Fitch Affirms 3 Russian Regional Banks

Fri Aug 15, 2014 10:06am EDT

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(The following statement was released by the rating agency) MOSCOW, August 15 (Fitch) Fitch Ratings has affirmed the Long-term Issuer Default Ratings (IDRs) of Ak Bars Bank (ABB) and Almazergienbank (AEB) at 'BB-' and Krayinvestbank (KIB) at 'B'. The Outlooks are Stable. A full list of rating actions is available at the end of this rating action commentary. KEY RATING DRIVERS: IDRS, SENIOR DEBT RATING, NATIONAL LONG-TERM RATINGS AND SUPPORT RATINGS The banks' ratings reflect Fitch's view of potential support from regional authorities, in case of need, due to these authorities' majority ownership (indirectly for ABB) and operational control of the banks as well as the track record of capital and liquidity support to date. For ABB, the ratings also consider the bank's significant market share in Tatarstan, and for AEB its small size relative to the budget of Yakutia. However, Fitch views the probability of support as only moderate in each case, and therefore notches down the ratings of all banks from their respective parents. The four-notch difference between the rating of ABB and the Republic of Tatarstan (RT; BBB/Negative) reflects the region's indirect and somewhat non-transparent ownership, mostly through the RT-controlled holding company OJSC Svyazinvestneftekhim (SINEK; BBB/Negative). The notching also reflects risks over RT's financial flexibility and ability to provide capital support in a timely manner and significant corporate governance issues, as the bank is still heavily exposed to entities, which Fitch believes to be connected to the local administration, and to other high-risk assets (together represented 2.2x Fitch Core Capital (FCC) at end-2013). However, the ratings are supported by ABB's substantial market shares in its local region. The three-notch difference between the rating of AEB and its 77%-owner Republic of Sakha (Yakutia) (Yakutia, BBB-/Stable) considers the bank's limited systemic importance in its home region. However, the notching does not take into account Yakutia's stated intention to attract a strategic investor, and thus to significantly dilute its stake in the bank. This is because this process could be gradual and lenghty (over the period of 2016-2018, according to the bank's management), and the region is likely to retain at least a 25% +1 share in the bank, meaning that close ties with the regional authorities will remain. The three-notch difference between the rating of KIB and its 98%-owner, the Krasnodar Region (KR; BB/Negative), considers the bank's significant high-risk development loans and other non-core assets (2.4x FCC at end-2013), most of which Fitch believes to be related to officials within the regional administration and/or the bank's management. This suggests weaknesses in corporate governance, potentially making support more costly and less politically acceptable. RATING SENSITIVITIES: IDRS, NATIONAL LONG-TERM RATINGS, SENIOR DEBT RATING AND SUPPORT RATINGS AEB's ratings could be downgraded if Yakutia is downgarded. The Stable Outlook on the ratings of KIB and ABB reflects Fitch's expectation that even if their parents, whose IDRs are on Negative Outlook, are downgraded by a notch, for example, as a result of a sovereign downgrade, the banks' ratings would remain at their already relatively low levels. However, a multi-notch downgrade of the regions, which is currently not envisaged by Fitch, would likely cause a downgrade of the banks. Downside pressure on the banks' support-driven ratings could also arise from any major weakening in their relationship with the regions, for instance, as a result of changes to any key senior regional officials or pressure from the federal authorities for the regions to divest their stakes in the banks (although neither of these are currently expected by Fitch). AEB's ratings could also be downgraded if Fitch changes its view on Yakutia's propensity to support the bank in anticipation of the planned dilution of the stake and/or if the bank is sold to a less creditworthy owner. An upgrade of ABB or KIB would be contingent on their respective parents' Outlooks being revised to Stable and improved corporate governance with respect to the banks' high-risk exposures. Upside potential for AEB's ratings is limited due to the authorities' plans to dilute their stake in the bank. KEY RATING DRIVERS: ABB's VR ABB's VR reflects the bank's signifciant high-risk corporate lending and investment property exposures, tightly managed capital and poor pre-impairment profitability. Positively, it reflects the bank's reasonably performing retail loan book and currently comfortable liquidity position, the latter underpinned by inelastic customer funding and manageable short-term refinancing needs. The bank managed to sell RUB12bn of non-core asset in 2013, but the residual amount of these and other high risk-exposures is still high and continues to weigh on its VR. These include: - RUB34bn of net loans (1.2x FCC) related to ABB's management and the RT administration, the bulk of which are exposed to long-term project finance construction projects in RT - RUB12bn of investment properties (0.4x FCC), the recoverability of which may be lengthy and result in additional impairment charges - RUB6bn of other high-risk exposures (0.2x FCC), which comprise mostly construction loans at the initial stage of completion with weak collateral coverage Additionally, the bank has RUB11bn of loans (0.4x FCC) to third-party investment companies; however, these are fiduciary in nature and Fitch therefore views them as slightly lower- risk. The agency estimates that ABB's regulatory capital buffer at end-1H14 was sufficient to withstand only RUB7bn of additional losses. This translates to average losses of 11% on the above-listed high-risk exposures, which in Fitch's view corresponds to only mild economic stress. Internal capital generation is weak, with 2013 pre-impairment operating profit of only RUB3.7bn (equal to 1.5% of average loans). Furthermore, this was supported by RUB4bn of non-core one-off income from the sale of investment properties above book value. Liquidity and refinacning risks are moderate in the near term as the bank has RUB26bn of wholesale and money markets repayments in next 12 months, while the available liquidity buffer was RUB71bn at end-1H14. The next sizable debt repayment is a USD500m (RUB17bn equivalent) eurobond due in November 2015. KEY RATING DRIVERS: AEB's VR AEB's VR factors in the bank's moderate regional franchise, modest profitability and moderate capitalisation, but satisfactory asset quality and reasonable liquidity. AEB reported small NPLs of 2.6% of end-1Q14 loans, which were fully covered by reserves. However, a further 9% of loans were restructured and only moderately reserved, but were performing and in most cases well-collateralised, suggesting sound recovery prospects. Corporate lending is concentrated, with the 20 largest borrowers comprising 35% of gross loans or 2.4x FCC at end-1Q14, but many exposures were to state-controlled borrowers or had reasonable collateral. Retail loan performance was also satisfactory, supported by predominant lending to employees of corporate clients and participation in government-subsidised mortgage programmes. The regulatory capital adequacy ratio (N1) stood at a rather tight 11.5% at end-1H14, allowing AEB to increase its statutory reserves by only 3% (to 9%) of loans, while pre-impairment profitability is moderate (equal to 2.6% of average loans at end-2013). The buffer provided by highly liquid assets covered 24% of customer accounts at end-1Q14, while near-term money market/wholesale repayments were only modest. The bank's liquidity is also supported by stable funding from government-controlled entities (26% of customer accounts). KEY RATING DRIVERS: KIB's VR The affirmation of KIB's VR reflects only minor changes in its risk profile since the last review of the bank in June 2014. The rating is constrained by significant real estate development exposure, entirely structured through affiliated parties' promissory notes (RUB7.2bn, 1.4x FCC at end-2013) and development loans (RUB5.2bn, 1x FCC at end-2013), moderate capitalisation (10.7% at end-1H14) and modest liquidity (high liquid assets were only 14% of total assets at end-1H14). However, it also considers the bank's comfortable funding profile, based on granular retail deposits. RATING SENSITIVITIES: ALL BANKS' VRs Downward pressure on the banks' VRs could stem from a marked deterioration in asset quality, resulting in capital erosion, in the absence of appropriate support, or a marked increase in high-risk assets. AEB's VR could be upgraded if the bank' capitalisation and franchise strengthens and profitability improves. An upgrade of ABB's VR would be contingent on further major progress with work-outs of problem loans and non-core assets. Given KIB's corporate governance and asset quality issues, upside potential for its VR is limited. KEY RATING DRIVERS AND SENSITIVITIES: ABB'S SUBORDINATED DEBT ABB's 'old-style' (without mandatory conversion triggers) subordinated debt is rated two notches below its Long-term IDR. The rating differential reflects one notch for incremental non-performance risk (in Fitch's view, the risk of default on subordinated debt could be moderately higher than on senior obligations in a stress scenario) and one notch for potential loss severity (lower recoveries in case of default). Any changes to the bank's Long-term IDR would likely impact the rating of the subordinated debt. The rating actions are as follows: Ak Bars Bank (ABB) Long-term foreign and local currency IDR: affirmed at 'BB-'; Outlook Stable Short-term foreign currency IDR: affirmed at 'B' National Long-term rating: affirmed at 'A+(rus)'; Outlook Stable Viability Rating: affirmed at 'b-' Support Rating: affirmed at '3' Senior unsecured debt: affirmed at 'BB-' Senior unsecured debt National rating: affirmed at 'A+(rus)' AK BARS Luxembourg S.A Senior unsecured debt: affirmed at 'BB-' Subordinated debt: affirmed at 'B-' Almazergienbank (AEB) Long-term foreign currency IDR affirmed at 'BB-'; Outlook Stable Short-term foreign currency IDR affirmed at 'B' Long-term local currency IDR affirmed at 'BB-'; Outlook Stable National Long-term rating affirmed at 'A+(rus)'; Outlook Stable Viability Rating affirmed at 'b' Support Rating affirmed at '3' Krayinvestbank (KIB) Long-term foreign and local currency IDRs: affirmed at 'B'; Outlook Stable Short-term foreign currency IDR: affirmed at 'B' National Long-term rating: affirmed at 'BBB-(rus)'; Outlook Stable Viability Rating: affirmed at 'b-' Support Rating: affirmed at '4' Senior unsecured debt: affirmed at 'B'/'BBB-(rus)/ 'RR4' Contacts: Primary Analysts Dmitri Vasiliev (ABB) Director +7 495 956 5576 Fitch Ratings CIS Limited 26 Valovaya Street, Moscow 115054 Sergey Popov (AEB, KIB) Associate Director +7 495 956 9981 Fitch Ratings CIS Limited 26 Valovaya Street, Moscow 115054 Secondary Analysts Anna Erachina (ABB, AEB) Analyst +7 495 956 7063 Ruslan Bulatov (KIB) Analyst +7 495 956 9982 Committee Chairperson James Watson Managing Director +7 495 956 6657 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, 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.

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