Fitch Upgrades Rosevrobank to 'BB-'; Affirms 6 Other Russian Private Banks

Fri May 23, 2014 12:20pm EDT

Related Topics

(The following statement was released by the rating agency) MOSCOW/LONDON, May 23 (Fitch) Fitch Ratings has upgraded Rosevrobank's (REB) Long-term Issuer Default Rating (IDR) to 'BB-' from 'B+' with a Stable Outlook. The agency has also affirmed the Long-term IDRs of Chelindbank (Chelind) at 'BB-', Locko-Bank (Locko), Primsotsbank, Bank Levoberezhny, SDM-Bank (SDM) at 'B+' and Bank Snezhinsky (BS) at 'B-'. The Outlooks are Stable. A full list of rating actions is at the end of this comment. KEY RATING DRIVERS: ALL BANKS' IDRS, NATIONAL LONG-TERM RATING AND VIABILITY RATINGS (VRS) The upgrade of REB's ratings mainly reflects its extended track record of attracting cheap and sticky customer funding, which gives it a significant competitive edge in the tougher operating environment. It also considers the bank's reasonable asset quality with growing share of government-related corporate borrowers and historically low-risk secured retail (mainly mortgages), moderate capitalisation, solid profitability and comfortable liquidity. The affirmation of the other banks' ratings with Stable Outlooks reflects: (i) limited changes in the credit profiles since last review and Fitch's view that these banks' relatively low ratings can tolerate a moderate deterioration of the operating environment (the latter reflected by the Negative Outlook on the Russian sovereign's 'BBB' rating); (ii) generally adequate asset quality, although there is moderate worsening of unsecured retail lending (Primsotsbank, Levoberezhny) and some specific concerns regarding corporate lending (Locko); (iii) reasonable capitalisation and profitability; (iv) broadly stable liquidity profiles and limited refinancing risks except Locko, which has material wholesale funding; and (v) on the negative side, the banks' relatively narrow franchises and high balance sheet concentrations. Fitch has withdrawn BS's ratings as the bank has chosen to stop participating in the rating process. Therefore, Fitch will no longer have sufficient information to maintain the ratings. Accordingly, Fitch will no longer provide ratings or analytical coverage for the bank. KEY RATING DRIVERS: REB'S IDRS, NATIONAL LONG-TERM RATING AND VR REB's asset quality remains resilient, with non-performing loans (NPLs, 90 days overdue) comprising a low 2.8% of the end-2013 loan book. NPLs were comfortably 2x covered by reserves. Beyond that, a comfortable additional loss absorption capacity is available from the bank's capital cushion and pre-impairment operation profit (equals 9.3% of average loans). Loan concentration is relatively high with top 25 exposures making 50% of corporate loans at end-2013. However, half of these largest exposures are composed of moderate risk working-capital loans to cash generative clients with a long operational track record while the other half are low-risk loans to government-related companies. Retail loans (29% of gross loans) are also low risk, as these are mostly mortgages with low LTVs. Funding is one of the main strengths with interest-free current accounts (mainly corporates) comprising a high 52% of end-2013 liabilities. The funding profile translates into REB's low funding cost (3.4% in 2013) giving the bank a significant competitive edge. Although this funding is rather granular (the 20 largest clients equalled low 15% of end-1Q14 current accounts) and proved to be rather sticky, REB has a significant liquidity cushion, which covered more than 50% of total customer accounts at end-2013, mitigating withdrawal risk. REB currently has no wholesale liabilities. REB's capitalisation is moderate as expressed by its 12.7% FCC ratio as of end-2013 and regulatory capital adequacy ratio of 11.1% at end-4M14. However, this is supported by healthy internal capital generation (ROAE of 23% in 2013). KEY RATING DRIVERS - CHELIND'S IDRS, NATIONAL RATING AND VR Chelind's asset quality was stable in 2013, supported by a relatively strong regional economy (see "Fitch Affirms Russia's Chelyabinsk Region at 'BBB-'; Outlook Stable" dated 25 April 2014). The ratio of NPLs/ gross loans stood at 5.2% with restructured loans at a further 3.7% at end-2013. These were fully covered by reserves of 9.5%. The credit risk is also mitigated by reasonable pre-impairment profit equalling 4.9% of average loans. The bank's capitalisation is solid with an FCC ratio of 19.3% at end-2013 and regulatory capital ratio of 18.2% at end-4M14. Internal capital generation ratio was healthy (ROE of 10.9% in 2013) considering the already high capital base. Capitalisation should be preserved as the bank plans only moderate about 8% growth in 2014. Chelind's liquidity position is comfortable due to its prominent position in the Chelyabinsk region where it is number two after Sberbank by retail deposits, limited wholesale debt, and a substantial cushion of liquid assets covering 28% of relatively granular customer accounts at end-1Q14. KEY RATING DRIVERS: SDM'S IDRS, NATIONAL LONG-TERM RATING AND VR At end-2013 SDM's reported NPLs were a modest 0.9% and were 3x covered by reserves. Although SDM's loan book concentration remains high (the 20 largest exposures comprised 50% of the end-2013 loan book, or above 2x FCC), Fitch is comfortable with the quality of most of the largest exposures as they are either short-term working capital loans to local medium-sized trade companies or real estate-related project finance loans, which are reasonably well secured with already operational properties. SDM's retail book is small and mostly channelled to low-risk mortgage clients. SDM's customer funding (90% of end-2013 liabilities) is mostly attracted from long-standing clients. Withdrawal risks are mitigated by SDM's healthy liquidity position (liquid assets equal high 56% of customer funding at end-2013). Liquidity is also supported by the relatively fast amortising loan book and the bank's proven ability to de-leverage under stress. SDM's capital is adequate with an FCC ratio of 16.6% at end-2013. Internal capital generating capacity is also reasonable, as the bank's ROAE (17% in 2013) is broadly in line with the growth plans. KEY RATING DRIVERS LOCKO'S - IDRS, VR AND NATIONAL RATING Locko reported a low NPL ratio of 3.6% at end-2013. However, Locko's practice of rolling over credit lines prior to maturity may distort the real loan quality, while also shortening the reported maturity of the loan book and improving regulatory liquidity ratios. Fitch views most of the 25 largest exposures (23% of the total book or 1.1x of FCC) as moderate risk due to reasonable borrowers' leverage and/(or) collateral coverage. However, few of these exposures (4% of total loans or 21% of FCC), comprising loans to construction companies for long-term development projects without hard collateral (due to them not being completed yet) and unsecured loan to bad debt collection company, are potentially high risk, in Fitch's view. The retail loan book (63% of total loans) is of adequate quality due to the dominance of secured car loans and mortgages (64% of retail loans at end-2013). Capitalisaiton is reasonable with the FCC ratio of 17.2% at end-2013. Total regulatory capital ratio was lower at 12.5% at end-1Q14 mainly due to higher statutory reserves. Fitch estimates the bank has the capacity to increase regulatory loan impairment reserves to 10.5% from 6.4% currently, overall a reasonable loss absorption buffer. Further complementing this, the bank's pre-impairment profitability was robust (6.4% of average loans in 2013) supported by strong securities gains (historically one of Locko's areas of competence). Refinancing risk is material given RUB12bn of wholesale funding maturing in 2013 (including local bonds with put options), representing 18% of total liabilities. The plan is to refinance, although it may be challenging given current market conditions. The bank had RUB11bn of liquid assets at end-1Q14, moderately mitigating refinancing risk. KEY RATING DRIVERS - PRIMSOTSBANK, LEVOBEREZHNY IDRS, VR AND NATIONAL RATING Asset quality is reasonable at both banks, although Fitch notes a moderate increase of NPL origination rates (defined as net increase in NPLs plus write-offs/average performing loans) in unsecured retail portfolios (30% and 48% of gross loans, respectively) in 2013, by 3.6% (up to 7%) for Primsotsbank, and by 5% (up to 8%) for Levoberezhny. End-2013 NPLs were 5% and 7.5% of gross loans, and renegotiated exposures made up a further 6% and 3.5% at Primsotsbank and Levoberezhny, respectively. NPLs were fully covered by loan impairment reserves at both banks, while restructured loans were only moderately reserved, as the banks have either reasonable collateral or these exposures are performing. The banks' capitalisation is moderate, with the regulatory ratio being tighter at Primsotsbank's (11.4% at end-1Q14) compared with Levoberezhny (13.2%). The ability to absorb additional losses through capital was therefore limited to a moderate 2% and 4% of gross loans, respectively. Positively, both banks' show healthy pre-impairment profits (5.4% of average loans for Primsotsbank, 9.5% - Levoberezhny), which offer a comfortable extra buffer. Net returns are also reasonable (17.4% and 31% annualised ROE in 9M13), which is sufficient to support growth. Liquidity cushions were comfortable, with the liquid assets (cash, net short-term interbank and securities eligible for repo with the CBR), net of modest wholesale repayments covering 33% of Primsotsbank's customer accounts and 27% of Levoberezhny's. Dmity Yarovoy and his immediate family jointly own 87% of Primsotsbank and 67% of Levoberezhny. Although both banks are controlled and managed by the same shareholders, they have limited overlap of business. RATING SENSITIVITIES - ALL BANKS' IDRS AND VR Upside potential for the ratings is limited given their limited franchises, high balance sheet concentrations and a weak economy outlook. The banks' ratings could be downgraded in case of a marked deterioration in the operating environment, resulting in asset quality deterioration and/or a liquidity squeeze. Additional negative pressure on Locko's ratings stems from relatively high refinancing risks. KEY RATING DRIVERS AND SENSITIVITIES: SDM'S AND LOCKO'S SENIOR UNSECURED DEBT AND LOCKO'S SUBORDINATED DEBT SDM's and Locko's senior unsecured debt is rated in line with the banks' Long-term IDRs, reflecting Fitch's view of average recovery prospects (corresponding to a Recovery Rating of '4'), in case of default. Any changes to the banks' VRs would likely impact the ratings of both senior and subordinated debt. Locko's expected subordinated debt rating has been affirmed a notch below its VR in line with Fitch's criteria for rating these instruments. Fitch has simultaneously withdrawn it, as the issue is no longer planned. RATING DRIVERS AND SENSITIVITIES: SUPPORT RATINGS AND SUPPORT RATING FLOORS The '5' Support Ratings and 'No Floor' Support Rating Floors of the banks reflect their small size, limited market shares and retail deposit franchises, making government support uncertain. In Fitch's view, support from the banks' private shareholders can also not be relied upon. An upgrade of these ratings is unlikely in the foreseeable future, although acquisition by a stronger owner could lead to an upgrade of the Support Rating. The rating actions are as follows: REB Long-term foreign and local currency IDRs: upgraded to 'BB-' from 'B+', Outlook Stable Short-term IDR: affirmed at 'B' Viability Rating: upgraded to 'bb-' from 'b+' Support Rating: affirmed at '5' Support Rating Floor: affirmed at 'No Floor' National Long-term rating: upgraded to 'A+(rus)' from 'A(rus)', Outlook Stable ' SDM Long-term foreign and local currency IDRs: affirmed at 'B+', Outlook Stable Short-term IDR: affirmed at 'B' Viability Rating: affirmed at 'b+' Support Rating: affirmed at '5' Support Rating Floor: affirmed at 'No Floor' National Long-term rating: affirmed at 'A-(rus)', Outlook Stable Senior unsecured debt: affirmed at 'B+'; Recovery Rating 'RR4' Senior unsecured debt National Long-term Rating: affirmed at 'A-(rus)' Senior unsecured debt: affirmed at 'B+(exp)'; Recovery Rating 'RR4' Senior unsecured debt National Long-term Rating: affirmed at 'A-(exp)(rus)' Locko Long-term foreign and local currency IDRs: affirmed at 'B+', Outlook Stable Short-term IDR: affirmed at 'B' Viability Rating: affirmed at 'b+' Support Rating: affirmed at '5' Support Rating Floor: affirmed at 'No Floor' National Long-term rating: affirmed at 'A-(rus)', Outlook Stable Senior unsecured debt: affirmed at 'B+'; Recovery Rating 'RR4' Senior unsecured debt National Long-term rating affirmed at 'A-(rus)' Subordinated debt: affirmed at 'B(exp)', Recovery Rating 'RR5' and withdrawn Senior unsecured debt: affirmed at 'B+(exp)'; Recovery Rating 'RR4' Senior unsecured debt National Long-term Rating: affirmed at 'A-(exp)(rus)' Chelindbank Long-term foreign currency IDR: affirmed at 'BB-', Outlook Stable Short-term foreign currency IDR: affirmed at 'B' Viability Rating: affirmed at 'bb-' Support Rating: affirmed at '5' Support Rating Floor: affirmed at 'No Floor' National Long-term rating: affirmed at 'A+(rus)', Outlook Stable Levoberezhny Long-Term foreign and local currency IDRs affirmed at 'B+'; Outlook Stable Short-Term IDR affirmed at 'B' National Long-Term Rating affirmed 'A-(rus)'; Outlook Stable Viability Rating affirmed at 'b+' Support Rating affirmed at '5' Support Rating Floor affirmed at 'No Floor' Primsotsbank Long-Term IDR affirmed at 'B+'; Outlook Stable Short-Term IDR affirmed at 'B' National Long-Term Rating affirmed 'A-(rus)'; Outlook Stable Viability Rating affirmed at 'b+' Support Rating affirmed at '5' Support Rating Floor affirmed at 'No Floor' Bank Snezhinskiy Long-term foreign currency IDR affirmed at 'B-'; Outlook Stable and withdrawn; Short-term IDR affirmed at 'B' and withdrawn; Viability Rating affirmed at 'b-' and withdrawn; Support Rating affirmed at '5' and withdrawn; Support Rating Floor affirmed at 'No Floor' and withdrawn Contact: Primary Analyst (REB, SDM) Dmitri Vasiliev Director +7 495 956 5576 Fitch Ratings CIS Ltd 26 Valovaya Street Moscow 115054 Primary Analyst (Locko, Primsotsbank, Bank Levoberezhny) Anton Lopatin Director +7 495 956 7096 Fitch Ratings CIS Limited 26 Valovaya Street Moscow 115054 Primary Analyst (Chelind, BS) Roman Kornev Director +7 495 956 7016 Fitch Ratings CIS Limited 26 Valovaya Street Moscow 115054 Secondary Analyst (REB) Sergey Popov Associate Director +7 495 956 9981 Secondary Analyst (Chelind, BS) Maria Kuraeva Analyst +7 495 956 9901 Secondary Analyst (Primsotsbank, Bank Levoberezhny) Anna Erachina Analyst +7 495 956 9901 Secondary Analyst (Locko) Alexander Danilov Senior Director +7 495 956 9901 Secondary Analyst (SDM) Alyona Plakhova Analyst +7 495 956 9901 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 31 January 2014, 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.

FILED UNDER: