November 30, 2017 / 2:27 PM / 17 days ago

Fitch Affirms 4 Russian State Banks; Outlooks Positive

(The following statement was released by the rating agency) MOSCOW/LONDON, November 30 (Fitch) Fitch Ratings has affirmed the Long-Term Foreign- and Local-Currency Issuer Default Ratings (IDRs) of Sberbank of Russia (Sberbank), Vnesheconombank (VEB) and their leasing subsidiaries, Sberbank Leasing and JSC VEB-Leasing, at 'BBB-'. Fitch has also affirmed the Long-Term IDRs of Gazprombank JSC (GPB), its subsidiary Gazprombank (Switzerland) Ltd (GPBS), and Russian Agricultural Bank (RusAg) at 'BB+'. The Outlooks on the IDRs of all seven entities are Positive. A full list of the rating actions is at the end of this commentary. KEY RATING DRIVERS IDRS, SUPPORT RATINGS, SUPPORT RATING FLOORS (SRFs), The affirmation of the Long-Term Foreign Currency IDRs and Support Rating Floors (SRFs) of Sberbank and VEB at the sovereign level of 'BBB-', and those of RusAg and GPB at 'BB+', reflects Fitch's view of a very high propensity of the Russian authorities to support the banks, in case of need. This is due to: (i) majority state ownership (100% of VEB and RusAg is government-owned; 50%+1 share in Sberbank is owned by the Central Bank of Russia (CBR)), or a high degree of state control and supervision by quasi-sovereign entities (GPB), most significantly by the bank's founder and shareholder PJSC Gazprom (BBB-/Positive); (ii) the exceptionally high systemic importance of Sberbank, as expressed by its dominant market shares (approximately 30% of system loans and 45% of retail deposits at end-3Q17), VEB's status as a development bank, RusAg's important policy role of supporting the agricultural sector and GPB's high systemic importance for the banking sector; (iii) the track record of capital support to VEB, GPB and RusAg to date; and (iv) the high reputational risks of a potential default for the Russian authorities/state-controlled shareholders. The Positive Outlooks on all four state-owned banks reflect that on the sovereign. The affirmation of VEB's ratings also reflects Fitch's expectation that the bank will receive sufficient and timely government support in the near to medium term to address weaknesses in its solvency and liquidity and enable it to service its obligations to creditors. VEB expects to receive RUB100 billion of new equity from the government annually in 2018-2020, which will be enough to reserve reported uncovered problem exposures (RUB330 billion or 11% of gross loans at end-2016). VEB's problematic Ukrainian exposure (about RUB0.4 trillion at end-1H17) was reclassified back to performing as the state fully guaranteed it in 2016. The guarantee was provided for five years, but Fitch understands this can be prolonged in case of need. Foreign wholesale funding at VEB was USD13 billion at end-1H17 with about USD3 billion maturing in 2H17-2018. Fitch believes VEB will repay most of these upcoming repayments from new government capital injections, refinancing the remaining part on the local market and/or using its own liquidity cushion (about USD10 billion equivalent at end-1H17). The ratings of GPB and RusAg are one notch lower than those of Sberbank and VEB as the banks do not have the exceptional systemic importance of the former or the development bank status of the latter. The notching from the sovereign also reflects (i) delays in provision of equity support to both banks, and their potential remaining capital needs; and (ii) that GPB is not directly majority-owned by the state. The affirmation of the IDRs of Sberbank-Leasing, VEB Leasing and GPBS in line with those of their parents reflects Fitch's view that they are highly-integrated core subsidiaries. DEBT RATINGS The senior unsecured debt ratings are aligned with the banks' IDRs. The upgrade of GPB's 'new-style' subordinated debt issues is the result of a reassessment of the risk of non-performance on these instruments by Russian state-owned/controlled banks. In Fitch's view, the track record of not imposing losses on these instruments during the recapitalisation of the banks since 2014 suggests that their non-performance risk is likely to be close to that of senior debt, as captured by the Long-Term IDRs, rather than captured by Viability Ratings (VR), which reflect the banks' standalone strength. Accordingly, state banks' 'new style' subordinated debt issues are now notched once from their IDRs, instead of their VRs, in line with the existing approach for rating 'old style' subordinated debt issues. The one notch reflects below-average recovery prospects for all subordinated instruments in case of default. This has resulted in GPB's 'new style' subordinated issue being upgraded to 'BB' from 'B+'. Sberbank's new style subordinated issue is affirmed at 'BB+' as the bank's IDR and VR are at the same level. The ratings of debt issued by Sberbank, VEB, RusAg, GPB and their subsidiaries apply to debt issued prior to 1 August 2014. VIABILITY RATINGS SBERBANK Sberbank's 'bbb-' VR reflects (i) the bank's exceptionally strong competitive position and pricing power due to dominant market shares in the Russian banking sector, (ii) the bank's cheap, stable and granular funding base and thus robust net interest margin and pre-impairment profitability; and (iii) reasonable asset quality and capital position. At end-3Q17 Sberbank's NPLs (non-performing loans; 90 days overdue) and performing restructured loans equalled a moderate 4.6% and 4.3% of gross loans, respectively. These were 81% covered by impairment reserves. We believe that downside asset quality risks for Sberbank are limited and expect its loan impairment charges to stay around 1.5% of gross loans in the medium term. At end-2Q17, of Sberbank's 20 largest corporate borrowers (31% of net corporate loans, or 1.5x FCC at end-1H17) Fitch identified only two potentially risky exposures related to oil and gas, construction and real estate industries totalling RUB0.5 trillion net of reserves (17% of Fitch Core Capital (FCC)), although risks are somewhat mitigated by availability of collateral. Other large corporate loans are of low to moderate credit risks, in Fitch's view. Retail loan quality is good, reflected by a low 1.2% annualised NPL origination rate in 9M17. Sberbank's FCC ratio dropped to 11.0% at end-3Q17 from 12.6% at end-2Q17 as it switched to Basel III. The expected transition to IFRS9 in 1Q18 may further reduce the FCC ratio by up to 50bps. Fitch does not view this decline negatively, as the implied risk-weighted assets (RWAs) density was very high 110% at end-3Q17 and Sberbank targets to gradually restore its Core Tier 1 ratio to 12.5% over the medium term, which should be achievable due to low-single-digit loan growth and healthy profit retention. Regulatory capitalisation is also reasonable. At 1 November, Sberbank's prudential Tier 1 capital ratio stood at 11.0% which is 2.5pts above the statutory minimum, including buffers applicable from 1 January 2018 (8.525%). Sberbank's profitability is robust, with about 26% ROAE for 9M17 and we expect it to stay above 20%, absent of major economic shocks. Sberbank's annualised pre-impairment profit equalled a high 6.5% of average gross loans in 9M17, above its cost of risk due to wide margins and reasonable cost efficiency. We do not expect significant margin pressure for Sberbank in the medium term as most other banks have higher funding costs, making it difficult for them to compete with Sberbank on lending rates. Sberbank's strong funding profile is underpinned by the bank's dominant 45% share in sector retail deposits and significant 20% share of on-demand customer funding in liabilities, resulting in a low average funding cost of about 4.2% in 3Q17 compared with a 6.0% sector average. Sberbank's wholesale contractual funding repayments in 2018 are negligible (below 1% of total liabilities). At end-3Q17, Sberbank held a significant cushion of liquid assets (in both local and foreign currencies) and its overall liquidity buffer exceeded 24% of total liabilities. GPB The affirmation of GPB's VR at 'bb-' reflects the bank's solid franchise, allowing lending to high profile corporate clients and attracting stable, albeit concentrated, funding from them. However, the rating is constrained by heightened risk appetite, downside asset quality risks mostly stemming from the lumpy legacy corporate exposures and tight capital position despite the recent capital injection. Asset quality is potentially vulnerable. NPLs stood at low 3% of gross loans at end-2Q17 and were 2x covered by reserves. However, impaired (but reportedly performing) loans were a high 14% at the same date and despite a moderate reduction from 20% at end-9M16 remain the main source of risk. The bulk relates to large risky loans (about RUB200 billion or 50% of loss absorbing capital), which were recently guaranteed by an entity with a sovereign-level credit rating, and loans to a distressed metals and mining company (further 30% of loss absorbing capital). Fitch understands the above guarantee provides temporary capital relief, while cash recoveries on the exposures are currently uncertain. The financial position of the metals and mining company has somewhat improved due to higher metal prices, but remains very sensitive to their potential decline. Additional asset quality risks stems from GPB's large equity (RUB114 billion net of goodwill) and debt exposures (RUB198 billion) to weakly performing non-banking subsidiaries (together 78% of loss-absorbing capital at end-1H17). Equity exposure increased by RUB60 billion in 1H17 due to additional investment in Gazprom Media, which corresponds to the size of the equity contribution from Gazprom to the bank, undermining its availability to absorb potential losses in the bank, in Fitch's view. Market risk appetite is high due to large investments into equities (RUB114 billion at end-1H17, or 28% of loss-absorbing capital), including a 49% equity stake in the subsidiary of the above-mentioned metals and mining company (6% of loss absorbing-capital) and a 37% stake in recently founded closed investment fund Gazprombank-Finansovyi (another 6%), the assets of which mostly consisted of PJSC Transneft's preference shares. Exposure to market risk has subsequently increased after the acquisition of a 19% stake in PJSC Megafon (BB+/Stable) from Telia in October 2017 (further 15% of end-1H17 loss-absorbing capital). Capitalisation is tight relative to the impaired exposures and equity holdings. The loss absorbing capital, which includes RUB166 billion preference shares owned by Russia's Finance Ministry and Deposit Insurance Agency, was 8.4% of Basel I RWAs at end-1H17. Fitch Core Capital, which excludes preference shares, was only 5% of RWAs. Regulatory capital ratios were moderately above the minimums including buffers at 1 October 2017: core Tier 1, Tier 1 and total capital ratios of the banking group were at 8.8%, 9.1% and 13.2%. Absent of big losses GPB should be able to comply with the higher buffer requirements applicable from 1 January 2018 (7.025%, 8.525%, 10.525%). Subsequently, GPB is going to raise further RUB21.2 billion from Gazprom through perpetual subordinated debt, which would increase the bank's regulatory Tier 1 and total capital ratios by around 40bps. Liquidity cushion remains sizeable with cash and short-term bank placements covering 17% of liabilities at end-1H17, while unpledged debt securities and loans eligible for repo with the CBR comprised a further 23%. Refinancing risk is small, as wholesale debt repayments in 2018 were only 2% of end-1H17 liabilities. RUSAG The affirmation of RusAg's VR at 'b-' reflects moderate changes to the bank's credit profile since last review, with weak asset quality and weak capitalisation still weighing on the rating. Refinancing risks are moderate. RusAg has continued provisioning and writing off its problem loans partly thanks to new capital support from the Russian government coming in. As a result, NPLs reduced to 16% of gross loans at end-1H17 from 18% at end-1H16 and NPL coverage by total loan reserves grew to a moderate 65% from 54%. However, NPL origination is likely to remain high in the medium term given still high restructured loans, at 34% and 33%, respectively, and, more generally, RusAg's commitment to relatively high-risk agricultural lending. Fitch estimates that FCC could have notched up to a weak 2% of Basel II RWAs at end-3Q17 from a historical low of 1% at end-1H17 owing to a RUB25 billion core capital injection in September. In addition, preferred shares, which Fitch considers high-quality loss absorbing capital, amounted to 4% of RWAs. Pre-impairment core profitability improved to a moderate 2% of average gross loans in 9M17 (annualised) after 1% in 2016 and a loss in 2015 helping RusAg to meet its high provisioning needs. Net profitability is likely to remain around break even for the next several years. Funding profile benefits from gradual repayment of wholesale funding and good access to large local funding sources. Eurobond repayments in 2018 could put some pressure on liquidity ratios and the bank's funding costs. Fitch estimates RusAg's liquid assets, net of Eurobonds due until end-2018, at 18% of customer funding at end-3Q17. Additionally, loans eligible for repo with the CBR made up 8% of customer funding. RATING SENSITIVITIES IDRS, SRs, SRFs Rating actions on the IDRs of all entities will most likely mirror those on Russia's sovereign ratings. Additional downside pressure on VEB's, GPB's and RusAg's support-driven ratings could emerge in case of weaker support track record to these entities being insufficient to address capital/asset quality issues. In this case the notching between their and the sovereign ratings may be widened. Although not a base case scenario, the SRFs of all four entities could be lowered, leading to the downgrade of the IDRs of VEB, GPB and RusAg, in case of new, more severe sanctions against Russia, if Fitch takes a view that it results in weaker sovereign propensity to support foreign creditors of state-owned banks. A significant weakening of the propensity of parent banks to provide support (not expected by Fitch at present) to subsidiary entities could result in downgrades of the subsidiaries' ratings. DEBT RATINGS The senior unsecured and subordinated debt ratings would likely change in tandem with the respective banks' Long-Term IDRs. VRs An upgrade of Sberbank's VR could be triggered by a sovereign upgrade, as Fitch believes that Sberbank's intrinsic credit strength is close to and correlated with that of the sovereign. A downgrade of Sberbank's VR could be driven by a sharp deterioration of the operating environment and Sberbank's asset quality, although Fitch views this as fairly unlikely at present. An upgrade of GPB's and RusAg's VRs would require a substantial improvement in their asset quality, capital adequacy and performance (the latter particularly for RusAg). Conversely, these two banks could be downgraded in case of weakening of their asset quality and capitalisation if this is not promptly offset by new solvency support from the sovereign. The rating actions are as follows: Sberbank of Russia Long-Term Foreign- and Local-Currency IDRs: affirmed at 'BBB-'; Outlooks Positive Short-Term Foreign- and Local-Currency IDRs: affirmed at 'F3' Viability Rating: affirmed at 'bbb-' Support Rating: affirmed at '2' Support Rating Floor: affirmed at 'BBB-' SB Capital S.A. Senior unsecured debt: affirmed at 'BBB-' 'Old-style and 'New-style' subordinated debt: affirmed at 'BB+' Vnesheconombank Long-Term Foreign- and Local-Currency IDRs: affirmed at 'BBB-'; Outlooks Positive Short-Term Foreign-Currency IDR: affirmed at 'F3' Support Rating: affirmed at '2' Support Rating Floor: affirmed at 'BBB-' Senior unsecured debt: affirmed at 'BBB-' VEB Finance PLC: Senior unsecured debt: affirmed at 'BBB-' Gazprombank JSC: Long-Term Foreign- and Local-Currency IDRs: affirmed 'BB+'; Outlooks Positive Short-Term Foreign-Currency IDR: affirmed at 'B' Viability Rating: affirmed at 'bb-' Support Rating: affirmed at '3' Support Rating Floor: affirmed at 'BB+' Senior unsecured debt: affirmed at 'BB+' GPB Eurobond Finance PLC: Senior unsecured debt: affirmed at 'BB+' 'Old-style' subordinated debt: affirmed at 'BB' 'New-style' subordinated debt: upgraded to 'BB' from 'B+' Russian Agricultural Bank Long-Term Foreign- and Local-Currency IDRs: affirmed at 'BB+'; Outlooks Positive Short-Term Foreign-Currency IDR: affirmed at 'B' Viability Rating: affirmed at 'b-' Support Rating: affirmed at '3' Support Rating Floor: affirmed at 'BB+' Senior unsecured debt: affirmed at 'BB+' RSHB Capital S.A.: Senior unsecured debt: affirmed at 'BB+' Gazprombank (Switzerland) Ltd Long-Term Foreign-Currency IDR: affirmed at 'BB+'; Outlook Positive Short-Term Foreign-Currency IDR: affirmed at 'B' Support Rating: affirmed at '3' Sberbank Leasing Long-Term Foreign- and Local-Currency IDRs: affirmed at 'BBB-'; Outlooks Positive Short-Term Foreign-Currency IDR: affirmed at 'F3' Support Rating: affirmed at '2' JSC VEB-Leasing Long-Term Foreign- and Local-Currency IDRs: affirmed at 'BBB-'; Outlooks Positive Short-Term Foreign-Currency IDR: affirmed at 'F3' Support Rating: affirmed at '2' Senior unsecured debt: affirmed at 'BBB-' Contact: Primary Analysts Dmitri Vasiliev (Sberbank, GPB) Director +7 495 956 5576 Fitch Ratings CIS Limited 26 Valovaya Street, Moscow 115054 Roman Kornev (RusAg, GPBS) Director +7 495 956 7016 Fitch Ratings CIS Limited 26 Valovaya Street, Moscow 115054 Anton Lopatin (Vnesheconombank) Director +7 495 956 7096 Fitch Ratings CIS Ltd 26 Valovaya Street Moscow 115054 Aslan Tavitov (Sberbank Leasing) Director +44 20 3530 1788 Fitch Ratings Limited 30 North Colonnade London E14 5GN Ruslan Bulatov (VEB Leasing) Associate Director +7 495 956 9982 Fitch Ratings CIS Limited 26 Valovaya Street, Moscow 115054 Secondary Analysts Ruslan Bulatov (Vnesheconombank, GPB, Sberbank Leasing) Associate Director +7 495 956 9982 Anton Lopatin (Sberbank) Director +7 495 956 7096 Anna Erachina (RusAg) Associate Director +7 495 956 7063 Artem Beketov (VEB Leasing) Analyst +7 495 956 9932 Dmitri Vasiliev (GPBS) Director +7 495 956 5576 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; Peter Fitzpatrick, London, Tel: +44 20 3530 1103, Email: peter.fitzpatrick@fitchratings.com. 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