Fitch: Sub Loan Conversion Supports Russian Banks' Regulatory Capital

Tue Aug 12, 2014 9:42am EDT

(The following statement was released by the rating agency) Link to Fitch Ratings' Report: Conversion of VEB Subordinated Loans here MOSCOW/LONDON, August 12 (Fitch) The conversion of subordinated loans granted by state-owned development bank Vnesheconombank (VEB) into preferred shares will improve regulatory capital flexibility at Russia's largest banks, Fitch Ratings says in a new special report. However, the conversion will not improve core capital, and may also weaken overall capital quality if banks raise additional subordinated debt on the back of it. On 21 July 2014, President Putin signed a decree allowing 17 large Russian banks to convert subordinated loans received from VEB in the crisis of 2008 into preferred shares. Sberbank has also been given the right to convert its RUB500bn subordinated loan from the Central Bank of Russia (CBR) into either preferred shares or a perpetual bond. Fitch estimates that the banks that convert will benefit from considerable uplift (ranging from 20bps to 450bps) to their regulatory Tier 1 capital adequacy ratios, which in most cases currently represent the banks' biggest capital constraint. However, core Tier 1 and total capital ratios will remain largely unaffected and may come under pressure in the medium term as a result of further loan growth. The quality of the new capital will be moderate due to rather weak loss absorption, resulting from the low 2% conversion trigger for preferred shares (a higher 5.5% for the perpetual). The conversion will create the capacity and incentive to raise more subordinated debt, which if used aggressively, may weaken overall capital quality. The report, entitled 'Conversion of VEB Subordinated Loans', contains detailed analysis and the impact on individual banks. It is available at www.fitchratings.com or by clicking the link above. Contact: Alexander Danilov Senior Director +7 495 956 2408 Fitch Ratings CIS Ltd 26 Valovaya Street Moscow 115054 Moscow James Watson Managing Director +7 495 956 6657 Timur Lebedev Research Analyst +7 495 956 9983 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 at www.fitchratings.com. 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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