November 27, 2017 / 2:42 PM / a year ago

Fitch Affirms Credit Europe Bank at 'BB-', Outlook Stable

(The following statement was released by the rating agency) MOSCOW, November 27 (Fitch) Fitch Ratings has affirmed Russia-based Credit Europe Bank's (CEBR) Long-Term Issuer Default Rating (IDR) at 'BB-' with a Stable Outlook. A full list of rating actions is at the end of this rating action commentary. KEY RATING DRIVERS IDRs and VR CEBR's IDR is driven by the bank's standalone creditworthiness, as reflected by a 'bb-' Viability Rating (VR). The affirmation of the ratings reflects the bank's reasonable financial metrics maintained to date and decreased refinancing risks following recent bulk wholesale repayments while access to deposit funding has also improved. The ratings also capture the bank's limited franchise, exposure to Russia's volatile consumer finance segment (52% of gross loans), high concentrations and dollarisation (75% of the total) of corporate lending. CEBR's asset quality metrics stabilised in 2016-1H17 with non-performing loans (NPLs, above 90 days overdue) reported at around 8% of loans at end-1H17 and end-2016. Restructured loans (largely from retail lending) contributed a further 8% of loans. Risks in the bank's retail segment are reasonably controlled as reflected in a 5% NPL origination rate in 1H17 (defined as the increase in retail loans overdue above 90 days, plus write-offs, divided by average performing retail loans), down from a high 10% in 2015. Stabilisation of the operating environment and continued recovery of the Russian consumer finance market have supported stabilisation of asset quality. Downside risks remain due to retail borrowers' still high debt burden while unsecured loans accounted for a large 66% of the bank's retail portfolio at end-1H17. NPLs in the retail portfolio were fully covered by reserves. NPLs in the corporate loan book stood at 10%, with moderate (47%) reserve coverage at end-1H17. However, adequate collateral coverage, the valuation of which in most cases appears reasonable, mitigates credit risk to an extent. Corporate loans remain highly concentrated, with exposure to the largest 20 groups of borrowers accounting for about 70% of the bank's total corporate portfolio, or 1.5x Fitch Core Capital (FCC), half of which relates to the high-risk construction and real estate sectors. Fitch's review of major loans reveals that, on top of NPLs, there were a few higher-risk exposures (reflecting borrower's high leverage, prior restructurings and/or high loan-to-value ratios) which, net of specific reserves, accounted for a moderate 23% of FCC. Pre-impairment profitability is improving (estimated at 6% of average gross loans in 9M17, annualised; 2016: 5%) helped by renewed growth, after years of deleveraging, and lower funding costs (8% in 9M17, down from 10% in 2015). However, CEBR's modest bottom line result (6% ROAE in 9M17; 2016: 2%), reflects still high, albeit decreasing, loan impairment charges (4% of average gross loans in 9M17; 2016: 7%) and a fairly high cost base (cost-to-income ratio of 55%), while economies of scale are yet to emerge. We expect CEBR to continue profitable growth, helped by the sector recovery, although ROAE is unlikely to return to high double digits soon. CEBR's capitalisation is solid, with a FCC ratio of 19% at end-3Q17, helped by the recent deleveraging, but it should be viewed in light of the bank's risk profile, currently modest internal capital generation and ambitious growth targets. Regulatory Tier 1 capital ratio was a lower 12%, but comfortably above the 7.875% minimum (including buffers applicable from 2018), reflecting higher statutory risk weights for unsecured retail loans and sizeable operational risk charge. We expect that gradually improving profitability and planned earnings retention will help to manage capitalisation at reasonable levels during accelerated growth. Refinancing risks have decreased markedly as CEBR has replaced its expensive wholesale debt placements with cheaper and granular retail deposits during 2016-9M17. As a result, CEBR's loans-to-deposits ratio declined to 130% at end-3Q17 from a high 230% at end-3Q16. Non-deposit funding is limited (15% of total liabilities), partly in the form of subordinated debt maturing in 2019. Liquidity cushion (mostly cash items and inter-bank placements) was equal to a modest 15% of retail deposits at end-3Q17, which are price-sensitive and could be flighty at times of stress. Moderate liquidity support could also be made available by the parent bank, Credit Europe Bank N.V. (CEB; BB-/RWP), in case of need. SUPPORT RATING AND SUPPORT RATING FLOOR CEBR's Support Rating of '4' reflects the limited probability of support from current sole owner CEB, in case of need. Fitch has maintained the bank's Support Rating on Watch Negative, following the recent announcement by CEB that it is in the process of transferring ownership of CEBR to a different entity within its ultimate shareholder's Fiba Group. We believe that as a result of the spin-off, CEB's stake in CEBR will decrease to 10%. Fitch cannot reliably assess the ability of Fiba Group to provide extraordinary support to CEBR in case of need. SENIOR AND SUBORDINATED DEBT Fitch has affirmed and withdrawn CEBR's senior unsecured debt ratings as these are no longer considered to be relevant to the agency's coverage because only a minimum amount of Fitch-rated issues remains outstanding. CEBR's old-style subordinated debt is rated one notch below the bank's VR, reflecting below-average recovery prospects for this type of debt. RATING SENSITIVITIES CEBR's ratings could be downgraded if a significant deterioration of the bank's asset quality metrics results in capital erosion. Upside is currently limited, though a broadening of the bank's franchise and further improvement of CEBR's asset quality and profitability metrics, while maintaining strong capitalisation and a stable funding profile, would be credit-positive. CEBR's Support Rating is likely to be downgraded to '5' after the completion of the spin-off. If the spin-off is cancelled, the Support Rating is likely to be affirmed. The rating actions are as follows: Long-Term IDR: affirmed at 'BB-', Outlook Stable Short-Term IDR: affirmed at 'B' Viability Rating: affirmed at 'bb-' Support Rating: '4', maintained on RWN Senior unsecured debt: affirmed and withdrawn at 'BB-' Subordinated debt (issued by CEB Capital SA): affirmed at 'B+' Contact: Primary Analyst Anton Lopatin Director +7 495 956 7096 Fitch Ratings CIS Ltd 26 Valovaya Street Moscow 115054 Secondary Analyst Alyona Agrenenko Associate Director +7 495 956 2409 Committee Chairperson Olga Ignatieva Senior Director +7 495 956 6906 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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