October 5, 2017 / 3:30 PM / a year ago

Fitch Upgrades Rusuniversal; Affirms 2 Other Mid-sized Russian Banks

(The following statement was released by the rating agency) MOSCOW, October 05 (Fitch) Fitch Ratings has upgraded Russian Universal Bank's (Rusuniversal) Long-Term Issuer Default Ratings (IDRs) to 'B+' from 'B'. At the same time, Fitch has affirmed the Long-Term IDRs of SDM-Bank (SDM) at 'BB-' and Expobank LLC (Expo) at 'B+'. The Outlooks on all banks are Stable. A full list of rating actions is at the end of this rating action commentary. The upgrade of Rusuniversal reflects the bank's extended record of strong financial metrics and limited risk appetite. The affirmations of SDM and Expo reflect the banks' fairly stable financial performance through the credit cycle, in particular (i) stable asset quality, (ii) generally healthy performance, and (iii) reasonable capital buffers. The ratings of all three banks continue to reflect their fairly narrow franchises (in particular at Rusuniversal) resulting in, among other things, significant balance sheet concentrations and some uncertainty regarding future growth strategies in a still challenging operating environment. The higher rating of SDM relative to peers reflects its more stable and sustainable franchise and business model and greater consistency of performance. KEY RATING DRIVERS IDRS AND VIABILITY RATINGS SDM SDM's asset quality has remained resilient as the share of non-performing loans (NPLs, loans overdue more than 90 days) constituted a low 1.5% of gross loans at end-1H17 (1.3% at end-2016), and are fully reserved. Restructured exposures added another 2%, although these were performing under the revised terms. Concentrations are high (the 20 largest borrowers accounted for 56% of gross loans, equal to 134% of Fitch Core Capital, (FCC)), but the quality of the largest exposures is generally adequate. Higher-risk exposures include construction and rental businesses (33% of FCC) and car dealers (10%), but these are well-covered by hard collateral. The FCC to risk-weighted assets ratio stood at a reasonable 19% at end-1H17, up from 15% in 2015, due to healthy internal capital generation in 2016 of 19%. Regulatory capitalisation is somewhat weaker due to higher risk-weightings, with the Tier 1 capital ratio standing at 11.6% at the same date. However, this still allowed the bank to absorb losses equal to 17% of loans before breaching the regulatory minimum levels. SDM is mainly funded with customer accounts (95% of total liabilities at end-1H17). Thirty-five per cent of these were interest-free current accounts of corporates and individuals, supporting the bank's profitability (funding costs were a low 5% in 1H17, annualised). The potential outflow of these funds is mitigated by a significant liquidity cushion, which allowed for the repayment of 60% of total customer funding at end-8M17. Expo Expo's asset quality has been stable during the last 12 months with NPLs standing at 3.1% of gross loans at end-1H17 (1.9x reserved). Although the bank's loan book is highly concentrated by name (the 25 largest borrowers made up 91% of total loans at end-1H17), the risks are mitigated by the small size of the loan portfolio (1.7x FCC). The potentially more volatile real estate and construction sector represented a high 40% of gross loans; however, in many cases the collateral is liquid with reasonable loan-to-values (LTVs). The loans/assets ratios was a low 33% at end-1H17, while the majority of the securities book (42% of assets) was 'BBB'/'BB' rated. The bank's FCC ratio was a comfortable 19.6% at end-1H17. The regulatory Tier 1 ratio was a lower but still reasonable 14.5% at end-8M17, due primarily to more conservative risk weightings. Fitch estimates that the bank's regulatory capital buffer was sufficient to increase impairment reserves up to a considerable 37% of loans, from the current 7%, without breaching minimum capital requirements (including capital buffers). Expo's profitability is volatile and has depended so far mainly on gains from securities revaluations and execution of M&A deals, which made up 75% of profit before tax in 2016, but were negligible in 1H17. This resulted in deterioration of overall profitability, notwithstanding a reduction of impairment charges, with annualised return on average equity (ROAE) falling to 14% in 1H17 from 28% in 2016. The bank's liquidity cushion covered customer accounts by a high 65% at end-1H17, while market refinancing needs are limited. Rusuniversal Rusuniversal's IDRs are constrained by the bank's small size, highly concentrated relationship-based business model and tighter regulation on banking services to defence industry enterprises that narrows the bank's core business. Positively, the ratings acknowledge Rusuniversal's very strong financial metrics. Rusuniversal focuses mainly on defence sector companies with whom the bank's management and shareholders have long-standing relations. Both loans and deposits are extremely concentrated. The bank had only 10 corporate loans (while retail lending is negligible), while the top 10 depositors represented 87% of total customer accounts at end-1H17. The tighter regulation resulted in several of Rusuniversal's largest customers (about half of total customer accounts) moving to other banks in September 2017. Although this is manageable for the bank given full coverage of customer accounts by liquid assets, this could negatively affect Rusuniversal's business and performance. Rusuniversal's financial metrics remain robust. The bank has zero NPLs and very high regulatory capitalisation (the total capital ratio was above 100% at end-9M17). The bank's loan book is small (20% of total assets, equal to just 40% of the bank's equity), while most other assets are either invested in rouble sovereign debt or placed with the Central Bank of Russia. SUPPORT RATINGS AND SUPPORT RATING FLOORS The '5' Support Ratings for all three banks reflect Fitch's view that support from the banks' shareholders, although possible, cannot be relied upon. The Support Ratings and Support Rating Floors of 'No Floor' also reflect that support from the Russian authorities cannot be relied upon due to the banks' small size and lack of overall systemic importance. Accordingly, the IDRs of all three banks are based on their intrinsic financial strength, as reflected in their Viability Ratings. SENIOR UNSECURED DEBT RATINGS Fitch has affirmed and withdrawn the rating of Expo's senior unsecured debt as it is no longer considered by Fitch to be relevant to the agency's coverage because a negligible amount of the issue remains outstanding. RATING SENSITIVITIES IDRS AND VIABILITY RATINGS Downside pressure on all three banks' ratings could stem from asset quality deterioration if this results in erosion of profitability and capital. A significant liquidity squeeze would also be credit-negative. Upside for the ratings of SDM and Rusuniversal is limited by their small franchises. Upside for Expo's ratings would be contingent on improvements in asset quality, an extended record of reasonable financial metrics and adoption of a more stable and sustainable business model. SUPPORT RATINGS AND SUPPORT RATING FLOORS Positive rating action 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: SDM Long-Term Foreign and Local Currency IDRs affirmed at 'BB-'; Outlook Stable Short-Term Foreign Currency IDR affirmed at 'B' Support Rating affirmed at '5' Support Rating Floor affirmed at 'No Floor' Viability Rating affirmed at 'bb-' Expo Long-Term Foreign and Local Currency IDRs: affirmed at 'B+'; Outlooks Stable Short-Term Foreign Currency IDR affirmed at 'B' Support Rating affirmed at '5' Viability Rating affirmed at 'b+' Support Rating Floor affirmed at 'No Floor' Senior unsecured debt affirmed at 'B+'/Recovery Rating 'RR4'; withdrawn Rusuniversal Long-Term Foreign and Local Currency IDRs upgraded to 'B+' from 'B', Outlooks Stable Short-Term Foreign Currency IDR affirmed at 'B' Viability Rating upgraded to 'b+' from 'b' Support Rating affirmed at '5' Support Rating Floor affirmed at 'No Floor' Contact: Primary Analysts Roman Kornev (SDM, Expo) Director +7 495 956 7016 Fitch Ratings CIS Limited 26 Valovaya Street Moscow 115054 Ruslan Bulatov (Rusuniversal) Associate Director +7 495 956 9982 Fitch Ratings CIS Limited 26 Valovaya Street Moscow 115054 Secondary Analysts Konstantin Alekseenko (SDM) Analyst +7 495 956 2401 Ruslan Bulatov (Expo) Associate Director +7 495 956 9982 Artem Beketov (Rusuniversal) Analyst +7 495 956 9932 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; Peter Fitzpatrick, London, Tel: +44 20 3530 1103, Email: peter.fitzpatrick@fitchratings.com. 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