May 22, 2014 / 3:47 PM / in 4 years

Fitch Upgrades Bystrobank to 'B'; Affirms Asian-Pacific and SKB

(The following statement was released by the rating agency) MOSCOW, May 22 (Fitch) Fitch Ratings has upgraded JSC Bystrobank's Long-term Issuer Default Rating (IDR) to 'B' from 'B-'. At the same time, the agency has affirmed the Long-term IDRs of JSC Asian-Pacific Bank (APB) at 'B+' and SKB-Bank (SKB) at 'B'. All of the ratings have Stable Outlooks. A full list of rating actions is available at the end of this comment. KEY RATING DRIVERS - BystroBank's IDRS, VR, NATIONAL LONG-TERM RATING The upgrade of BystroBank's ratings reflects the longer track record of reasonable performance and a more mature business model, as well as moderation of previously rapid growth. The ratings also reflect the bank's strong market position in the home region of Udmurtia (BB-/Stable), so far moderate, albeit widening, credit losses, sound profitability and reasonable capitalisation and liquidity. Constraining the ratings are a focus on risky retail segment and still unseasoned retail loan book, which pose an elevated credit risk. BystroBank's retail loan book (83% of gross loans at end-2013) doubled in 2013, mainly driven by growth of unsecured consumer loans and car loans (41% and 51% of retail loans, respectively). However, retail loans moderately contracted in 1Q14 and the plan for the full year is for them to grow only by 15%. Retail NPLs remained flat at 6% in 2013, although the average NPL generation ratio (defined as net increase in NPLs plus write-offs/average performing loans) increased to 6.8% in 2013 from 3% in 2012. Positively, Bystrobank's pre-impairment profitability was around 10.5% of average loans in 2013, providing reasonable headroom in case of further deterioration of asset quality. Corporate lending (17% of end-2013 loans) is viewed as moderate risk. About 95% of the total corporate book was accounted by just 20 exposures, predominantly short-term working capital facilities provided to middle-sized companies of IT, trade and pharmaceutical sectors. Most of the loans lack hard collateral, but credit risk is mitigated by the short average loan tenor and long-term relationships with borrowers. Bystrobank's liquidity position is reasonable with end-1Q14 liquidity cushion covering 20% of customer accounts. The latter is the main funding source (83% of end-2013 liabilities), of which granular retail deposits made up about 75%. Bystrobank's capitalisation (regulatory capital ratio of 12% at end-4M14, Basel total capital ratio of 18.6% and FCC of 16.4% at end-2013) is moderate given elevated credit risks due to its focus on unsecured retail lending. Capitalisation should be supported by internal capital generation (return on equity of 22% in 2013) and moderation of growth. RATING SENSITIVITIES - Bystrobank'S IDRS, VR, NATIONAL LONG-TERM RATING Upside is limited in the current tough operating environment, particularly in the Russian consumer lending segment. However, stabilisation of asset quality metrics, while maintaining reasonable earnings and capitalisation would be credit-positive. A significant deterioration in asset quality and/or a deposit outflow would put negative pressure on the ratings. KEY RATING DRIVERS - APB'S IDRS, VR, NATIONAL LONG-TERM RATING The affirmation of APB's ratings reflects its somewhat improved franchise and solid pre-impairment profitability, adequate capitalisation and moderate, albeit widening, credit losses. At the same time, APB's ratings remain constrained by the bank's recently rapid growth in a now more challenging Russian consumer finance market. APB's NPL origination rate increased notably to 6.3% from 3.8% in 2012, which, however, is in line with market trends. Specifically, consumer finance (the main product accounting for 57% of gross loans at end-2013) NPL origination rate rose to 10.2% from 6.3%. Fitch expects credit losses to widen further in 2014, as a vastly expanded portfolio (40% loan growth in 2013) continues to season in a tougher operating environment. However, Fitch believes that APB's loss absorption capacity remains solid as reflected by both a pre-impairment profit of 11.7% of average performing loans in 2013 (2012: 11.5%) and adequate capitalisation (14.4% FCC at end-2013). The quality of pre-impairment profit is sound, partly because of the significant share of fee-based earnings (27% of gross revenues in 2013), of which the bulk are recurring. The bank's capitalisation has been primarily supported by solid internal capital generation (21% in 2013, 28% in 2012). A RUB0.6bn (4% of end-2013's IFRS equity) contribution from shareholders in April 2014 should also be supportive of APB's regulatory capital position (regulatory total capital adequacy stood at a modest 11.4% at end-1Q14 due to higher regulatory risk weights and provisions for unsecured retail loans). APB's liquidity is solid. The loans-to-deposits ratio was 109% at end-2013 with 62% of deposits sourced from individuals. Refinancing risks are limited with RUB4.5bn of local bonds (a put option in August) and short-term interbank deposits due in 2014, which were 3x times covered by highly-liquid assets at end-1Q14. Nevertheless, APB's liquidity is somewhat exposed to its largest corporate depositor with a RUB8bn account. RATING SENSITIVITIES - APB'S IDRS, VR, NATIONAL LONG-TERM RATING The ratings could be downgraded upon a significant deterioration of the bank's asset quality, loss absorption capacity or liquidity. An upgrade may result from a continued strengthening of the franchise and a more entrenched track record of sustainable through-the-cycle performance. KEY RATING DRIVERS: SKB'S IDRS AND VR The affirmation of SKB's ratings reflects a moderate worsening of the credit profile, which, however, is still consistent with the current rating level. Asset quality deteriorated notably, although the bank's solid pre-impairment profitability was sufficient to prevent credit losses from hitting capital, while expected continued moderation of loan growth should help to control risks better. SKB faces contingent risk related to double leverage at the shareholder (Sinara Group; SG) level, although Fitch's current base case expectation is that the ultimate shareholder, Dmitry Pumpyansky, may use cash derived from his other businesses to repay this debt and/or support the bank's capitalisaiton. Liquidity position is comfortable. NPLs made up high 13.6% of total loans at end-2013 and were fully covered by impairment reserves. However, retail loans' (70% of end-2013 loans) NPL origination ratio increased to 11.7% in 2013 from 10% in 2012, which was mainly a result of previously rapid growth (56% loans CAGR in 2009-2012) with a focus on higher-risk longer-term loans (up to seven years). Growth slowed to only 3% in 2013, which amplified the seasoning effect. Corporate loans are generally of moderate quality, although few of the larger exposures (12% of FCC) are viewed as potentially high-risk. Exposure to manufacturing entities under SG (29% of FCC) is reasonably well secured and therefore also carries moderate risk. Positively, SKB's pre-impairment profit (13.8% of average loans in 2013) was sufficient to absorb the increased impairment. However, this resulted in poor overall profitability (1.6% ROE). Capitalisaiton is moderate with a FCC ratio of 7.9% at end-2013 and a regulatory capital ratio of 12.4% at end-1Q14. The latter meant that the bank would be able to absorb (through equity) losses equal only to 3.6% of loans before breaching the minimum 10% capital adequacy ratio. Fitch also notes contingent risks related to the purchase in 1H13 by SG of a 25% stake in SKB from EBRD. This purchase was partially financed with a long-term loan from a third-party bank, which could put pressure on the bank's capitalisation should SG upstream capital from SKB to repay the loan. However, this risk may be mitigated by SG's non-bank related earnings and Dmitry Pumpyansky's other cash sources, mainly dividends from OJSC TMK (declared dividends of RUB731m for 2013), of which he owns 77%. At end-2M14 SKB had adequate cushion of liquid assets (cash and equivalents, unpledged bonds eligible for repo financing with Central Bank of Russia), covering customer accounts by 19.5%. RATING SENSITIVITIES - SKB's IDRS AND VR Wider credit losses as the portfolio further seasons leading to impairment charges and capital erosion could result in a downgrade. Upstreaming of capital and/or liquidity to repay debt at SG level resulting in a weakening of capitalisaiton and/or its quality could also lead to a downgrade. Upside potential is currently limited given the potential for further asset deterioration. KEY RATING DRIVERS AND SENSITIVITIES: APB's AND Bystrobank's SENIOR UNSECURED DEBT APB's and Bystrobank's senior unsecured debt is rated in line with the respective banks' Long-term IDRs, reflecting Fitch's view of average recovery prospects (corresponding to a Recovery Rating of '4'), in case of default. RATING DRIVERS AND SENSITIVITIES: SUPPORT RATINGS AND SUPPORT RATING FLOORS The '5' Support Ratings and 'No Floor' Support Rating Floors of the three banks reflect their small size and limited franchises, making government support, in case of need, less likely. In Fitch's view, support from the banks' private shareholders also cannot be relied upon. An upgrade of these ratings is unlikely in the foreseeable future, although acquisition by a stronger owner could lead to an upgrade of the Support Rating. The rating actions are as follows: Bystrobank Long-term foreign and local currency IDRs: upgraded to 'B' from 'B-'; Stable Outlook Short-term IDR: affirmed at 'B' National Rating: upgraded to 'BBB(rus)' from 'BB-(rus)'; Stable Outlook Viability Rating: upgraded to 'b' from 'b-' Support Rating: affirmed at '5' Support Rating Floor: affirmed at 'No Floor' Senior unsecured debt: upgraded to 'B(EXP)'/'BBB(rus)(EXP)' from 'B-(EXP)'/'BB-(rus)(EXP)'; Recovery Rating 'RR4(EXP)' APB Long-term foreign currency IDR: affirmed at 'B+'; Outlook Stable Short-term foreign currency IDR: affirmed at 'B' Long-Term local currency IDR: affirmed at 'B+'; Outlook Stable National Long-Term Rating: affirmed at 'A-(rus)'; Outlook Stable Viability Rating: affirmed at 'b+' Support Rating: affirmed at '5' Support Rating Floor: affirmed at 'No Floor' Senior unsecured debt: assigned at 'B+'/'A-(rus)', Recovery Rating 'RR4' SKB Long-term foreign currency IDR: affirmed at 'B', Outlook Stable Short-term IDR: affirmed at 'B' Viability Rating: affirmed at 'b' Support Rating: affirmed at '5' Support Rating Floor: affirmed at 'No Floor' Contact: Primary Analysts Aslan Tavitov (Bystrobank) Associate Director +7 495 956 99 01 Fitch Ratings CIS Limited 26 Valovaya Street Moscow 115054 Roman Kornev (APB) Director +7 495 956 70 16 Fitch Ratings CIS Limited 26 Valovaya Street Moscow 115054 Anton Lopatin (SKB) Director +7 495 956 70 96 Fitch Ratings CIS Limited 26 Valovaya Street Moscow 115054 Secondary Analysts Ruslan Bulatov (Bystrobank) Analyst +7 495 956 99 82 Konstantin Yakimovich (APB) Associate Director +7 495 956 99 78 Alyona Plakhova (SKB) Analyst +7 495 956 24 09 Committee Chairperson James Watson Managing Director +7 495 956 66 57 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 on Applicable criteria, 'Global Financial Institutions Rating Criteria' dated 31 January 2014, are available at Applicable Criteria and Related Research: Global Financial Institutions Rating 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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