December 20, 2017 / 4:28 PM / 5 months ago

Fitch Affirms Credit Bank of Moscow at 'BB-'; Downgrades VR to 'b+'

(The following statement was released by the rating agency) MOSCOW/LONDON, December 20 (Fitch) Fitch Ratings has affirmed the Long-Term Issuer Default Ratings (IDRs) of Credit Bank of Moscow (CBM) at 'BB-' with a Stable Outlook and its senior debt at 'BB-'. At the same time, the agency has downgraded CBM's Viability Rating (VR) to 'b+' from 'bb-', its subordinated debt to 'B' from 'B+' and its perpetual securities to 'CCC' from 'B-'. A full list of rating actions is at the end of this Rating Action Commentary. The affirmation of CBM's IDRs at 'BB-', one notch higher than the bank's VR, reflects Fitch's view that the risk of default on senior obligations (the reference obligations which IDRs rate to) is lower than the risk of the bank needing to impose losses on subordinated obligations to restore its viability (which the VR rates to). This is due to the large volume of junior debt (the additional Tier 1 perpetual and the Tier 2 subordinated debt), which currently amounts to around 13% of end-3Q17 IFRS risk-weighted assets (RWAs) and could be used to restore solvency and protect senior debt holders in case of a material capital shortfall at the bank. The downgrade of CBM's VR to 'b+' from 'bb-' reflects a moderate increase in Fitch's assessment of the volume of potentially risky asset exposures - driven in part by Fitch now considering some exposures more risky than before and in part by new net issuance - and a reassessment of the appropriate rating level given the volume of these exposures. As a result, Fitch now considers both asset quality and core capitalisation more vulnerable than before, and Fitch has lowered its assessments of the bank's company profile, corporate governance and risk appetite given significant volumes of relationship lending. Profitability and funding remain relative rating strengths. KEY RATING DRIVERS CBM reported low NPLs (non-performing loans, 90+ days overdue) of 2% at end-3Q17, which were fully covered by reserves. However, Fitch identified a large volume of potentially risky assets - RUB149 billion net of reserves, or 1.1x of end-3Q17 Fitch Core Capital (FCC) adjusted for the RUB14 billion raised during the SPO in October 2017 - which could be a source of impairment in the future. These moderately increased from the previous assessment of RUB127 billion (1.2x of FCC) based on end-1Q17 figures. These potentially risky exposures include: - RUB39 billion (29% of FCC) of loan and guarantee exposures to a pharmacy company, in which the bank's majority shareholder is a minority equity investor, and to which the bank is the largest creditor. This exposure increased moderately by RUB18 billion compared to the previous review, due to the inclusion of the guarantees in the calculation and new loan issuance. Risks stem from the borrower's weak financial position. - RUB25 billion (19% of FCC) of related-party construction loans. These increased by RUB8 billion. The construction projects are early stage, although the risks are mitigated by the companies' record of successful development. - RUB75 billion (56% of FCC) of large corporate loans to borrowers with high leverage or weak financial performance, of which RUB27 billion are not past due but impaired. The volume has increased by RUB38 billion since the previous review, mainly due to a reassessment of some exposures. The bank has some hard collateral against some of these exposures, which mitigates the risk, although its repossession and sale could be challenging. CBM says RUB5 billion of this total amount will be repaid by end-2017. - RUB6 billion (5% of FCC) of weak reverse repo exposures with high counterparty risks and weak collateral with limited discounts. These decreased by RUB24 billion. - RUB5 billion (4% of FCC) of less liquid bonds. These, together with some high-risk interbank exposures seen previously, decreased by RUB17 billion. The risks relating to the above exposures are mitigated by CBM's robust pre-impairment profit, which was RUB44 billion in 2016 and RUB31 billion in 9M17 (equal to 6% of average gross loans, annualised). This is sufficient to cover about 30% of the above-mentioned risky assets on an annual basis. Assuming a 50% stress on the risky assets it would therefore require between 1.5 and 2 years to reserve them sufficiently. The equity cushion is only moderate and able to absorb a small amount of extra losses. CBM's end-3Q17 FCC ratio, adjusted for the SPO, was 12% (10.7% reported at end-3Q17). The regulatory core Tier 1 ratio at end-10M17 (post-SPO) was a lower 8.5% (due to higher loan provisioning in the local accounts), preserving only a moderate 1.5% margin over the required minimum level for 2018 (7.025%, including the buffers for systemic importance and capital conservation). However, the bank's capital is bolstered by a large junior debt cushion, including additional Tier 1 and loss-absorbing Tier 2 subordinated debt, which are together equal to RUB145 billion or 13% of RWAs. This is virtually sufficient to fully cover the above potentially risky exposures in the worst-case scenario when large losses need to be recognised before the bank is able to absorb them through profits. We also consider significant 1.5x double leverage at the level of the bank's holding company, Concern ROSSIUM, which also holds stakes in non-financial businesses, as a contingent risk. The holdco's investments in subsidiaries exceeded its own equity at end-3Q17 by RUB50 billion, of which RUB30 billion was financed by long-term debt and RUB20 billion by short-term liabilities. The latter need to be constantly refinanced to avoid upstreaming liquidity and/or dividends from the bank, which is the holdco's main cash-generating asset. However, the bank's majority shareholder holds some of the holdco's debt, which reduces risks relating to the double leverage. Liquidity risks are limited, despite a high funding concentration, as this lumpy funding is placed in related asset exposures, most of which are rather liquid. CBM's liquidity buffer at end-3Q17 (comprising cash and equivalents, short-term interbank and unencumbered on-balance-sheet securities repo-able with the central bank) provided 41% coverage of customer funding net of the largest customer. Net of wholesale funding facilities maturing in 4Q17-1H18, the liquidity buffer covered customer deposits by a still good 29%. There were no significant changes in liquidity coverage between end-3Q17 and the first half of December. In Fitch's view, CBM's liquidity position is sound, and the bank is relatively well placed to withstand any market volatility connected with the temporary administration imposed on 15 December on another Russian bank, Promsvyazbank (not rated by Fitch). SUPPORT RATING AND SUPPORT RATING FLOOR The upgrade of the Support Rating to '4' from '5' and the revision of the Support Rating Floor to 'B' from 'No Floor' reflect Fitch's view that there is now a moderate probability of support from the Russian authorities, given CBM's moderate franchise and its recently acquired status of a systemically important bank, as well as the recent track record of state support being provided to two failed systemic banks without losses being imposed on their senior creditors. DEBT RATINGS CBM's senior unsecured debt is rated in line with the bank's Long-Term IDRs. The ratings of the bank's subordinated and Tier 1 instruments have been downgraded in line with the VR. The bank's subordinated debt rating is notched down once from the bank's VR. This incorporates zero notches for incremental non-performance risk and one notch for below-average expected recoveries in case of default. The rating of CBM's perpetual additional Tier 1 notes is three notches below the bank's VR. The notching reflects: incremental non-performance risk relative to the bank's VR due to the option to cancel coupon payments at CBM's discretion; and likely high loss severity in case of non-performance due to the instrument's deep subordination. Fitch is withdrawing the 'BB-(exp)' senior debt rating as the debt issuance is no longer expected to convert to final ratings. RATING SENSITIVITIES Upgrades of CBM's ratings would require a marked improvement in its asset quality and a strengthening of capitalisation through reduced exposure to risky assets, higher core capital ratios and/or reduced risks stemming from double leverage at the holdco level. Negative rating pressure may stem from further asset quality deterioration resulting in material capital erosion or a significant liquidity squeeze. The Long-Term IDR and senior debt ratings may be downgraded to the level of the VR if the coverage of the bank's risky asset exposures by its junior debt decreases significantly, increasing the risk of losses for senior creditors in case of the bank's failure. CBM's subordinated and perpetual additional Tier 1 instrument ratings are primarily sensitive to any change in the bank's VR. The Rating Watch Positive on the rating of the perpetual notes reflects the possibility that it will be upgraded to 'CCC+' from 'CCC' following the finalisation of Fitch's revised Bank Rating Criteria, the Exposure Draft of which was published on 13 December 2017. The Exposure Draft envisages the use of '+' and '-' modifiers for 'CCC' ratings. The rating actions are as follows: Credit Bank of Moscow Long-Term Foreign- and Local-Currency IDRs: affirmed at 'BB-', Outlooks Stable Short-Term Foreign-Currency IDR: affirmed at 'B' Viability Rating: downgraded to 'b+' from 'bb-' Support Rating: upgraded to '4' from '5' Support Rating Floor: revised to 'B' from 'No Floor' Senior unsecured debt: affirmed at 'BB-' Senior unsecured debt: 'BB-(exp)'; withdrawn CBOM Finance Plc (Ireland) Senior unsecured debt: affirmed at 'BB-' Subordinated debt: downgraded to 'B' from 'B+' Hybrid capital instrument: downgraded to 'CCC' from 'B-', placed on Rating Watch Positive Contact: Primary Analyst Roman Kornev Director +7 495 956 7016 Fitch Ratings CIS Ltd 26 Valovaya Street Moscow 115054 Secondary Analyst Artem Beketov Analyst +7 495 956 9932 Committee Chairperson James Longsdon Managing Director +44 20 3530 1076 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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