December 4, 2013 / 5:36 PM / 5 years ago

Fitch Affirms 5 Belarus Banks at 'B-'; Outlook Stable

(The following statement was released by the rating agency) MOSCOW/LONDON, December 04 (Fitch) Fitch Ratings has affirmed the foreign currency Long-term Issuer Default Ratings (IDRs) of Belarusbank (BBK), Belinvestbank (BIB), BPS-Sberbank (BPS), Belgazprombank (BGPB) and Bank BelVEB (BelVEB) at 'B-' with Stable Outlooks. A full list of rating actions is at the end of this rating action commentary. KEY RATING DRIVERS - IDRS, SUPPORT RATINGS, SUPPORT RATING FLOORS The affirmation of the banks' Long-term IDRs with Stable Outlooks reflects Fitch's base case expectation that Belarus will be able to avoid a full blown macroeconomic and banking crisis over the rating Outlook horizon (12 to 18 months). At the same time, downside risks for the banks' ratings remain significant, given structural weakness in the economy and pressures on external finances. Belarus's current account deficit (CAD) increased to about 9.5% of GDP in 1H13 (2012: 2.7%), largely due to weaker Russian demand for exports. The CAD has resulted in further pressure on FX reserves (down by USD2.1bn in 10M13 to USD6.8bn) and the exchange rate (down by 10% year-to-date). Weaker exports, coupled with relatively high interest rates, have resulted in a slowdown in economic growth (1.1% yoy in 10M13 compared to 1.5% in 2012) notwithstanding still rapid nominal credit growth (25% in 10M13). Weaker demand, rising inventories and the high cost of credit have resulted in weaker credit metrics at many large companies, suggesting potential future deterioration of banks' loan quality (although this has yet to be reflected in reported metrics). Tighter monetary policy and supervision have also resulted in limited local currency liquidity in the banking system and reduced capital cushions, respectively (the latter primarily due to the higher 150% risk weightings on FX loans). At the same time, Fitch notes that Belarus passed a quite extreme stress test in 2011 while avoiding a sovereign default, and the now more flexible exchange rate should result in a somewhat greater ability to absorb future external financial shocks. The Long-term IDRs, Support Ratings and Support Rating Floors of BBK and BIB reflect the high propensity of the Belarusian authorities to support the banks, in case of need. This view is driven by the banks' high systemic importance, policy roles and the track record of support to date, albeit each of these factors is somewhat more pronounced in respect to BBK. BBK accounted for a large 41% and 47%, respectively, of system assets and deposits at end-3Q13, and its loan book largely comprises lending under state programmes, which are ultimately funded by the government. BIB's assets and deposits accounted for 6% and 8% respectively, of system totals at end-3Q13. State programmes accounted for 24% of end-3Q13 loans, one-third of which was funded by the government. BIB expects a BYR600bn equity injection in 1Q14 (equal to 25% of end-3Q13 IFRS equity) to support its regulatory capital ratio, which had fallen to 10.3% at end-10M13. The Long-term IDRs of BPS (owned by Sberbank of Russia; BBB/Stable), BGPB (OAO Gazprom, BBB/Stable, and Gazprombank, BBB-/Stable) and BelVEB (Vnesheconombank, BBB/Stable) are underpinned by what Fitch views as the high propensity of their Russian owners to provide support if needed. This view is supported by Russia's proximity to the Belarusian market, the low cost of any support required and the track records of support to date. However, the ratings are constrained at 'B-' by the quite high risk of transfer and convertibility restrictions being imposed in case of sovereign stress, which could limit the banks' ability to utilise support from their shareholders to service their obligations. BelVEB and BGPB have already received parental support in the form of equity injections and subordinated loans in 2011 and 2012. BelVEB's FCC ratio was 11.3% at end-3Q13 and BGPB's FCC ratio was a reasonable 16%. BPS's FCC ratio was a moderate 10.2% at end-3Q13, although the bank is expecting a small equity injection by end-2013, and Sberbank is also supporting capitalisation by sharing risks on the bank's loan book. KEY RATING DRIVERS - VRs The VRs of the five banks remain closely correlated with the sovereign credit profile due to (i) the likelihood that any further deterioration of the sovereign's financial position would have a sharply negative impact on the broader economy; (ii) the economy's high state ownership, and the dependence of many borrowers on government support; and (iii) the banks' high direct exposure to the sovereign resulting from holdings of government debt and FX swaps with the National Bank of Belarus. Banks' regulatory capital ratios have weakened significantly as a result of the higher risk weights introduced in 4Q13. BPS and BIB's ratios had fallen close to the 10% minimum at end-10M13, while BGPB and BelVEB's ratios were somewhat higher (12.8% and 11.5%, respectively), and BBK's was a more solid 19% following a large 4Q11 equity injection. Fitch views each of the banks' capital positions as vulnerable, given potential weaknesses in asset quality. Non-performing loan ratios (exposures overdue over than 90 days) were in low single digits at each of the banks at end-9M13, although in Fitch's view, this does not reflect underlying lending risks. This view is supported by structural weaknesses in the economy, recent rapid loan growth coupled with the decrease in exports, high FX lending, loan restructuring and the long tenors, and interest rate subsidies on many loans, which may help to conceal impairment. However, still positive economic growth and state support for the public sector should help to limit asset quality deterioration in the near term. Belarusian banks reported stable profits in 2013 due to the stabilisation of interest margins and the reduced negative impact in IFRS accounts of hyperinflation adjustments. Most banks have channelled a sizable proportion of pre-impairment profit into reserves. Customer funding remains the core funding source as deposits grew gradually throughout 2013, supporting banks' liquidity. However, high interest rates and an increase in mandatory reserves caused a marked tightening of local currency liquidity in 2H13, also reducing credit growth. Third-party foreign debt remains low, meaning refinancing risk is manageable. RATING SENSITIVITIES Any changes in the five banks IDRs are likely to be linked to changes in the sovereign credit profile. A further weakening of the sovereign could indicate a reduced ability to support BBK and BIB, and greater risk of transfer and convertibility restrictions being introduced, which could result in downward pressure on each of the banks' IDRs. The banks' VRs could be downgraded if their financial profiles deteriorate considerably as a result of marked asset quality deterioration and capital erosion, without support being made available. The potential for positive rating actions on either the IDRs or VRs is limited in the near term, given weaknesses in the economy and external finances. The rating actions are as follows: BBK and BIB Long-term IDR: affirmed at 'B-'; Outlook Stable Short-term IDR: affirmed at 'B' Viability Rating: affirmed at 'b-' Support Rating: affirmed at '5' Support Rating Floor: affirmed at 'B-' BPS-Sberbank, BGPB, BelVEB Long-term IDR: affirmed at 'B-'; Outlook Stable Short-term IDR: affirmed at 'B' Viability Rating: affirmed at 'b-' Support Rating: affirmed at '5' Contact: Primary Analyst Aslan Tavitov Associate Director +7 (495) 956 70 65 Fitch Ratings Moscow Valovaya Street, 26 Moscow 115054 Secondary Analyst Anna Erachina Analyst +7 (495) 956 70 63 Committee Chairperson Alexander Danilov Senior Director +7 (495) 956 24 08 Media Relations: Julia Belskaya von Tell, Moscow, Tel: +7 495 956 9908, Email:; Hannah Huntly, London, Tel: +44 20 3530 1153, Email: Additional information is available on Applicable criteria, 'Global Financial Institutions Rating Criteria', dated 15 August 2012 are available at 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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