Fitch Upgrades Absolut Bank to 'B'+; Affirms 3 Other Russian Banks

Tue May 27, 2014 12:29pm EDT

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(The following statement was released by the rating agency) MOSCOW/LONDON, May 27 (Fitch) Fitch Ratings has upgraded Absolut Bank's Long-term Issuer Default Rating (IDR) to 'B+' from 'B'. The agency has also affirmed the Long-Term IDRs of LLC Expobank (EB), Russian Universal Bank (Rusuniversal) and Spurt-Bank (Spurt) at 'B'. The Outlooks on all four banks' IDRs are Stable. A full list of rating actions is at the end of this commentary. KEY RATING DRIVERS - ABSOLUT'S IDRs, NATIONAL RATING AND VIABILITY RATING The upgrade of Absolut's IDR to 'B+' from 'B' mainly reflects its longer track record of sustainable performance after it was acquired in May 2013 by Non-State Pension Fund Blagosostoyanie (the Fund), controlled by JSC Russian Railways (RR, BBB/Negative), and reduced concerns about its recent merger with sister bank, OJSC KIT Finance Investment Bank (KIT), partly because the Fund had acquired some impaired assets from KIT's balance sheet prior to merger. The upgrade also considers the Fund's now stronger commitment in assisting the bank in its development, also reflected in considerable amount of funding provided to it by the Fund's related parties to replace that of the former owner KBC Bank (A-/Stable), and broader involvement of the bank in servicing companies related to the Fund. At the same time Absolut's Long-term IDRs do not factor in explicit extraordinary support from the Fund and reflect the bank's intrinsic creditworthiness (as shown by its Viability Rating). This is because there is limited visibility around the Fund's financial ability to provide support, as well potential constraints given the bank's complex ownership structure and evolving legislation of pension funds in Russia. Absolut's non-performing loans (NPLs, overdue by more than 90 days) were a low 3% of gross loans at end-2013 reflecting the bank's focus on moderate-risk corporate borrowers and low-risk residential mortgages. The impact of KIT's consolidation on loan quality should be broadly neutral for Absolut given the Fund's prior acquisition of impaired assets with a net value of RUB6.9bn from KIT's balance sheet for a consideration of RUB5bn (RUB1.9bn impairment loss was recognised by KIT). However, Absolut still inherited one big RUB8.1bn (33% of combined pro-forma equity) non-core real estate asset (a land plot in St. Petersburg for residential construction), which may require additional provisioning, as the disposal at this valuation is likely to be problematic. The bank's liquidity position is adequate, albeit there is an increased reliance on funding from the Fund and other related entities, which accounted for a quarter of customer accounts at end-2013. Refinancing risk is substantial with about RUB31bn (18% of liabilities) of wholesale funding maturing in 2014, including RUB12bn of bonds with put options. Mitigating this, the bank's liquid assets are sufficient to cover all 2014 repayments subject to stability of deposits. Capitalisation was moderate at end-2013 (Fitch Core Capital (FCC) of 15.5%) and should slightly decline (by about 100bp) as a result of the merger, as KIT's capitalisation was weaker. Thus, at end-4M14 the post-merger regulatory capital ratio was 12.5% compared to 13.8% at end-2013. Fitch has been informed that the Fund may provide up to RUB3bn of new equity to support capitalisation and growth, if required, as the bank's internal capital generation is quite modest (ROAE of only 2% in 2013). RATING SENSITIVITIES - ABSOLUT'S IDRs, NATIONAL RATING AND VIABILITY RATING An upgrade of Absolut's ratings would require a considerable franchise development without compromising asset quality, substantial profitability improvement, diversification of funding and reduction of non-core assets. Greater visibility of the Fund's financial profile confirming its ability to provide support coupled with a more explicit commitment to do so could also result in the upgrade of support-driven ratings and potentially IDRs. KEY RATING DRIVERS - EB'S IDRs, NATIONAL RATING AND VIABILITY RATING The affirmation of EB's international ratings reflects the track record of successfully managed M&A deals, adequate capitalisation and liquidity, and moderately improved, although potentially vulnerable profitability. At the same time, the ratings also take into account the limited franchise, high balance sheet concentrations and further expected fast growth through M&A activities, and specifically uncertainty related to the expected acquisition of a bank in Czech Republic. The upgrade of the National Rating reflects Fitch's view that the bank's credit profile is relatively stronger than that of some other Russian banks with a 'b' Viability Rating. EB's shareholders actively pursue the acquisition of banks/financial companies at significant discounts to book values. In 2013 EB's balance size increased by 25%, mainly driven by: (i) acquiring leasing company FB Leasing (RUB2.7bn of assets at date of purchase); and (ii) purchasing car loans portfolios mainly from one other bank. These deals generated about RUB1bn of fair value gains in the bank's IFRS accounts, which represented 75% of pre-tax profit in 2013 (ROAE was moderate 14.7%). EB expects to acquire LBBW Bank Cz (the Czech subsidiary of German Landesbank) in 2H14. Although there is likely to be some deleveraging of LBBW prior to the sale, the acquisition of a relatively big bank (total assets of around EUR1bn at end-2013) could negatively impact EB's capitalisaiton and liquidity. Mitigating this, Fitch understands the shareholder has some free resources, which may be injected into EB if needed. Capitalisation is currently reasonable. At end-1Q14, the total regulatory capital ratio stood at 19.7% potentially allowing EB to create impairment reserves up to 21% of total loan book (up from 3% currently) in local GAAP accounts before the capital ratio falls below the 10% required minimum. However, Fitch does not expect reserves to increase significantly because there are few risky exposures in the corporate book, while retail loans are secured and for the acquired portfolios there is an additional recourse to the sellers. Liquidity is also adequate. Although the depositor base was highly concentrated (top 20 accounts made up 30% of total customer accounts at end-2013), liquid assets less upcoming wholesale debt repayment covered 30% of customer funds at end-1Q14. RATING SENSITIVITIES - EB'S IDRs, NATIONAL RATING AND VIABILITY RATING EB's ratings could be upgraded if the bank strengthens its franchise by properly integrating acquired businesses, decreases balance sheet concentrations, improves core profitability and reduces reliance on one-off gains. Downward pressure may arise if capitalisation and/(or) liquidity deteriorates. KEY RATING DRIVERS - Spurt's IDRs, NATIONAL RATING AND VIABILITY RATING The affirmation of Spurt's ratings reflects its limited franchise with concentrations on both sides of the balance sheet, moderately weakened asset quality, some related party lending, tight capitalisation and liquidity, and only modest profitability. The ratings also acknowledge its long track record of operations and good relations with regional authorities. Asset quality was reasonable at end-2013 with NPLs making up 4.4% of gross loans and additional 3% being restructured. Reserves covered only NPLs reflecting solely that the restructured loans were mostly performing, but their collateral coverage was largely insufficient. The corporate book (70% of gross loans) was concentrated with the top 25 exposures making up 50% of corporate loans. The riskier part is construction exposure (about 1.3x FCC), although Spurt mainly lends to residential construction and/or companies benefiting from connections with the local authorities. The bank's largest exposure (0.3x FCC), to a weakly performing petrochemical plant related to the shareholder, is also a potential risk, although the company has recently raised a significant financing for renovation purposes from Vnesheconombank, which may ultimately improve its performance. The retail lending (30% of loans, of which 40% were unsecured) is moderately below the break-even. Capitalisation is rather tight with a regulatory ratio of 11.4% at end-1Q14 suggesting a limited buffer to absorb losses. Profitability is modest (ROE of 4.1% in 2013), being burdened by impairment reserves resulting from retail portfolio seasoning. Spurt's liquidity was also tight with liquid assets net of moderate near-term wholesale repayments covering a moderate 16% of customer accounts. However, the bank's corporate customer funding (43% of funds at end-2013) was predominantly relationship-driven mitigating withdrawal risk, to an extent. RATING SENSITIVITIES - Spurt's IDRs, NATIONAL RATING AND VIABILITY RATING Upside potential for the ratings is limited given the limited franchise and balance sheet concentrations. The ratings could be downgraded in case of material erosion of asset quality and capitalisation. A weakening of the bank's relations with the regional authorities, resulting in significant deposit outflows could also result in a downgrade. KEY RATING DRIVERS - RUSUNIVERSAL's IDR, NATIONAL RATING AND VIABILITY RATING The affirmation of Rusuniversal's ratings reflect limited changes in the credit profile since our last review, including the bank's narrow franchise and highly-concentrated balance sheet with a high level of relationship-based business and some regulatory risk. At the same time, the bank's ratings take into account healthy reported asset quality, strong capitalisation, and ample liquidity. Rusuniversal focuses mainly on defence sector companies with whom the bank's management/shareholders have long-term relations. Both loan and deposit books are extremely concentrated. The top 10 loans made up 83% of gross loans and the top five depositors 77% of customer accounts. There is also an overlap between some depositors and borrowers, further underlying franchise limitations and some regulatory risk. There is also a risk that the state may force defence industry companies to transfer financial flows to state-owned banks, potentially challenging Rusuniversal's long-term viability. Franchise and concentration issues aside, the bank's metrics are strong: zero NPLs, high regulatory capitalisaiton (61.8% at end-1Q14) sufficient to reserve the entire loan book, good profitability (ROE of 6.9% in 2013) considering high capital base and solid liquidity covering all of its customer funding. RATING SENSITIVITIES - RUSUNIVERSAL's IDR, NATIONAL RATING AND VIABILITY RATING Given the franchise limitations, the upside potential for the ratings is limited. The bank's ratings could be downgraded if regulatory pressures significantly impact its business and/or if the bank's capitalisation deteriorates as a result of either shareholders decision to withdraw a significant amount of capital or major asset quality deterioration. KEY RATING DRIVERS AND SENSITIVITIES - EB'S AND Absolut's SENIOR UNSECURED DEBT EB's and Absolut'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. 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: Absolut Long-term foreign currency IDR: upgraded to 'B+' from 'B'; Outlook Stable Long-term local currency IDR: assigned 'B+'; Outlook Stable Short-term IDR: affirmed at 'B' National Long-Term Rating upgraded to 'A-(rus)'; Outlook Stable Viability Rating upgraded to 'b+' from 'b' Support Rating affirmed at '5' Support Rating Floor: affirmed at 'No floor' Senior unsecured debt: upgraded to 'B+'/'A-(rus) ' from 'B'/'BBB+(rus) '; Recovery Rating 'RR4' EB Long-Term foreign and local currency IDRs affirmed at 'B'; Outlook Stable Short-Term foreign currency IDR affirmed at 'B' Support Rating affirmed at '5' Viability Rating affirmed at 'b' National Long-Term Rating upgraded to 'BBB(rus)' from BBB-(rus); Outlook Stable Support Rating Floor affirmed at 'No Floor' Senior unsecured debt affirmed at 'B'; Recovery Rating 'RR4' Senior unsecured debt National Long-term rating upgraded to 'BBB(rus)' from BBB-(rus) Spurt Long-term foreign currency IDR 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 'BBB-(rus)'; Outlook Stable Rusuniversal Long-term foreign and local currency IDRs: affirmed at 'B', Outlook Stable Short-term IDR: affirmed at 'B' National Long-term rating: affirmed at 'BBB-(rus)', Outlook Stable Viability rating: affirmed at 'b' Support Rating: affirmed at '5' Support Rating Floor: affirmed at 'NF' Contact: Primary Analyst (Rusuniversal and Expobank) Anton Lopatin Associate Director +7 495 956 70 96 Fitch Ratings Moscow 26 Valovaya Street Moscow 115054 Primary Analyst (Spurt) Dmitry Vasiliev Associate Director +7 495 956 55 76 Fitch Ratings Moscow 26 Valovaya Street Moscow 115054 Primary Analyst (Absolut) Roman Kornev Associate Director +7 495 956 70 16 Fitch Ratings Moscow 26 Valovaya Street Moscow 115054 Secondary Analyst (Spurt) Anna Erachina Analyst +7 495 956 70 63 Secondary Analyst (Rusuniversal) Alyona Plakhova +7 495 956 24 09 Secondary Analyst (Expobank and Absolut) Ruslan Bulatov Analyst +7 495 956 99 82 Committee Chairperson James Watson Managing Director +7 495 956 66 57 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. 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