September 20, 2017 / 3:16 PM / 10 months ago

Fitch Affirms Four Russian Regional Banks

(The following statement was released by the rating agency) MOSCOW/LONDON, September 20 (Fitch) Fitch Ratings has affirmed the Long-Term Issuer Default Ratings (IDRs) of Chelindbank and Bank Avers at 'BB-', and of Primsotsbank and Bank Levoberezhny at 'B+'. The Outlooks are Stable. A full list of rating actions is at the end of this rating action commentary. KEY RATING DRIVERS The banks' IDRs are driven by their individual strength, as reflected in their Viability Ratings (VRs). The VRs reflect the banks' limited franchises (although notable in their respective home regions), significant concentrations as a result of their relatively small size, and the relatively high-risk Russian operating environment. However, the ratings also consider the banks' generally solid financial metrics reflected in sufficient capitalisation, reasonable asset quality, decent profitability and comfortable liquidity. The higher ratings of Chelind and Avers reflect their stronger capital ratios, deeper regional franchise (Chelind) and lower risk appetite and loan impairment (Avers). The Stable Outlooks reflect Fitch's expectation that the banks will be able to sustain their performance in the near to medium term, notwithstanding still moderate economic growth and potential margin pressure from the gradual lowering of the Central Bank of Russia's key rate. The banks' financial profiles have been supported during the economic downturn by their moderate risk appetites and significant pre-impairment profitability, and capital cushions provide a further buffer to absorb credit losses. Liquidity risks are limited given deposit stability, sizable liquidity cushions and modest refinancing requirements. The credit profiles of Primsotsbank and Levoberezhny are closely correlated given their common ownership and similar business models, although transactions and risk sharing between the banks have been limited. CHELIND'S IDRs AND VR Chelind's non-performing loans (NPLs; 90+ days overdue) have been reasonably stable in recent years and were about 7% at end-1H17. Restructured loans added a further 2.5% of the book while reserve coverage of total problem loans (NPLs plus restructured) was a sound 1x. Low loan growth (4.5% in 1H17, a small contraction in 2016) and write-offs make it more difficult to reduce the NPL ratio. Chelind's net interest margin (NIM) narrowed slightly to about 7.9% in 1H17 from 8.4% in 2016, but remained above the 2015 low of 7%. Pre-impairment operating profit was equal to 5.8% of average gross loans (2016: 6.0%), but profitability was supported by net impairment recoveries equal to 13% of pre-impairment profit. Chelind's loss absorption capacity compares well with peers, with regulatory Tier 1 and total capital adequacy ratios of 14.1% and 18.9%, respectively, at end-1H17, up from 12.8% and 18.0% at end-1H16 thanks to moderate deleveraging. At end-1H17, the bank's capitalisation allowed it to additionally reserve about 13% of gross loans (up to about 24% in total) without breaching minimal regulatory capital adequacy requirements. Fitch believes that Chelind's capital ratios should be preserved, at least in the near term, given its modest growth plans and ability to absorb incremental losses through income. At end-1H17, Chelind's total available liquidity net of potential debt repayments covered about half of its customer accounts. Liquidity is also supported by the stable cash generation from the loan book, equal to about 6% of total customer accounts each month. AVERS' IDRs AND VR Avers' 'bb-' VR reflects its moderate risk appetite and high capital buffer. It also takes into account the high proportions of assets, liabilities and revenues relating to sister group TAIF, reflecting the treasury function Avers performs for this group. TAIF is a large oil refining/petrochemical holding in the Republic of Tatarstan, ultimately controlled, like the bank, by individuals close to republican authorities, Fitch understands. About 30% of the bank's assets at end-8M17, 90% of non-equity funding and a quarter of operating profit for 2016 and 1H17 related to TAIF or the bank's shareholders. Liquid assets comprised a high 60% of Avers' balance sheet at end-8M17. The loan portfolio accounted for 37% of assets. About 70% of this was represented by local currency facilities to one of TAIF's major operating companies with maturities of below 30 days and covered by foreign-currency deposits with the bank. Exposure to TAIF, net of cash collateral, was about 20% of capital, close to the regulatory limit. Loans to other borrowers are concentrated but of moderate risk. Combined NPLs and restructured loans were below 1% of the bank's gross loans at end-1Q17. The capital buffer is significant, as reflected by the regulatory Tier 1 and total capital ratios of 21.5% and 23% at end-8M17. This allowed the bank to reserve a further 30% of loans (i.e. the entire non-cash-covered book) without breaching minimum ratios. Pre-impairment profit, equal to 6% (annualised) of average loans in 1H17, offers an additional cushion. The majority of customer accounts are sticky, as these represent deposits of shareholders and placements of TAIF companies, including those that serve as collateral for loans. Wholesale funding was negligible and liquid assets (mostly securities repoable with the Central bank, reverse repo exposures and short-term placements with the top Russian banks) were sufficient to cover 70% of customer accounts. PRIMSOTSBANK'S IDRs AND VR NPLs comprised 7% of the portfolio at end-1Q17 and restructured exposures 4%, with loan impairment reserves covering these by 96%. The corporate portfolio (62%) is of reasonable quality and has shown moderate impairment in the economic downturn. The performance of the retail portfolio (of which 60% is consumer loans) has improved as the bank now focuses primarily on lower-risk clients (salaried employees of corporate clients and customers with positive credit histories) and secured retail products (mortgage loans and facilities secured by real estate and autos). The loss origination rate in the consumer portfolio (calculated as the growth of NPLs plus write-offs divided by average performing loans) fell to 1%-2% in 2016-1H17 from 5% in 2015 and 9% in 2014. Regulatory capitalisation (Tier 1 and total CARs of 10% and 12% at end-8M17) allowed the bank to provision an additional 5% of loans. Pre-impairment performance offered further significant loss absorption capacity, equal to 8% of average loans (annualised, in 1H17), supported by a solid net interest and fee income. Primsotsbank's liquidity cushion was equal to a comfortable 45% of customer accounts at end-1H17. Liquidity is also supported by limited wholesale and bank funding, stable deposit trends (70% of deposits are retail) and monthly proceeds from loan repayments, equal to about 5% of customer accounts. LEVOBEREZHNY'S IDRs AND VR The higher NPL ratio at Levoberezhny (12% at end-1H17) resulted from several large defaults in the corporate book and losses from the bank's large unsecured retail portfolio, which accounted for 40% of gross loans at end-1H17. The retail loss origination ratio significantly moderated, to 1%-3% of average consumer portfolio in 2016-1H17 from 10%-15% in 2013-2014, due to improved underwriting standards and a focus on lower-risk clients (salaried employees of corporate clients, state-sector employees and borrowers with positive credit histories). The bank's asset quality ratios therefore showed some improvement in 2016/1H17 and restructured exposures were limited, at 2% of loans, at end-1H17. Regulatory capitalisation (Tier 1 and total CARs of 10 % and 13.8% at end-8M17) allowed for an additional 7% of loan reserves, and pre-impairment profit, equal to 9% of average loans (annualised, net of unpaid accruals) in 1H17, provides a significant extra buffer. The liquidity cushion (comprising cash, net short-term interbank placements and securities eligible for repo with the Central Bank) was sufficient to cover 45% of customer accounts at end-1H17. Near-term wholesale repayments are negligible. Deposit trends have been stable and monthly proceeds from loan repayments, equal to about 5% of customer accounts, also support the liquidity profile. SUPPORT RATINGS AND SUPPORT RATING FLOORS The banks' Support Ratings of '5' and Support Rating Floors of 'No Floor' reflect their limited market shares and systemic importance, as a result of which support from the Russian authorities cannot be relied on, in Fitch's view. Support from the banks' private shareholders is also not factored into the ratings. RATING SENSITIVITIES Significant capital erosion as a result of large loan losses, or a considerable increase in risk appetites, could lead to downgrades. Avers' ratings could be also downgraded if the current benefits of cooperation with TAIF reduce, resulting in weaker profitability and higher-risk asset exposures. Upside potential for the ratings is currently limited given the banks' limited franchises. However, increased capital buffers and an extended track record of sound performance could put upward pressure on the ratings of Primsotsbank and Levoberezhny. The rating actions are as follows: Chelind Long-Term Foreign-Currency IDR: affirmed at 'BB-', Outlook 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' Avers Long-Term Foreign-Currency IDR: affirmed at 'BB-', Outlook Stable Long-Term Local-Currency IDR: affirmed at 'BB-', Outlook 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' Primsotsbank Long-Term Foreign-Currency IDR affirmed at 'B+'; Outlook 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' Levoberezhny Long-Term Foreign-Currency IDR: affirmed at 'B+'; Outlook Stable Long-Term Local-Currency IDR: affirmed at 'B+'; Outlook 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' Contact: Primary Analysts Anna Erachina (Avers, Primsotsbank, Levoberezhny) Associate Director +7 495 956 7063 Fitch Ratings CIS Limited 26 Valovaya Street Moscow 115054 Maria Kuraeva (Chelind) Associate Director +7 495 956 9901 Fitch Ratings CIS Limited 26 Valovaya Street Moscow 115054 Secondary Analysts Ruslan Bulatov (Avers) Associate Director +7 495 956 9982 Ilya Sarzhin (Chelind, Primsotsbank, Levoberezhny) 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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