% of equity), Rencredit (94%), Russian Standard (94%), Nomos (66%), Tinkoff (58%) and VTB (30%). The risk may increase if customers start converting rouble deposits into foreign currency. Revaluation of foreign-currency loans for the calculation of risk-weighted assets also has a moderate negative effect on capital ratios. We estimate that a further 20% rouble depreciation could reduce banks' Tier 1 ratios by only 10bp-50bp through this channel. In addition, asset quality for foreign-currency loans could also weaken as borrowers without access to foreign-currency revenues face debt-servicing difficulties, so loan impairment charges and reserves may increase. Foreign-currency lending for the sector is moderate, at around 18% of loans, but significantly higher at some banks, such as Gazprombank (36%), Alfa (34%), Unicredit (38%) and Raiffeisen (35%). However, these banks tend to provide foreign-currency loans to borrowers with foreign-currency denominated revenues, which mitigates the asset quality risk. Equities price falls generally put only moderate pressure on banks' capital, as the exposure (excluding funds and subsidiaries) was only 6% of sector equity at 1 February 2014. We estimate that a 20% decline in equity prices would lead to a contraction of Tier 1 ratios by only 10bp-30bp. Bond holdings (excluding ones classified as held to maturity) are more significant at 70% of equity. Therefore our 5% stress would depress Tier 1 ratios by 10bp-100bp. The rouble has lost around 10% against the dollar since 1 January 2014, while the Russian equity market slumped by 12% on 3 March due to rising tensions in Ukraine, but has rebounded by about 4% since then. Apart from financial market movements, Russian banks' performance and capitalisation could also deteriorate if economic growth is weaker than our forecasts of 1.5% and 2% for 2014 and 2015, respectively. Lower business and consumer confidence, higher interest rates and reduced access to foreign credit could increase risks. Potential economic and financial sanctions could also affect growth and investment, although this is not our base case. 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. The above article originally appeared as a post on the Fitch Wire credit market commentary page. The original article can be accessed at www.fitchratings.com. All opinions expressed are those of Fitch Ratings. Applicable Criteria and Related Research: Russian Banks Datawatch 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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