September 22, 2017 / 2:45 PM / 10 months ago

Fitch Affirms 3 Private Medium-Sized Russian Banks

(The following statement was released by the rating agency) MOSCOW/LONDON, September 22 (Fitch) Fitch Ratings has affirmed the Long-Term Issuer Default Ratings (IDRs) of Rosevrobank (REB) at 'BB-', Banca Intesa Russia (BIR) at 'BBB-' and Joint Stock Company LOCKO-Bank (Locko) at 'B+'. The Outlooks are Stable. A full list of rating actions is at the end of this rating action commentary. KEY RATING DRIVERS IDRS, SUPPORT RATINGS AND SENIOR DEBT The affirmation of BIR's IDRs and senior debt rating reflects Fitch's view that BIR would likely be supported, in case of need, by its ultimate parent, Intesa Sanpaolo S.p.A. (ISP, BBB/Stable). This view is based on BIR's strategic role for further development of the group's Russian franchise, the low cost of the potential support that might be required, common branding and potential reputational and contagion risks for the group in case of a subsidiary default. The IDRs of REB and Locko, and Locko's senior debt rating reflect their intrinsic strength, as expressed by their Viability Ratings (VR). The banks' '5' Support Ratings and 'No Floor' Support Rating Floors reflect Fitch's view that support from shareholders or the Russian authorities, although possible, cannot be relied upon in case of need. VRs The affirmation of all three banks' VRs (REB at 'bb-', BIR and Locko at 'b+') reflects their generally adequate and stable credit profiles. This view is based on sufficient capitalisation, reasonable asset quality (better at REB), resilient profitability (at REB and Locko) and comfortable liquidity. Negatively, the banks' VRs factor in the relatively high-risk Russian operating environment, the banks' limited franchises and fairly concentrated balance sheets. REB's one-notch higher VR relative to the other two banks reflects its stronger and more resilient performance through the cycle, lower risk appetite and lower impaired loans. BIR BIR's asset quality remains under pressure, as the share of NPLs (non-performing loans, overdue more than 90 days) was a significant 17% at end-1H17 (same at end-2016), although fully reserved. Restructured exposures made up an additional 7% of gross loans at end-1H17, but these are performing under the renegotiated terms. The NPL origination ratio (defined as the net increase in NPLs for the period plus write-offs, divided by average performing loans - a proxy for credit losses) declined to zero in 1H17 following a strengthening of underwriting standards. However, the latter has also resulted in BIR's negative loan growth in previous years (-28% in 2016 and -16% in 2015). Profitability remained weak: the net interest margin (7% in 1H17, annualised) was almost fully consumed by high operating expenses (89% of gross revenues) as efficiency weakened as a result of the recent deleveraging. Pre-impairment profitability (4% of average equity) was insufficient to cover impairment charges, and BIR thus reported a negative return on average equity of 5%. The Fitch Core Capital (FCC) to risk-weighted assets ratio was 16% at end-1H17 (17% at end-2016, 13% at end-2015) supported by deleveraging and modest positive net income reported in 2016, derived from a one-off commission gain. The Tier 1 regulatory capital ratio was also 17% at end-8M17, providing sizeable additional loss-absorption capacity equal to 18% of gross loans. Funding was mainly sourced from customer accounts and deposits (68% of total funding), while the share of funding from the parent further decreased to 11% at end-1H17 from 14% at end-2016 due to deleveraging. Liquidity was sufficient to repay 49% of customer accounts at end-8M17, while the unused credit lines from the parent could cover all customer accounts in case of need. REB The affirmation of REB's VR reflects the extended record of good financial performance supported by relatively low funding costs and strong asset quality, a solid capital buffer and ample liquidity. At the same time, REB's ratings factor in its currently small franchise. REB's loan book quality remains strong, with a consistently low NPLs ratio (1.7% at end-1H17) and low restructured exposures (2.9%). These exposures were 2x covered by loan impairment reserves (LIRs) at end-1H17. Based on a review of the 25 largest corporate exposures (equal to 1x FCC) we consider them of limited risk because these are either (i) working-capital loans to cash- generative clients with long operational track records; or (ii) low-risk loans to government-related companies (about 20% of gross loans). REB's capitalisation is strong, as reflected by a high FCC ratio of 18% at end-1H17, up from 16% at end-2016. The increase was due to only limited lending growth and strong internal capital generation (annualised ROAE of 18% in 1H17). Regulatory capital ratios were also solid, with an 11% Tier 1 capital adequacy ratio (CAR) and 14% total CAR. Fitch estimates that at end-1H17 the bank's regulatory capital was sufficient to increase LIRs up to 22% of gross loans (from the current 12%) without breaching minimum capital requirements. Beyond that, loss absorption capacity is strengthened by solid pre-impairment profit, which was equal to a large 9.4% of average loans in 1H17 (annualised). REB's liquidity is ample, with liquid assets, including cash, short-term bank placements and liquid securities covering a high 45% of customer deposits at end-8M17. The bank's funding benefits from the high share (41% of liabilities at end-1H17) of sticky and granular interest-free current accounts. The funding structure translates into REB's fairly low funding cost (4.6% in 1H17), providing the bank with a significant competitive edge for lending to better quality corporates while maintaining healthy margins. Funding concentration is low (the 20 largest clients accounted for a moderate 20% of end-1H17 total accounts) and proved to be rather stable through the past crises. LOCKO NPLs in Locko's corporate portfolio (which accounted for 45% of total loans) stood at 10.1% at end-1H17 (end-2016: 7.3%), and restructured loans made up a further 2.9%. Corporate NPLs were 73% covered by reserves, while coverage of NPLs and restructured loans was a combined 57%. Fitch views this as adequate as most restructured exposures are performing and secured by completed real estate, and half of these are expected to be refinanced at other banks shortly. At the same time Locko applies reasonable discounts when assessing collateral and expects some recoveries on its NPLs. Problem loans in the retail portfolio (55% of the total book) were 10.6% at end-1H17, with NPLs and restructured making up 6.1% and 4.5%, respectively. Reserve coverage of problem retail loans was 52%, which is reasonable in Fitch's view, as about 70% of them were secured and the restructured part was represented by somewhat more risky but still performing loans. Single borrower concentrations are moderate, with the largest 25 borrowers accounting for 0.76x FCC. However, additional asset quality pressure may stem from Locko's significant exposure to the construction and real estate sectors (net exposure of 0.5x FCC at end-6M17). Fitch views most of these as of adequate risk since they are amortising and underlying projects are performing, while about 30% of them (0.2x FCC) are of higher risk, as the collateral is fairly illiquid real estate, although loan-to-value ratios are reasonable in most cases. The bank's FCC ratio was 21% at end-1H17 (19% at end-2016), while regulatory Tier 1 and total capital ratios at end-8M17 were lower due to more conservative risk weightings but still sound at 13% and 14%, respectively, allowing the bank to increase impairment reserves to 17% (from 8%) of gross loans without breaching minimum ratios. Pre-impairment profit net of securities gains equalled a healthy 5.9% of average loans in 1H17 (annualised), providing additional loss absorption capacity. Funding concentrations are low, with the 20 largest clients accounting for less than 20% of end-1H17 customer balances. Locko had a large cushion of liquid assets at end-8M17, which net of potential money market repayments maturing within the next 12 months covered customer accounts by 36%. RATING SENSITIVITIES BIR The Stable Outlook on BIR's ratings reflects the Stable Outlook on Russia's sovereign rating and the Stable Outlook on ISP. BIR would likely be downgraded if either Russia or ISP is downgraded, but would only be upgraded if both Russia and ISP were upgraded. BIR could also be downgraded if there was a sharp reduction in ISP's commitment to the subsidiary. Upside for the VR is currently limited due to BIR's weak performance and asset quality metrics. Negative pressure could stem from further asset quality deterioration and a weakening of the capital position, if this is not rectified by fresh equity injections from the parent. REB AND LOCKO REB's and Locko's ratings could be downgraded if their asset quality deteriorates significantly and erodes the banks' profitability and core capital. Upward pressure for Locko's ratings could emerge if the bank manages to improve its asset quality metrics and extends its record of suffering only moderate credit losses in its higher-risk lending segments. REB could be upgraded in case of a further strengthening of its franchise and an extended record of sound performance. REB'S and LOCKO'S SUPPORT RATINGS AND SUPPORT RATING FLOORS Fitch believes that any changes in the banks' SRs and SRFs are unlikely in the near term, although if either of the banks is sold to a higher-rated investor, it could result in an upgrade of its SR. LOCKO'S AND BIR'S SENIOR UNSECURED DEBT Senior unsecured debt ratings are sensitive to changes in the respective banks' IDRs. The rating actions are as follows: BIR Long-Term Foreign- and Local-Currency IDRs: affirmed at 'BBB-'; Outlook Stable Short-Term Foreign- and Local-Currency IDRs: affirmed at 'F3' Support Rating: affirmed at '2' Viability Rating: affirmed at 'b+' Senior unsecured rating: affirmed at 'BBB-' REB Long-Term Foreign- and Local-Currency IDRs: affirmed at 'BB-'; Outlooks Stable Short-Term Foreign-Currency IDR: affirmed at 'B' Viability Rating: affirmed at 'bb-' Support Rating: affirmed at '5' Support Rating Floor: affirmed at 'No Floor' LOCKO Long-Term Foreign- and Local-Currency IDRs: affirmed at 'B+', Outlooks Stable Short-Term Foreign-Currency IDR: affirmed at 'B' Viability Rating: affirmed at 'b+' Support Rating: affirmed at '5' Support Rating Floor: affirmed at 'No Floor' Senior unsecured debt: affirmed at 'B+'/Recovery Rating 'RR4' and 'B+(EXP)'/Recovery Rating 'RR4(EXP)' Contact: Primary Analysts Olga Ignatieva (REB) Senior Director +7 495 956 6906 Fitch Ratings CIS Limited 26 Valovaya Street Moscow 115054 Anton Lopatin (BIR) Director +7 495 956 7096 Fitch Ratings CIS Limited 26 Valovaya Street Moscow 115054 Roman Kornev (Locko) Director +7 495 956 7016 Fitch Ratings CIS Limited 26 Valovaya Street Moscow 115054 Secondary Analysts Sergey Popov (REB) Associate Director +7 495 956 9981 Konstantin Alekseenko (BIR) Analyst +7 495 956 2401 Ilya Sarzhin (Locko) Analyst +7 495 956 9983 Committee Chairperson James Watson Managing Director +7 495 956 6657 Media Relations: Julia Belskaya von Tell, Moscow, Tel: +7 495 956 9908, Email:; Peter Fitzpatrick, London, Tel: +44 20 3530 1103, Email: Additional information is available on Applicable Criteria Global Bank Rating Criteria (pub. 25 Nov 2016) here Additional Disclosures Dodd-Frank Rating Information Disclosure Form here Solicitation Status here Endorsement Policy here ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. 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