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March 12 (Reuters) - (The following statement was released by the rating agency)
Fitch Ratings has affirmed Krayinvestbank’s (KIB) Long-term Issuer Default Rating (IDR) at ‘B+’ with a Stable Outlook. At the same time, the agency has maintained the bank’s ‘b-’ Viability Rating (VR) on Rating Watch Negative (RWN). A full list of rating actions is at the end of this comment.
KEY RATING DRIVERS: IDRs, SUPPORT RATING, NATIONAL RATING AND SENIOR DEBT RATING KIB’s ‘B+’ Long-term IDR and ‘4’ Support Rating reflect the limited probability of support that KIB may receive if needed from the Krasnodar Region of Russia (KR; BB+/Stable), which directly owns a 98% stake in the bank. Fitch’s view of the propensity to provide support is based on KR’s majority ownership and a track record of assistance to date in the form of both liquidity support and the provision of capital.
At the same time, Fitch views the probability of support from KR’s administration as only limited given KIB’s moderate importance for the region’s banking system and significant concerns about the bank’s sizeable exposure to development loans and other non-core assets (roughly 2.5x Fitch core capital (FCC) at end-2013). In the agency’s opinion, these have questionable recoverability and may largely be related in some way to officials within the current regional administration and/or the bank’s management, thereby suggesting weaknesses in corporate governance and potentially making support more costly and less politically acceptable.
RATING SENSITIVITIES: IDRs, SUPPORT RATING, NATIONAL RATING AND SENIOR DEBT RATING
Downside pressure on KIB’s support-driven ratings could arise from any major weakening in the relationship between KR and the bank, for example as a result of changes in key senior regional officials. The IDRs could also be downgraded as a result of a downgrade of KR’s ratings.
KIB’s Long-Term IDR could be upgraded if KIB’s systemic importance increases and the bank’s corporate governance notably improves, but Fitch views this as unlikely in the near to medium term.
The ‘b-’ VR reflects KIB’s lumpy loan book, high exposure to construction and development sectors, moderate capitalisation and tight liquidity. However, it also considers its comfortable funding profile based on granular retail deposits.
The RWN on KIB’s VR continues to reflect potential risks resulting from KIB’s RUB4.8bn exposure (1.0x end-1H13 FCC) to third party receivables (mostly promissory notes) with questionable recoverability. So far, Fitch has not obtained sufficient information on these investments to take a view on their quality and recoverability. However, management expects to restructure these exposures by end-1Q14, after which the agency expects to obtain sufficient information to assess them.
At end-2013 KIB was highly exposed to real estate development loans (RUB4.8bn, 1.0x end-1H13 FCC) and investment property (RUB2.7bn, 0.5x end-1H13 FCC). In Fitch’s view, some of the investment properties are reasonably valued, but half of the exposures are higher risk residential properties at the initial stage of construction, or industrial properties with questionable liquidity.
KIB’s reported non-performing loans (NPLs; loans 90 days overdue) were a moderate 2.8% at end-2013, while a further 3.3% were rolled over; NPLs and restructured loans combined were comfortably 1.1x covered by loan impairment reserves (LIR). However, Fitch emphasises the high loan book concentration (the 20 largest exposures amounted to 68% of corporate loans at end-2013, or 2.3x end-1H13 FCC) and development nature of the largest exposures, most of which are at the initial stage of construction.
In light of significant exposure to non-core assets and long-term nature of the development loans, KIB’s liquidity position is vulnerable, aggravated by the tight liquidity buffer covering only 13% of end-2013 customer funding. As a moderate mitigant, KIB’s exposure to third-party wholesale funding is limited, while its customer funding (78% of total liabilities at end-2013) is relatively sticky with a high share of granular retail deposits (54% of total liabilities). KIB demonstrated moderate growth of 16% in 2013, resulted in a weakening of its capital position, with the total regulatory capital ratio decreasing to 11.6% at end-2013 from 13.1% at end-2012 due to poor internal capital generation (ROAE of 3.1% in 2013 according to national accounts). Fitch understands that KIB’s further growth is restricted by its tight capital, which would allow the bank to create additional LIR equal to only 3.4% of the loan book. In Fitch’s view, the anticipated equity injection of RUB1bn, which management expects to be made by end-1H14 (postponed from 2H13), will only have a temporary effect given further moderate growth plans (KIB targets 11% loan growth in 2014).
The RWN on KIB’s VR could be resolved with a downgrade if either the third party receivables are replaced with poor quality assets, or Fitch believes the risks associated with these receivables are high. Conversely, if the risks related to these exposures are more moderate, KIB’s VR could be affirmed at ‘b-'. Downward pressure on KIB’s VR could also result from further deterioration of asset quality and performance, resulting in erosion of capital, or from growing exposure to development projects and other non-core assets. Upside potential is limited.
The rating actions are as follows:
Long-term foreign and local currency IDRs: affirmed at ‘B+'; Outlook Stable
Short-term foreign currency IDR: affirmed at ‘B’
National Long-term Rating: affirmed at ‘A-(rus)'; Outlook Stable
Viability Rating: ‘b-', maintained on RWN
Support Rating: affirmed at ‘4’
Senior unsecured debt Long-term rating: affirmed at ‘B+'; Recovery Rating ‘RR4’
Senior unsecured debt National rating: affirmed at ‘A-(rus)'