Fitch Affirms URALSIB Bank and Uralsib Leasing Group at 'B+'; Outlook Negative

Tue Jul 22, 2014 2:20pm EDT

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(The following statement was released by the rating agency) MOSCOW/LONDON, July 22 (Fitch) Fitch Ratings has affirmed Russia-based URALSIB Bank's (UB) and its subsidiary Uralsib Leasing Group's (ULG) Long-term Issuer Default Rating (IDR) at 'B+'. The Rating Outlook is Negative. A full list of rating actions is provided at the end of the commentary. KEY RATING DRIVERS - UB'S IDRS AND VIABILITY RATING (VR) The affirmation of ratings with a Negative Outlook reflects Fitch's view that the credit profile remains under downward pressure from extremely weak capitalisation, slow progress with reduction of large non-core assets and related-party exposures, poor operating performance, and a moderate liquidity position. Positively the ratings are supported by the bank's granular corporate loan book of generally decent quality, adequately performing retail lending and a solid retail deposit collection capability. We also give some credibility to the bank's capital-raising plan and its efforts to improve profitability by rebalancing the loan book in favour of higher-yielding retail loans, by re-pricing corporate loans and cost cutting. The major weakness is capitalisation (Fitch Core Capital ratio of 8.9% at end-2013) in light of the large holdings of non-core assets and related-party exposures cumulatively equalling to 1.5x of FCC at end-2013. These exposures included: -RUB19bn (62% of FCC) indirect (held through a mutual fund) investment in 92.7% equity stake of insurance group SG Uralsib (SGU), which is not consolidated by UB due to lack of operational control and plans to sell it. However, the sale at the currently high valuation (6x net assets) could be problematic given its poor performance and a challenging Russian insurance market. -RUB19bn (62% of FCC) of real-estate investments (also held through mutual funds), some of which (e.g. land in Moscow about a third of the total amount) are also aggressively valued, in Fitch's view. -RUB8bn of related-party exposures (26% of FCC), including RUB1.8bn of unsecured interbank placements and RUB6.2bn of receivables and loans secured with land. Regulatory capitalisation is of particular concern (core Tier I and Total ratios of 7.9% and 11.2%, respectively, at end-1H14), because Basel III regulations introduced in 2014 require investments in financial companies (even if held indirectly, such as SGU) to be gradually deducted (by 20% each year starting from1 January 2014) from core Tier 1 capital. UB expects next such deduction at 1 January 2015 to be around RUB3.6bn (about 11% of Tier 1 regulatory capital at end-1H14). Although not a base case, further downside risks for the regulatory capitalisation may arise from potential changes with respect to regulatory treatment of UB's holding of RUB6.3bn (20% of FCC) convertible subordinated bonds of ULG (treated as equity in the company's accounts) or above real estate investments (currently 250% risk-weighted) should deductions for these from the bank's core Tier I capital become required as is for equity investments in financial organisations/subsidiaries. To relieve regulatory capital pressure UB plans to slash capital distributions (after RUB1.5bn of mostly dividends and charitable contributions on behalf of the shareholder in 2013) and, make a perpetual debt placement in 4Q14 among private investors, according management. However, the latter would not improve core Tier 1 ratio, which in the medium-term would still require profitability improvement and/or a new equity contribution. The ratio of non-performing (overdue by more than 90 days) loans (NPLs)/ gross loans was roughly stable in 2013 at about 10%, due to problem loan sales equalling to 4% of corporate loans and generally sound performance of retail loans. In 1H14, few defaults among large borrowers led to elevated impairment charges in regulatory accounts, although these are unlikely to require significant additional provisioning. Fitch does not see imminent risks from UB's 40 largest third-party loan exposures (20% of loans), except an exposure to OAO Mechel, highly-indebted metals and mining group of companies, and its shareholder. This exposure totals 1.2% of gross loans (11% of FCC), and although currently performing, is subject to whether and how the state intends to save the company from bankruptcy. Liquidity has been volatile, but remains supported by a granular depositor base and a strong retail deposit collection capacity. UB's standalone liquid assets (cash, bank placements and unencumbered repo-able debt securities), net of its near-term debt maturities, represent a moderate 17% of customer deposits on 17 July 2014, up on end-May 2014's 9%. ULG's upcoming repayments are not significant, and hence unlikely to be a source of liquidity pressure for UB. RATING SENSITIVITIES - UB'S IDRS AND VR The ratings could be downgraded if capital-raising plan fails or if capitalisation and/or its quality erodes further due to either deterioration of performance, downward adjustments to some of the asset valuations or any new material capital withdrawals by the shareholder. A major liquidity squeeze could also lead to a downgrade. Ratings could stabilise at the current level if the bank is able to raise new capital by end-2014 to support regulatory capitalisation, as well as delivering on its target to improve core profitability thereby reducing the need for external capital in the face of future capital deductions for non-core/financial assets. KEY RATING DRIVERS AND SENSITIVITIES - SUPPORT RATING AND SUPPORT RATING FLOOR UB's '4' Support Rating and 'B' Support Rating Floor reflect the moderate probability of government support, given the bank's broad regional coverage across Russia and significant deposit franchise. The ratings could be downgraded if state support fails to be made available when needed. The Support Rating could be upgraded if UB becomes owned by a high-rated entity. KEY RATING DRIVERS AND SENSITIVITIES - ULG'S IDRS AND SUPPORT RATING ULG's IDRs are equalised with the parent's IDRs based on Fitch's view that ULG is a core subsidiary and would likely be supported by UB in case of need. This view is based on majority 87.6% ownership by UB, a significant level of supervision by the parent through the Board of Directors and at management level, high reputational risk for UB of ULG's potential default due to, among other things, the entities' common branding. ULG's IDRs are likely to move in tandem with the parent's ratings. Although we believe UB currently retains flexibility to provide support, we could start notching down ULG's ratings from UB's if the latter's ability to provide timely support to the leasing subsidiary deteriorates significantly as a result of weakened financial standing and/or regulatory limitations. The rating actions are as follows: URALSIB Bank: Long-Term IDR affirmed at 'B+'; Outlook Negative Short-Term IDR affirmed at 'B' Viability Rating affirmed at 'b+' Support Rating affirmed at '4' Support Rating Floor affirmed at 'B' Uralsib Leasing Group: Long-Term Foreign Currency IDR affirmed at 'B+'; Outlook Negative Short-Term Foreign Currency IDR affirmed at 'B' Long-Term Local Currency IDR affirmed at 'B+'; Outlook Negative Support Rating affirmed at '4' Contacts: Primary Analyst (URALSIB Bank) Alexander Danilov Senior Director +7 495 956 2408 Fitch Ratings CIS Ltd 26 Valovaya Street Moscow 115054 Primary Analyst (Uralsib Leasing Group) Sergey Popov Associate Director +7 495 956 9981 Secondary Analyst (URALSIB Bank, Uralsib Leasing Group) Roman Kornev Director +7 495 956 7016 Committee Chairperson Olga Ignatieva Senior Director +7 495 956 6906 Media Relations: Elaine Bailey, London, Tel: +44 203 530 1153, Email: elaine.bailey@fitchratings.com; Julia Belskaya von Tell, Moscow, Tel: +7 495 956 9908, Email: julia.belskayavontell@fitchratings.com. Additional information is available on www.fitchratings.com. Applicable criteria, 'Global Financial Institutions Rating Criteria' dated 31 January 2014, 'Rating FI Subsidiaries and Holding Companies, dated 10 August 2012, are available at www.fitchratings.com. Applicable Criteria and Related Research: Global Financial Institutions Rating Criteria here Rating FI Subsidiaries and Holding Companies 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. 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