(Repeat for additional subscribers)
July 16 (The following statement was released by the rating agency)
Fitch Ratings has upgraded Probusinessbank's (PBB) Long-term Issuer Default Ratings (IDR) to 'B' from 'B-' with Stable Outlook. A full list of rating actions is at the end of this comment.
KEY RATING DRIVERS
The upgrade mainly reflects: (i) the improvement in PBB's capital quality following the sale of a material part of non-core assets; (ii) slower loan growth in the challenging unsecured retail segment, which is still profitable for the bank despite some recent deterioration; and (iii) healthy liquidity position. However, the ratings also take into account moderate capitalisation, which is still weakened by significant non-banking assets, and considerable market risk.
PBB's consolidated (including six smaller Russian banks, factoring and property development companies) Basel total capital ratio (CAR) stood at a moderate 12.4% at end-1Q14. The Fitch core capital (FCC) ratio was lower at 9.5%. The quality of capital is undermined by investments in development property (RUB3.9bn, 25% of FCC at end-2013) valued mainly using subjective discount cash flow models and certain interbank placements (RUB2.9bn, 20% of FCC), which in Fitch's view may be fiduciary in nature. Positively, the group managed to sell RUB6.4bn worth of real estate assets in 2013, moderately improving capital quality.
PBB's standalone regulatory capitalisation was tight at 10.4% at end-5M14 partly due to deduction of investments in subsidiaries, although there is some flexibility in managing this. For example, in June PBB transferred its investment in Bank24.ru to a separate holding company, controlled by PBB's shareholders, which should improve the standalone regulatory capital ratio to 11.4% at end-6M14. However, the latter only provides a moderate ability to absorb losses equal to 3.6% of loan book before falling below a 10% required minimum level.
As a source of additional capital and mitigating potential credit losses, there was solid pre-impairment profitability equalling 7% of average gross loans (annualised) in 1Q14. At the same time, net profitability was undermined by a RUB1.6bn mark-down revaluation of the bank's large securities book (RUB42bn or 2.7x of FCC at end-2013), mostly consisting of bonds with rather long (around four years) duration. However, the quality of securities is good (most are Russian sovereign bonds), so the bank is unlikely to realise these losses.
Asset quality is reasonable for a bank with a focus on unsecured retail lending. Non-performing loans (NPLs; overdue more 90 days) accounted for a high 15% of gross loans at end-1Q14, but were reasonably (0.8x) covered by impairment reserves. Retail NPL generation ratio (defined as net increase in NPLs plus write-offs divided by average performing loans) was 14.5% in 1Q14, which although an increase from 11.7% in 2013, is still below the estimated break-even rate of about 20% due to high interest rates.
As a potential contingent risk, Fitch considers the acquisition by PBB's shareholders of failed Bank Solidarnost (BSD) in 1Q14, which was done under the sanitation process organised by the Depository Insurance Agency (DIA). BSD is a medium-sized regional bank with assets of RUB17bn and capital shortage estimated at around RUB2bn in local accounts at the time of sale. Under the sanitation plan, BSD received a RUB6bn effectively interest-free loan from DIA in late 2013, which allowed it to recognise a RUB3bn fair value gain in its IFRS accounts, thereby restoring the bank's capital. However, this gain will be recognised only gradually in local accounts, so to recapture BSD's regulatory capital position PBB's shareholders acquired its new RUB2.2bn shares issue and utilised a four-year loan from DIA for a similar amount to finance it. PBB's management expects to improve BSD performance in the next two to three years, although there is a risk that BSD's asset quality turns out to be worse than anticipated.
PBB's liquidity is comfortable with a cushion of liquid assets (cash and equivalents, unrestricted short-term interbank placements and bonds eligible for REPO financing with Central Bank) sufficient to cover customer accounts by 57% at end-1Q14.
Senior unsecured debt is rated in line with the bank's Long-term IDRs, reflecting Fitch's view of average recovery prospects (corresponding to a Recovery Rating of '4'), in case of default.
PBB's ratings could be downgraded if asset quality and/or capitalisation materially deteriorates. Upside potential is currently limited taking into account the challenging economic environment, elevated retail credit losses and weakened quality of capital.
Any changes to the banks' VRs would likely impact the rating of senior unsecured debt.
The rating actions are as follows:
Long-term foreign currency IDR: upgraded to 'B' from 'B-', Outlook Stable
Long-term local currency IDR: upgraded to 'B' from 'B-', Outlook Stable
Short-term IDR: affirmed at 'B'
Viability Rating: upgraded to 'b' from 'b-'
Support Rating: affirmed at '5'
Support Rating Floor: affirmed at 'No Floor'
National Long-term rating: upgraded to 'BBB(rus)' from 'BB+(rus)', Outlook
Senior unsecured Long-term Rating (including that issued by PBB LPN Issuance):
upgraded to 'B'/RR4 from 'B-'/RR4
Senior unsecured Short-term Rating : affirmed at 'B'
Senior unsecured Long-term Rating: upgraded to 'B (EXP)'/RR4 from 'B- (EXP)'/RR4 and withdrawn
Securities National Rating: upgraded to 'BBB(rus)' from 'BB+(rus)'