April 17, 2014 / 3:31 PM / in 4 years

Fitch Rates Bank of China (Eluosi) 'BBB+'; Outlook Negative

(The following statement was released by the rating agency) MOSCOW, April 17 (Fitch) Fitch Ratings has assigned Russia-based Bank of China (Eluosi) (BOC (Eluosi)) a Long-term foreign currency Issuer Default Rating (IDR) of 'BBB+' with a Negative Outlook. A full list of rating actions is at the end of this commentary. KEY RATING DRIVERS BOC (Eluosi)'s ratings are driven by a high probability of support, if needed, from the bank's parent, Bank of China (BOC, A/Stable). This reflects the full ownership by and high level of integration with BOC, common branding and the low cost of potential support considering the bank's small size relative to the parent. Fitch classifies BOC (Eluosi) as a 'strategically important' subsidiary for BOC due to the strong operational and risk management integration, solid track record of support (including equity injections and a long-term subordinated loan) and high reputational risks for the parent in case of the subsidiary's default. However, the ratings also capture the bank's limited impact on the group's performance (comprising less than 0.1% of consolidated assets) and the subsidiary's limited franchise. The Negative Outlook on BOC (Eluosi)'s IDRs reflects the likelihood of a downgrade of Russia's Country Ceiling of 'BBB+' given the Negative Outlook on Russia's sovereign ratings. Russia's Country Ceiling captures transfer and convertibility risks and limits the extent to which support from the foreign parent of the bank can be factored into the Long-term foreign currency IDR. The bank's Long-term local currency IDR also takes into account Russian country risks. Fitch has not assigned a Viability Rating to BOC (Eluosi) due to its rather narrow franchise, significant reliance on parent funding and high level of management and operational integration with the parent bank. The bank's balance sheet is fairly small (RUB13.4bn at end-2013), of which about two-third comprises liquid assets, while the loan book (dominated by lower-risk, large Russian companies from the energy, forestry and mining sectors) accounts for a low 11% of total assets. The bank's funding is mainly represented by customer accounts, which make up a high 80% of total liabilities. The bank's capitalisation is strong with the regulatory N1 ratio at a healthy 38.5% as of 1 April 2014. RATING SENSITIVITIES BOC (Eluosi)'s IDRs could be downgraded if the Russian Country Ceiling and sovereign ratings are downgraded. The ratings could also be downgraded if (i) the parent bank is downgraded by two notches or more; (ii) the parent bank sells its Russian subsidiary to a financially weaker owner; or (iii) Fitch changes its view of the willingness of the parent to support its subsidiary. However, Fitch does not currently expect any of these scenarios to materialise. An upgrade of BOC (Eluosi)'s ratings would be contingent on an upgrade of the Russian Country Ceiling. A revision of the sovereign Outlook to Stable would result in a similar action on the bank's ratings. The Stable Outlook on the bank's National Rating reflects Fitch's view that the bank's creditworthiness relative to other Russian issuers is unlikely to change significantly as a result of the potential sovereign downgrade. The rating actions are as follows: Long-term foreign currency IDR assigned at 'BBB+'; Outlook Negative Short-term foreign currency IDR assigned at ' F2' Long-term local currency IDR assigned at 'BBB+'; Outlook Negative National Long-term Rating assigned at 'AAA(rus)'; Outlook Stable Support Rating assigned at '2' Contacts: Primary Analyst Sergey Popov Associate Director +7 495 956 9981 Fitch Ratings CIS Ltd 26 Valovaya Street Moscow 115054 Secondary Analyst Alyona Plakhova Analyst +7 495 956 2409 Committee Chairperson James Watson Managing Director +7 495 956 6657 Media Relations: Julia Belskaya von Tell, Moscow, Tel: +7 495 956 9908, Email: julia.belskayavontell@fitchratings.com; Hannah Huntly, London, Tel: +44 20 3530 1153, Email: hannah.huntly@fitchratings.com. Additional information is available on www.fitchratings.com Applicable criteria, Global Financial Institutions Rating Criteria, dated 31 January 2014 and National Scale Rating Criteria, dated 30 October 2013 are available at www.fitchratings.com. Applicable Criteria and Related Research: Global Financial Institutions Rating Criteria here National Scale Ratings 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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