March 12, 2014 / 3:41 PM / in 4 years

Fitch Affirms Gazprombank and Gazprombank (Switzerland) at 'BBB-'; Outlook Stable

(The following statement was released by the rating agency) MOSCOW, March 12 (Fitch) Fitch Ratings has affirmed Russia-based Gazprombank's (GPB) and its 100% subsidiary Gazprombank (Switzerland) Ltd.'s (GPBS) Long-term Issuer Default Ratings (IDRs) at 'BBB-' with Stable Outlook. A full list of rating actions is provided at the end of this rating action commentary. KEY RATING DRIVERS - GAZPROMBANK'S IDRS, NATIONAL RATING, SUPPORT RATING AND SUPPORT RATING FLOOR GPB's Long-term IDRs are driven by its Support Rating Floor at 'BBB-' which, in turn, reflects Fitch's view of the high probability that support for the bank will be forthcoming, if needed, from the Russian Federation (BBB/Stable) or other state-controlled entities, most probably, the bank's founder and significant shareholder OAO Gazprom (BBB/Stable). Fitch's view is based on GPB's high systemic importance for the banking sector, a high degree of state control and supervision over the bank through quasi-sovereign entities, a strong track record of support, and high reputational risks of a potential default for the Russian authorities and the bank's state-controlled shareholders. The one-notch differential between the bank's Long-term IDRs and the sovereign ratings reflects moderate uncertainty about support given that GPB is not directly, majority owned by the state and is of limited strategic importance for Gazprom. GPB neither has the dominant market shares of Sberbank (BBB/Stable) nor the policy role of Vnesheconombank (BBB/Stable), entities for which Fitch equalises their Support Rating Floors with the sovereign. At end-2013 GPB was the third-largest banking group in the Russian Federation, although its market shares were a moderate 6.4% of sector loans and 7.4% of deposits. The bank focuses primarily on commercial banking services for large domestic corporates. A significant part of its balance sheet relates to acquisition financing and proprietary non-financial investments, predominantly in the natural resources and industrial sectors. Quasi-sovereign entities directly own a significant, albeit minority, 45.7% combined stake in the bank which is held by Gazprom (35.5%) and Vnesheconombank (10.2%). Supervision remains tight with five of 12 board members currently representing Gazprom (including the chairman Alexei Miller, CEO of Gazprom.) and one representing VEB. RATING SENSITIVITIES - GAZPROMBANK'S IDRS, NATIONAL RATING, SUPPORT RATING AND SUPPORT RATING FLOOR The support-driven ratings could come under downward pressure if there is a marked reduction in the stake owned by quasi-sovereign entities and/or if the links between the bank and the Russian authorities weaken significantly. A downgrade of the sovereign rating would likely be matched by a downgrade of the bank's ratings. Upgrade potential for the ratings is currently limited. KEY RATING DRIVERS - GAZPROMBANK'S VIABILITY RATING GPB's 'bb' Viability Rating (VR) reflects the bank's prominent market positions and generally lower-risk lending business focused on larger and stronger Russian corporates and secured retail products, as well as currently comfortable liquidity. However, the VR also considers high single-name and sector concentrations in loans, only moderate capitalisation and loss absorption capacity, modest core profitability and considerable exposure to non-banking assets. Fitch believes that the credit profile is also weakened by directed lending and investing, particularly in the interests of the state, Gazprom, and other affiliated parties, the risks of which may not always be adequately reflected in loan pricing, in Fitch's view. The bank's low delinquency rate at end-9M13, namely its non-performing (overdue by more than 90 days) loans at 1.0% of gross loans, was supported by a recently strong economic environment as well as by favourable repayment terms for some of the higher-risk loans. Many borrowers also benefit from solid export revenues that should improve as a result of the recent moderate devaluation of the rouble. Downside risks for asset quality stem from the vulnerable metals and mining sector exposure at 140% of Fitch Core Capital (FCC) at end-9M13. Some of this may be exposed to some form of debt restructuring, in Fitch's view. Part of any related credit losses could, however, be absorbed by the state to avoid operational disruption of the company given its high social and economic importance. The risks associated with GPB's loans to Ukrainian companies totalling 50% of FCC at end-2013 were for the most part offset by high-quality collateral, although performance of this collateral may ultimately depend on the broader development of relations between Russia/Gazprom and Ukraine. In a worst case scenario, Fitch expects the bank to be able to turn to Gazprom for at least partial support in relation to these exposures. The risk profile remains burdened by GPB's exposure to poorly performing non-banking subsidiaries (acquisition costs and intragroup loans equalled to 55% of FCC at end-9M13) and illiquid minority equity stakes (20% of FCC). These exclude GPB's 100% stake in Gazprom-Media Holding (BB/Stable; 22% of FCC) which has performed solidly. The risks of the trading equity book (15% of FCC) are mitigated somewhat by the predominance of blue chips and reasonable single-name diversification. Liquidity risks are currently moderate due to solid liquid assets (equal to 34% of customer deposits at end-2013), stable related-party and granular third-party deposits, a comfortable debt repayment schedule, established access to domestic and international capital markets and the potential benefits of support. Wholesale funding comprised a significant 31% of liabilities at end-9M13, although this is to a large degree attributable to the central bank's secured funding facilities. Capitalisation is moderate relative to the risk profile given the ratio of FCC/weighted risks at 8.6% at end-9M13; this was somewhat lower than the Basel II Tier I ratio of 10.1% mainly due to deduction of deferred tax assets. The total regulatory capital position (11.4% at end-2013) was sufficient to sustain a moderate 2.5ppts increase in provision rates in the loan book before the capital ratio would have reached the minimum required level of 10%. Capital erosion has resulted from loan growth recently exceeding internal capital generation (non-annualised at 21.6% and 7.1%, respectively, for 9M13). Profitability is constrained by relatively narrow net interest margin, which stood at 3.3% in 9M13, reflecting low rates on many of the larger corporate exposures. Performance slightly weakened in 9M13, with pre-impairment profit declining to 1.8% of average assets from 2.3% for 2012 as a result of lower trading gains. RATING SENSITIVITIES - GAZPROMBANK'S VR The VR could benefit from an improvement of asset quality through a reduction in concentration levels and lesser exposure to higher-risk projects; a reduction in non-core assets; and a stronger capital base. Weaker performance of some of the bank's larger exposures as a result of idiosyncratic risks and/or a deterioration in the broader operating environment, could result in a downgrade. KEY RATING DRIVERS AND SENSITIVITIES - GAZPROMBANK'S SENIOR UNSECURED ANS SUBORDINATED DEBT RATINGS GPB's senior unsecured debt ratings are aligned with the bank's Long-term IDR of 'BBB-' and the local-currency issue ratings are also aligned with the National Long-term rating of 'AA+(rus)'. The 'old-style' subordinated debt rating, at 'BB+', is notched down once from the bank's Long-term IDR, as Fitch believes that these issues would likely continue to benefit from state support. Both ratings would likely change in tandem with the Long-term IDR. The 'new-style' subordinated debt (with principal/ coupon write-down feature) rating, at 'BB-', is notched down once from the bank's VR; this incorporates zero notches for incremental non-performance risk relative to the VR and a notch for higher loss severity. Fitch has also assigned a final 'BBB-' rating to the bank's USD750m Series 16 senior unsecured loan participation notes issue maturing on 5 September 2019 and carrying the coupon of 4.96% payable semi-annually. KEY RATING DRIVERS - GAZPROMBANK (SWITZERLAND) LTD'S RATINGS GPBS's Long-term IDR is aligned with that of its parent, reflecting Fitch's view of the high probability that support from GPB would be forthcoming to the subsidiary, if needed. Fitch classifies GPBS as a core subsidiary, based on GPB's 100% ownership and supervision over the bank, the high level of operational integration between parent and the subsidiary, GPBS's important role for the parent's servicing of its core clients operating in Europe and the high reputation risk for GPB from a default of GPBS, given GPB's considerable capital markets funding and plans to expand further on international markets. The ratings are also supported by common branding and the small size of the subsidiary (less than 2% of the group's consolidated total assets at end-2013) making it fairly easy to support. That said, the small size means there is no cross-default linkage as GPBS does not qualify as a 'material subsidiary' under GPB's bond covenant definition. Furthermore, full support has not been yet tested in a real stress scenario, although GPB previously helped GPBS to restructure its balance sheet shortly after acquisition in 2009. RATING SENSITVITIES - GAZPROMBANK (SWITZERLAND) LTD'S RATINGS GPBS's Long-term IDR will likely change in tandem with the parent's Long-term IDR. Downward pressure could arise if there is a prolonged delay of support when needed, if the parent's propensity to provide assistance weakens, or if the bank is sold to a lower-rated institution. However, Fitch views these scenarios as unlikely. The ratings actions were as follows: Gazprombank: Long-term foreign and local currency IDRs: affirmed at 'BBB-'; Outlook Stable Short-term foreign currency IDR: affirmed at 'F3' National Long-term rating: affirmed at 'AA+(rus)'; Outlook Stable Viability Rating: affirmed at 'bb' Support Rating: affirmed at '2' Support Rating Floor: affirmed at 'BBB-' Senior unsecured debt long-term local-currency rating: affirmed at 'BBB-' National long-term senior unsecured debt rating: affirmed at 'AA+(rus)' GPB Eurobond Finance plc: Senior unsecured debt Long-term rating: affirmed at 'BBB-' 'Old-style' subordinated debt rating: affirmed at 'BB+' 'New-style' subordinated debt rating: affirmed at 'BB-' Gazprombank (Switzerland) Ltd.: Long-term IDR: affirmed at 'BBB-'; Outlook Stable Short-term IDR: affirmed at 'F3' Support Rating: affirmed at '2' Senior unsecured debt Long-term rating: affirmed at 'BBB-' Contact: Primary Analyst Alexander Danilov Senior Director +7 495 956 2408 Fitch Ratings CIS Limited 26 Valovaya Street Moscow 115054 Secondary Analyst Roman Kornev Director +7 495 956 7016 Committee Chairperson James Watson Managing Director +7 495 956 6657 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 at Applicable criteria, 'Global Financial Institutions Rating Criteria', dated 31 January 2014, 'Evaluating Corporate Governance', dated 12 December 2012, 'National Scale Ratings Criteria, dated 30 October 2013, 'Rating FI Subsidiaries and Holding Companies', dated 10 August 2012, 'Assessing and Rating Bank Subordinated and Hybrid Securities Criteria', dated 31 January 2014, are available at Applicable Criteria and Related Research: Global Financial Institutions Rating Criteria here Evaluating Corporate Governance here National Scale Ratings Criteria here Rating FI Subsidiaries and Holding Companies here Assessing and Rating Bank Subordinated and Hybrid Securities 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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