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Fitch Affirms Societe Generale's Russian Banking Subsidiaries' IDRs; Upgrades VRs
July 11, 2013 / 3:52 PM / in 4 years

Fitch Affirms Societe Generale's Russian Banking Subsidiaries' IDRs; Upgrades VRs

(The following statement was released by the rating agency) LONDON/MOSCOW, July 11 (Fitch) Fitch Ratings has affirmed Russia-based Rosbank's (RB), Rusfinance Bank's (RFB) and DeltaCredit Bank's (Delta) Long-term Issuer Default Ratings (IDRs) at 'BBB+' with a Stable Outlook. At the same time Fitch upgraded all three banks' Viability Ratings (VRs) to 'bb+' from 'bb'. A full list of rating actions is at the end of this comment. KEY RATING DRIVERS - IDRs, NATIONAL RATINGS, SUPPORT RATINGS RB's, RFB's and Delta's IDRs and Support Ratings are driven by potential support the banks may receive from their ultimate parent, France's Societe Generale (SG; 'A+'/Negative; 82.4% stake in RB which in turn owns 100% of RFB and Delta) and constrained by the Russian Country Ceiling of 'BBB+'. In Fitch's view, SG would have a strong propensity to support the banks, given its controlling stake and strategic commitment to the Russian market; the banks' still small size relative to the SG group limiting the burden of any support required; and the significant contagion/reputational risks for SG from their potential default. KEY RATING DRIVERS - RB'S VR The upgrade of RB's VR reflects the improved integration of RB into SG following its merger with BSGV and overhaul of the management framework; improvement of its asset quality due to considerable work outs of legacy problem loans; the bank's strong liquidity position and reasonable capitalisation. RB's risk profile and hence VR also benefits from its ownership of well performing and better capitalised RFB and Delta, which pay dividends and support its profitability. At the same time RB's stand-alone performance is still modest and, Fitch believes, achieving improvement would be challenging, yet possible given considerable potential for further cost optimisation. RB managed to recover about 3% of its average corporate loans in 2012 with the remaining non-performing loans (NPLs; 90 days overdue) equalling 9% of end-2012 loans and being 1.1x covered by reserves. Fitch views the quality of the remaining loan book as solid: 44% of end-2012 loans is lower risk secured auto loans and mortgages with a further 20% unsecured retail exposure to mostly payroll clients, while 36% of corporate loans are weighted towards better quality/blue chip corporates. Profitability remains modest (consolidated return on average assets (ROAA) of only 1.5%), due to the large and partly inefficient branch network, but, conversely, here the opportunity lies to optimise costs. Another reason is the bank's more conservative approach to lending which makes it challenging to grow in the currently competitive market. The bank also keeps a considerable low-yielding liquidity buffer (around 15% of end-5M13 assets or 31% of customer accounts). The RUB60bn outflow of corporate funding in May 2013 was not triggered by the recent allegations of RB's former head of the management board, but rather withdrawal of funds temporary placed in April 2013 by the few corporate clients with whom RB has a long-established relationship, which the bank placed on short-term money market. Excluding this effect the customer base and liquidity position remains stable. RB is strongly capitalised on a consolidated level as expressed by its high 15% Fitch Core Capital (FCC) ratio. However, regulatory capitalisation on a standalone basis is tighter with the regulatory total capital adequacy ratio (CAR) equalling 13.3% at end-5M13 allowing the bank to withstand only moderate 4.5% of additional credit losses. However, there is no immediate significant pressure on it given resolved asset quality problems, moderate growth plans (10% in 2013) and recently received dividends from RFB and Delta equalling, respectively, 45% and 35%, of their annual profits for 2012. KEY RATING DRIVERS - RFB'S AND DELTA'S VRs The upgrade of RFB's and Delta's VRs reflects reassessment of the appropriate rating levels given their relatively low-risk secured lending business, which showed considerable resilience during the last crisis, solid management, sound profitability and strong capitalisation. At the same time, RFB's and Delta's VRs continue to factor in the banks' significant dependence on SG's funding, although this is obtained on market terms, and uncertain growth prospects for RFB's car lending segment, despite the recently relaunched government subsidy program. RFB's asset quality remains solid with the NPL origination rate of 1.4% of average loans in 2012 (0.9% in 2011), which is well below the Fitch-estimated break-even rate of 7.3%. The bank remains strongly capitalised with a FCC ratio of 24.9% at end-2012 and regulatory total CAR of 18.3% at end-5M13; the latter would allow RFB to reserve additional 11% of gross loans before breaching the regulatory minimum. De-leveraging capacity stemming from a relatively short-term loan book (19 months on average) provides an additional safety cushion. Delta's NPLs were low at 0.7% at end-Q113 (considerably below average 1.7% for mortgages in Russia). The bank is reasonably capitalised with regulatory CAR standing at 15.1% (FCC ratio is much higher at 30.7% at end-Q113 due to lower risk-weights of mortgages as per IFRS), which would allow it to reserve an extra 6% of the loan book before breaching the regulatory minimum, which is well above historical losses. On the funding sides both banks still rely on SG's funds which, albeit decreasing, equal 32% and 43% of their end-2012 liabilities, respectively. Although the funding is provided in roubles (all of it for RFB, 48% for Delta), Fitch is concerned that the cost of this funding, if refinanced, may increase if there is a sharp deterioration of the local currency against the US dollar and/or euro. This is of more concern for Delta due to its mortgage loan book being longer-term (five years on average). RATING SENSITIVITES - IDRS, NATIONAL RATINGS AND SUPPORT RATINGS The banks' Long-term IDRs could be upgraded/downgraded if Russia's Country Ceiling ('BBB+') was upgraded/downgraded. The possible downward pressure for all three banks could also arise if there was a multi-notch downgrade of SG or a marked reduction in the strategic importance of the Russian market for SG, none of which Fitch currently anticipates. RATING SENSITIVITIES - VRS The upside potential for RB's VRs stems from marked improvement in operating efficiency translating into strong bottom line results and potentially further recoveries from its legacy loan book. The upside potential for RFB and Delta is currently limited, given their niche business models. However, an extended track record of solid performance through-the-cycle as well as the development of banks' own deposit collection franchises would be credit positive. Downside pressure for all three banks, although unlikely in the medium term, could stem from potential weakening of banks' asset quality and/or liquidity driven by a marked deterioration of the operating environment. KEY RATING DRIVERS AND SENSITIVITIES - SENIOR UNSECURED DEBT Long-term and National Ratings of all banks' senior unsecured debt correspond to their Long-term IDRs and are expected to move along with them. The rating actions are as follows: RB Long-term foreign and local currency IDRs: affirmed at 'BBB+'; Stable Outlook Short-term foreign currency IDR: affirmed at 'F2' Support Rating: affirmed at '2' National Long-term rating: affirmed at 'AAA(rus)'; Stable Outlook Viability Rating: upgraded to 'bb+' from 'bb' Senior unsecured debt: affirmed at 'BBB+'/'F2'/'AAA(rus)' Market linked securities: affirmed at 'BBB+(emr)' RFB Long-term foreign and local currency IDRs: affirmed at 'BBB+'; Stable Outlook Short-term foreign currency IDR: affirmed at 'F2' Support Rating: affirmed at '2' National Long-term rating: affirmed at 'AAA(rus)'; Stable Outlook Viability Rating: upgraded to 'bb+' from 'bb' Senior unsecured debt: affirmed 'BBB+'/'F2'/'AAA(rus)' Delta Long-term foreign and local currency IDRs: affirmed at 'BBB+'; Stable Outlook Short-term foreign currency IDR: affirmed at 'F2' Support Rating: affirmed at '2' National Long-term rating: affirmed at 'AAA(rus)'; Stable Outlook Viability Rating: upgraded to 'bb+' from 'bb' Senior unsecured debt: affirmed at 'BBB+'/'AAA(rus)' Contacts Primary Analyst (RB) Alexander Danilov Senior Director +7 495 956 2408 Fitch Ratings CIS Limited 26 Valovaya St. Moscow 115054 Primary Analyst (RFB, Delta) Dmitri Vasiliev Associate Director +7 495 956 5576 Fitch Ratings CIS Limited 26 Valovaya St. Moscow 115054 Secondary Analyst (RB) Dmitri Vasiliev Associate Director +7 495 956 5576 Secondary Analyst (RFB, Delta) Konstantin Yakimovich 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 15 August 2012, "Country Ceilings", dated 13 August 2012, and "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 Country Ceilings 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. 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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