June 03, 2015 |
|01 June 2015: Fitch Ratings has upgraded the Long-term Issuer Default Rating (IDR) of Bank Rossiysky Capital (RosCap) to 'BB-' from 'B+' and affirmed the Long-term IDRs of Sviaz-Bank (SB) at 'BB' and Globexbank (GB) at 'BB-', all three with Negative Outlooks. The agency has also affirmed Novikombank (Novikom) at 'B' with a Stable Outlook. A full list of rating actions is at the end of this commentary.|
KEY RATING DRIVERS
IDRS, SUPPORT RATINGS, NATIONAL RATINGS, SENIOR DEBT
The upgrade of RosCap reflects a revised assessment of the probability of support for the bank from the Russian authorities. In Fitch's view, support is now somewhat more likely than previously, given (i) the greater likelihood that the bank's sole shareholder, Russia's Deposit Insurance Agency (DIA), will retain its ownership over the long term; and (ii) the recent track record of support, potentially evidencing the DIA's intention to use the bank for cleaning up other failed lenders.
Fitch's view of a higher probability that the DIA will retain its ownership is based on revisions to Russian bankruptcy legislation, which allow the DIA to permanently hold bank equity stakes, and the extension of RosCap's financial recovery plan to 2025. Recent support came in the form of RUB15.2bn of new capital for RosCap from the DIA (RUB8.6bn of equity and RUB6.6bn of subordinated debt, to be converted into equity in 2015), offsetting the impact of RosCap's merger with Ellips Bank, a small regional entity with negative equity of RUB11bn.
At the same time, RosCap's Long-term IDR remains three notches below that of the Russian sovereign (BBB-/Negative), reflecting (i) the bank's low systemic importance; (ii) the 'enforced' nature of state ownership (following the bank's failure and rescue in 2009); (iii) the bank's still limited and weakly defined policy role; and (iv) the fact that capital support to date has been insufficient to strengthen capital ratios beyond very low levels.
The IDRs of SB and GB continue to reflect the potential support the banks could receive, if needed, from parent Vnesheconombank (VEB, BBB-/Negative). Fitch's view of potential support for the banks takes into account: (i) their full ownership, (ii) the solid track record of support to date, (iii) limited medium-term market opportunities to sell the banks due to weak investor demand and VEB's stated intention to recoup at sale all the investments made to date in the banks; and (iv) potential reputational risk for VEB in case of a default at GB or SB.
At the same time, SB and GB's ratings also consider (i) Fitch's view that the banks are non-core subsidiaries for VEB due to their limited synergies with the parent and the fact that they are not important for VEB's execution of its development role; (ii) the intention to eventually sell the banks, although this is probably a remote possibility at present; and (iii) their significant management independence. GB is rated one notch lower than SB as in Fitch's view it operates somewhat more independently from VEB, exhibiting a higher risk appetite (in particular in respect to real estate exposures) and weaker corporate governance. These features and the bank's loss potential could moderately affect VEB's propensity to provide support in a sufficient amount and/or timely fashion.
Novikom's IDRs are driven by its 'b' Viability Rating (VR). At present, Fitch does not factor into the bank's ratings potential support from its majority owner, State Corporation Rostec (58% stake, including 24% through subsidiary Rosoboronexport). This is because of (i) the limited visibility of Rostec's credit profile; (ii) the only short track record of the bank under Rostec's control; and (iii) the fact that the group's main strategic focus remains the technology, defence and related civil sectors.
The four banks' VRs reflect varying degrees of weaknesses in corporate governance, weak asset quality and significant risk of further impairment, tight capital positions and weak performance. However, the VRs benefit from the relative stability of their funding, and support for business origination, which they derive as a result of their indirect state ownership.
GB's VR of 'b-' (a notch lower than SB and Novicom) reflect its weaker corporate governance and high exposure to non-core assets, which are equal to the bank's Fitch Core Capital (FCC). RosCap's 'b-' VR primarily reflects its particularly weak capitalisation and high exposure to the development and real estate sector (equal to an estimated 6x FCC).
GB's regulatory Tier 1 and total capital ratios stood at 8.3% and 13.4%, respectively, at end-4M15 after a RUB5bn equity injection in 1Q15. SB's ratios were at similar levels (8.4% and 13.3%) after VEB converted RUB10bn of sub debt into equity at the end of 2014. However, the capitalisation of both banks is undermined by asset quality problems and by weaker performance, with both likely to report negative pre-impairment profit in 1H15 as a result of higher funding costs. Neither reports Basel capital ratios based on IFRS accounts.
SB reported NPLs (loans overdue by 90 days or more) were equal to 6.1% of gross loans at end-2014 (7.1% net of bonds reported as loans) and these were reasonably covered by impairment reserves. However, coverage would be a much weaker 43% if restructured exposures (3.4% of the portfolio) were also considered. Fitch also views some of the largest exposures (RUB8.5bn of loans, equal to 0.3x of FCC) as of higher risk, although these are currently performing and non-restructured.
GB's asset quality is also undermined by sizable restructured exposures (mainly loans to developers), which made up 14% of gross loans (1.4x of FCC), and are currently performing. Real estate risks also stem from exposure to mutual funds, assets of subsidiary development company RGI and property foreclosed from problem borrowers, which in total were equal to FCC at end-2014. GB's NPLs stood at 7.1% and were fully provisioned, while NPLs plus restructured were only 34% covered by reserves.
The liquidity of GB and SB is adequate, with cushions of liquid asset and lines available from VEB covering more than one-third of customer accounts.
The removal of the Rating Watch Negative (RWN) on RosCap's VR and its affirmation at 'b-' reflect the fact that the Ellips merger did not result in erosion of its capitalisation. However, the rating continues to reflect the bank's still weak capital position (FCC ratio of 3.8%, based on end-2014 accounts, which already included the to-be-converted subordinated debt in equity), the very high real estate and development exposure and recent rapid growth in both corporate and retail lending. The rating also considers high interest rate risk associated with funding of generally longer-term assets with short-term deposits, recent deterioration of performance due to higher funding costs and significant refinancing needs given the high share of short-term wholesale funding, although this is offset by the bank's currently adequate liquidity.
Novikom's VR, and hence Long-term IDR, reflects its limited franchise, high loan concentrations, tight capital, and weakening asset quality and profitability. However, the affirmation of the bank's ratings, and the Stable Outlook on the Long-term IDR, reflect the bank's reasonable liquidity position, supported by stable funding from Rostec, and the track record of capital support and the expected capital contributions from Rostec and the DIA.
The bank's asset quality weakened in 2014, as indicated by the increased levels of NPLs, restructured loans and loans in arrears below 90 days, at 3.2%, 5.1% and 6.3% of loans at end-2014. These were only moderately (43%) covered by loan impairment reserves. Loan concentrations are high (the 30 largest groups of borrowers, including Rostec group, made up 80% of end-2014 loans, equal to 12x FCC). Fitch considers the bank's exposure to Rostec group (30% of end-2014 loans) as low risk due to the sector's strategic importance and potential state support. However, loans extended to private companies (70%) are of somewhat higher risk, in particular given their long tenors and/or the generally weak financials of the borrowers.
Novikom's FCC ratio was a low 4.6% at end-2014 (regulatory core tier 1: 6.7% at end-4M15), but the total regulatory capital ratio was a reasonable 14.2% (also at end-4M15). Capital ratios should be moderately supported by a RUB3.6bn equity injection from the shareholder and a subordinated loan of RUB7.2bn from the DIA, both expected in 3Q15, but planned 30% asset growth for 2015 will partially offset these. Pre-impairment profitability, which was equal to 5.7% of average loans in 2014 IFRS accounts, is likely to narrow due to margin pressure, but should still provide a significant additional cushion to absorb potential loan losses.
The liquidity cushion net of near-term wholesale repayments was sufficient at end-4M15 to cover a significant 25% of the bank's customer accounts, helped by about RUB30bn inflows from the Rostec group in 4Q14-1Q15. The bank expects a further increase in group funding when it launches a treasury platform for Rostec. The inclusion of Rostec in the list of Russian entities subject to U.S. sanctions (U.S. entities are prohibited from providing funding with a maturity of more than thirty days) seemed to have no impact on Novikom's operations to date, and the bank's foreign funding is negligible.
Novikom's participation in the financial rehabilitation of Fondservicebank should not require capital commitments from the bank, according to management. Novikom is likely to become the majority owner of Fondservice in 3Q15. However, the latter's capital should be restored by contributions from the DIA and the Federal Space Agency, who reportedly will make additional commitments in case the bank's capital needs exceed current expectations.
IDRS, SUPPORT RATINGS, NATIONAL RATINGS, SENIOR DEBT
The Negative Outlooks on SB and GB reflect that on VEB's IDR. The Negative Outlook on RosCap reflects that on the Russian sovereign.
All three banks could be downgraded if (i) the Russian Federation, and hence VEB, are downgraded; (ii) timely support for any of the banks is not forthcoming in case of need; or (iii) in Fitch's view, a sale of any of the banks becomes significantly more likely than currently perceived.
RosCap's Long-term IDRs could stabilise at their current level, or be upgraded, if (i) the bank is given a clearly articulated policy role in respect to rehabilitation of other failed banks; and (ii) the bank is recapitalised to restore its solvency and support the implementation of its new policy role.
An upgrade of either SB or GB is currently unlikely. However, the ratings could stabilise at their current levels if the Outlooks on Russia and VEB are revised to Stable. The rating differential between VEB and SB/GB could also narrow if the banks gain significant policy roles and VEB affirms their importance for the long-term implementation of its development mandate.
Novikom's Long-term IDRs are subject to the same sensitivities as the bank's VR. In addition, the bank's Long-term IDRs could be upgraded to a level above its VR if Rostec demonstrates a strong commitment to support the bank's development, and Fitch is able to reliably assess the shareholder's ability to provide support.
SB's and GB's VRs could be downgraded if asset quality problems and non-core assets continue to accumulate and capitalisation remains tight, or if weak performance results in significant capital erosion without timely support being made available. GB could also be downgraded in case of significant impairment of real estate investments if losses are not compensated by new equity injections.
RosCap's VR could be upgraded if its capitalisation is restored as a result of injections to support its potential new policy role. The VR could be downgraded if RosCap's capital position further deteriorates as a result of either asset quality deterioration or mergers with other failed banks that are not supported with timely capital injections.
Novikom's VR could be downgraded in case of a marked deterioration in asset quality, significant capital erosion, or if, contrary to Fitch's current expectations, the bank needs to provide capital support to Fondservicebank. An upgrade of the VR would require a significant strengthening of the bank's capitalisation.
The rating actions are as follows:
Long-term foreign and local currency IDR: upgraded to 'BB-' from 'B+'; Outlook Negative
Short-term IDR: affirmed at 'B'
National Long-term Rating: upgraded to 'A+(rus)' from 'A-(rus)'; Outlook Stable
VR: affirmed at 'b-'; off RWN
Support Rating: upgraded to '3' from '4'
Support Rating Floor: revised to 'BB-' from 'B+'
Senior unsecured debt: upgraded to 'BB-'/'A+(rus)' from 'B+'/'A-(rus)'
Long-term foreign and local currency IDRs: affirmed at 'BB'; Outlook Negative
Short-term foreign currency IDR: affirmed at 'B'
Viability Rating: affirmed at 'b'
Support Rating: affirmed at '3'
National Long-term rating: affirmed at 'AA-(rus)'; Outlook Stable
Senior unsecured debt: affirmed at 'BB'
Senior unsecured debt National rating: affirmed at 'AA-(rus)'
Long-term foreign and local currency IDRs: affirmed at 'BB-'; Outlook Negative
Short-term foreign currency IDR: affirmed at 'B'
Support Rating: affirmed at '3'
Viability Rating: affirmed at 'b-'
National Long-term rating: affirmed at 'A+(rus)' ; Outlook Stable
Senior unsecured debt: affirmed at 'BB-'
Senior unsecured debt National rating: affirmed at 'A+(rus)'
Long-term foreign and local currency IDRs affirmed at 'B'; Outlook Stable
Short-term foreign-currency IDR affirmed at 'B';
Viability Rating affirmed at 'b'
Support Rating affirmed at '5'
Support Rating Floor affirmed at 'No Floor'
National Long-term Rating affirmed at 'BBB(rus)'; Outlook Stable;
Senior unsecured debt affirmed at 'B'/Recovery Rating 'RR4'
Senior unsecured debt National Long-term Rating: affirmed at 'BBB(rus)'
Company: Russian Capital
|Full company name||JSCB «ROSSIYSKY CAPITAL» (PJSC)|
|Country of risk||Russia|
|Country of registration||Russia|