June 01, 2016 | Cbonds
|Fitch Ratings has affirmed Bank Rossiysky Capital's (RosCap) Long-Term Issuer Default Rating (IDR) at 'BB-'. The agency has also affirmed the Long-Term IDRs of Sviaz-Bank (SB) at 'BB' and Globexbank (GB) at 'BB-', removing them from Rating Watch Negative (RWN). The Outlooks on all three banks are Negative.|
The agency has also downgraded Viability Ratings (VRs) of GB and RosCap to 'f' from 'b-' and simultaneously withdrawn the latter. A full list of rating actions is available at the end of this commentary.
KEY RATING DRIVERS
IDRS, SUPPORT RATING, NATIONAL RATING, SUPPORT RATING FLOOR (SRF), SENIOR DEBT
The affirmation of RosCap's Long-Term IDR and SRF at 'BB-' and Support Rating at '3' reflect the moderate probability of support from the Russian authorities, given (i) the high likelihood that the bank's sole shareholder, Russia's Deposit Insurance Agency (DIA) will retain its ownership over the long term; (ii) the bank's increasing role as the DIA's tool for resolution of failed banks (through acquisition of these banks or some of their assets); and (iii) recent capital support, albeit mainly in the form of preference shares rather than common equity.
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) that capital support to date has been insufficient to strengthen Fitch core capital beyond very low level; and (iii) potential corporate governance weaknesses that could challenge the authorities' willingness to support in all circumstances.
The senior unsecured debt ratings of RosCap are aligned with its IDR, as they represent direct, unconditional and unsecured obligations of the bank.
IDRS, SUPPORT RATINGS, NATIONAL RATINGS, SENIOR DEBT
SB and GB
The affirmation of SB's Long-Term IDR at 'BB' and GB's at 'BB-' and their Support Ratings at '3', as well as the removal of both banks from RWN reflects the reversal of their current owner's, Vnesheconombank (VEB, BBB-/Negative), plans to sell them to the DIA, whose support for the banks seemed less certain (for more details see 'Fitch Places Sviaz-Bank and Globexbank on Watch Negative' on www.fitchratings.com). VEB currently anticipates that it will remain the main shareholder of both banks over the medium-term.
The IDRs of SB and GB therefore continue to reflect Fitch's view of potential support from VEB. This view takes into account: (i) their full ownership by VEB; (ii) the track record of equity and liquidity support to date; and (iii) potential reputational risk for VEB in case of them defaulting.
At the same time, SB's and GB's Long-Term IDRs remain, respectively, two and three notches below that of VEB. This is because: (i) Fitch views the banks as non-core subsidiaries for VEB due to their limited synergies with the parent and that they are not important for VEB's execution of its development role; (ii) the intention to eventually sell the banks; 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 could result in larger losses challenging VEB's propensity to provide support in a sufficient amount or timely fashion.
The senior unsecured debt ratings (including debt issued by special purpose vehicles) are aligned with the banks' IDRs. The ratings of debt issued by GB and SB and their special purpose vehicles apply to debt issued prior to 1 August 2014.
RosCap and GB
The downgrade of RosCap's and GB's VRs to 'f' reflects Fitch's view that the banks have failed, as reflected by material capital shortfalls. The agency believes the banks are dependent on the Central Bank of Russia (CBR) forbearance to achieve regulatory compliance and require extraordinary external capital support to restore their solvency.
GB's Fitch core capital (FCC) fell to an extremely low 1.2% of regulatory risk-weighted assets (RWA) at end-2015 from 7.3% at end-2014, while RosCap's FCC ratio fell to negative 3.2% from positive 3.8%. The deterioration in both cases was due to large losses resulting from (i) an increase in non-performing loans (NPLs, to 25.6% of gross loans at end-2015 from 19.4% in RosCap and to 15.4% from 7.2% in GB) and hence loan loss reserves, and (ii) negative pre-impairment profit. Core capital provided by shareholders to offset this was limited: the DIA provided RUB13.6bn (6% of RWA) to RosCap through purchases of preferred shares in 2015-4M16 and expects to provide a further RUB10bn in the form of preferred shares by end-2016, while VEB injected a small RUB5bn (2% of RWA) of equity into GB in 2015.
Both banks' regulatory capital ratios were above minimum required levels at end-2015, but this was solely due to regulatory forbearance which allowed gradual recognition of loan impairment reserves. RosCap's financial recovery plan allows RUB15bn of reserves (84% of regulatory core capital) to be created over a period up to 2025, while GB needs to book RUB14bn of reserves (76% of regulatory core capital), according to the audit opinion accompanied regulatory financial statements, which is expected to take place after the conversion of VEB's RUB15bn subordinated loan into equity by end-3Q16.
However, Fitch believes that GB's subordinated debt conversion may not be enough to finance the provisioning requirements and still ensure regulatory compliance of capital ratios. We estimate that the total capital ratio would be around 7% (required minimum is 8%) after the provisioning, while the risk of further asset quality problems and losses poses additional risks. According to management, VEB is committed to provide a further RUB14bn of equity in case of need.
Liquidity remains acceptable at RosCap, while GB faces significant refinancing risks given (i) substantial short-term wholesale funding (14% of total liabilities at end-4M16); and (ii) potential outflows of pension fund deposits (11% of liabilities) due to tougher rating requirements by the CBR coming into force in October 2016. Although GB's liquid assets were a tight 11% of liabilities at end-4M16, the bank may receive liquidity support from VEB in case of significant funding outflows.
RosCap's VR has been withdrawn as the bank's standalone profile is becoming increasingly influenced by the bank's policy role and less commercially oriented. Fitch therefore considers it no longer appropriate to assess the bank's credit profile on a standalone basis and judges the VR no longer relevant for its coverage.
The affirmation of SB's VR at 'b' reflects only moderate deterioration of the bank's financial profile over the last 12 months. Its VR continues to reflect poor profitability, a tight capital position and some risks stemming from a concentrated, albeit adequately performing, loan book. However, SB's VR benefits from the stability of the bank's funding given its access to top tier state-related depositors.
Asset quality is acceptable, with NPLs moderately rising to 8% of gross loans at end-2015 from 6% at end-2014. Restructured loans were stable at 3% in 2015. Reserve coverage of these exposures increased significantly to 71% at end-2015 from 43% at end-2014, mainly due to one large legacy loan becoming reserved by 80%, up from 20% at end-2014.
Capitalisation is a weakness with the FCC ratio at only 5% at end-2015, down from 9% at end-2014, mainly due to heavy provisioning and negative pre-impairment profit reflecting a spike in funding costs (although this has been improving so far in 2016).
Compliance with minimum CBR regulatory capital ratios - Tier 1 ratio of 7.8% versus a minimum 6%; Total ratio 17.5% versus a minimum 8% at end-4M16 - is mainly achieved by under-reserving by RUB10bn of problem exposures, as mentioned by the auditors in the qualified opinion to the regulatory accounts. If these reserves had been created, the bank's Tier 1 ratio would have fallen below the required minimum.
However, in assessing SB's capital position Fitch takes into account the planned conversion of VEB's RUB16bn (6% of RWA) subordinated debt, currently accounted as Tier 2 capital, into Tier 1-eligible instruments (i.e. preference shares) in 2H16, which would allow the bank to create the necessary reserves while maintaining the Tier 1 ratio around 10%, above the required minimum.
Liquidity is sound, supported by a moderate share of unsecured wholesale funding (13% of total liabilities at end-2015), a comfortable liquidity cushion (43% of total customer accounts) and rather stable deposits of state-related entities (38% of total liabilities at end-2015).
IDRS, SUPPORT RATINGS, NATIONAL RATINGS, SENIOR DEBT
The Negative Outlooks on SB's and GB's IDRs reflect that on VEB's IDR. The Negative Outlook on RosCap's IDR reflects that on the Russian sovereign.
The banks' IDRs could be downgraded if (i) the Russian Federation, and hence VEB, are downgraded; (ii) if the propensity of owners to provide support weakens; or (iii) in Fitch's view, a sale of any of the banks becomes significantly more likely than currently perceived.
The Outlooks may be revised to Stable if a similar rating action is taken on Russia and VEB. The strengthening of RosCap's role as a 'resolution' bank, and if Fitch views this as increasing the likelihood of support from the DIA and the Russian authorities, could also create upward pressure on the rating.
The Stable Outlooks on the National Ratings reflect Fitch's view that the creditworthiness of Russian issuers relative to each other would be unlikely to change significantly in case of a sovereign downgrade.
Senior debt ratings will likely move in line with IDRs.
GB's VR will be upgraded once the bank receives sufficient capital support to restore its solvency. The post-recap rating will depend primarily on the size and quality of the capital support and the adequacy of loan provisioning.
SB's VRs could be downgraded if weak performance results in significant capital erosion without timely support being made available. A further deterioration of SB's asset quality, albeit not expected by the agency, could also put negative pressure on the rating. Upside for SB's VR is currently limited and would only be justified by a significant improvement of the bank's core profitability and capital position.
The rating actions are as follows:
Long-Term Foreign and Local Currency IDRs: affirmed at 'BB-'; Outlook Negative
Short-term Foreign Currency IDR: affirmed at 'B'
National Long-term Rating: affirmed at 'A+(rus)'; Outlook Stable
Viability Rating: downgraded to 'f' from 'b-'; withdrawn
Support Rating: affirmed at '3'
Support Rating Floor: affirmed at 'BB-'
Senior unsecured debt: affirmed at 'BB-'/'A+(rus)'
Long-Term Foreign and Local Currency IDRs: affirmed at 'BB'; off RWN; Outlook Negative
Short-Term Foreign Currency IDR: affirmed at 'B'
Viability Rating: affirmed at 'b'
Support Rating: affirmed at '3'; off RWN
National Long-Term Rating: affirmed at 'AA-(rus)'; off RWN; Outlook Stable
Senior unsecured debt: affirmed at 'BB'/'AA-(rus)'; off RWN
Long-Term Foreign and Local Currency IDRs: affirmed at 'BB-'; off RWN; Outlook NegativeShort-Term Foreign Currency IDR: affirmed at 'B'
Support Rating: affirmed at '3'; off RWN
Viability Rating: downgraded to 'f' from 'b-'
National Long-Term Rating: affirmed at 'A+(rus)' ; off RWN; Outlook Stable
Senior unsecured debt: affirmed at 'BB-'/'A+(rus)'; off RWN
Senior unsecured debt for euro-commercial paper programme short-term rating: affirmed at 'B'; withdrawn
Company: Russian Capital
|Full company name||JSCB «ROSSIYSKY CAPITAL» (PJSC)|
|Country of risk||Russia|
|Country of registration||Russia|