January 30, 2017 | Cbonds
|Fitch Ratings has upgraded Bank Zenit's (BZ) Long-Term Issuer Default Ratings (IDRs) to 'BB' from 'BB-' and removed it from Rating Watch Positive (RWP). The Outlook is Stable. The agency has also downgraded BZ's Viability Rating (VR) to 'b+' from 'bb-'. A full list of rating actions is at the end of this commentary.|
KEY RATING DRIVERS - IDRS, NATIONAL RATINGS, SUPPORT RATING AND SUPPORT RATING FLOOR
The upgrade of the IDRs, National and Support Ratings follows the increase of the ownership stake in the bank by oil company PJSC Tatneft (Tatneft, BBB-/Stable) to 50.4% from 49% and Fitch's expectation that the stake will further increase as a result of an announced RUB14bn equity injection for 1H17, RUB9bn of which will be provided by Tatneft in the form of subordinated debt conversion and the remainder in cash.
In Fitch's view, as a majority shareholder who will consolidate BZ in its financial accounts, Tatneft will now have a higher propensity to support the bank. To date, Fitch has not factored in support from Tatneft directly into BZ's ratings, although the bank's credit profile has benefitted from significant liquidity placements and capital injections from the company.
The two-notch difference between Tatneft's and BZ's IDRs reflects the agency's view that the bank is a non-core asset for the company, with limited synergies between the two entities, and there would be limited reputational damage for Tatneft in case of BZ's default.
Tatneft's 'BBB-' Long-Term IDR is capped by Russia's sovereign rating. The company's credit profile is underpinned by low leverage, with funds-from-operations (FFO)-adjusted gross leverage of 0.1x at end-2015. The investments in BZ will not have an impact on Tatneft's ratings, and potential further support of the bank should be manageable for Tatneft as BZ's equity accounted for only 17% of Tatneft's RUB141 billion LTM 3Q16 FFO.
The Stable Outlooks on BZ's IDRs reflect that on Tatneft and the Russian sovereign.
The National-scale ratings are being withdrawn in response to the new regulatory framework for credit rating agencies in Russia (see 'Fitch Ratings Withdraws National Scale Ratings in the Russian Federation' dated 23 December 2016).
The Support Rating Floor (SRF) has been withdrawn in line with Fitch's Global Bank Rating Criteria, as the agency usually does not maintain SRFs on banks whose most likely source of external support would be institutional (shareholder) rather than sovereign.
BZ's senior unsecured debt is rated in line with the bank's Long-Term IDR.
The downgrade of BZ's VR reflects the bank's weakened and still vulnerable asset quality, continued poor performance and only moderate capital cushion (even after a planned RUB14 billion increase in 1H17) relative to the volume of high-risk/restructured exposures. The VR also takes into account a comfortable liquidity buffer and limited refinancing needs.
BZ's non-performing loans (more than 90 days overdue; NPLs) increased to 7.2% of gross loans at end-9M16 from 5.8% at end-2015, but were fully covered by impairment reserves. However, Fitch identified at least RUB32.5 billion of potentially high-risk exposures (net of reserves, 1.5x of Fitch Core Capital (FCC) at end-9M16), which although not NPLs, may require provisioning in the future. These include: (i) receivables from debt collection companies (RUB6.8 billion, 0.3x) to which the bank sold its bad loans (ii) a poorly collateralised reverse repo exposure to a weak Russian bank (RUB7 billion, 0.3x; reduced to RUB5 billion at end-2016) and (iii) other loans (RUB21 billion, 0.9x) among the 25 largest loans, which are restructured and/or issued to construction companies to finance recently started projects with long tenor or covered by fairly illiquid collateral. Positively, some of these exposures (eg. construction-related) are collateralised with real estate, but given the completion/valuation risks, this is only a moderate mitigant.
BZ's FCC ratio increased to 9.4% at end-9M16 from 7.7% at end-2015 after RUB8bn of capital injection from shareholders (mostly Tatneft) in 2Q16. Regulatory capital ratios are also only moderate, with a Tier 1 ratio of 7.9% (minimum with buffers is 7.3%) and total capital ratio of 13.6% (minimum 9.3%) at end-2016. Adjusting for the expected RUB14bn equity increase would boost the FCC and regulatory Tier 1 ratios by about 500bps, but any increase may be only temporary, as, we believe BZ may use some of this capital to reserve its uncovered high-risk exposures.
BZ's profitability is weak, undermined by a high cost of funding (8% in 9M16) and relatively low loan yields (about 12%) resulting in a weak net interest margin of 2.5%. The bank was only marginally above break-even on a pre-impairment basis in 9M16. Including impairment charges equal to 4% of gross loans the bank reported a loss equal to 35% of its average equity. Pre-impairment results may improve somewhat as funding costs decline, but impairment charges are likely to remain a drag on net income.
BZ is funded mainly by customer accounts, which are moderately concentrated (the top 20 made up 30% of total loans at end-3Q16), although most are rather stable. About RUB15 billion or 8% of customer accounts were from Tatneft and related entities, which Fitch views as stable. The bank had a comfortable liquidity buffer (cash and equivalents and bonds repo-able with the Central Bank of Russia) equal to 40% of customer accounts at end-2016 (or 11% net of 2017 market debt repayments).
The bank's IDRs could be downgraded if (i) the Russian Federation, and hence Tatneft, are downgraded; (ii) if Tatneft's propensity to provide support BZ weakens; or (iii) support received is not sufficient to cover asset quality problems.
BZ could be upgraded in case of (i) an upgrade of Tatneft (which in turn would require an upgrade of Russia) or (ii) an extended track record of support for BZ from Tatneft and greater integration between the two entities.
Downside pressure on BZ's VR stems from potential asset quality and performance deterioration, if these result in capital erosion without being offset by new capital injections. Upside is limited and would require a substantial improvement of asset quality or capital.
The rating actions are as follows:
Long Term Foreign and Local Currency IDRs: upgraded to 'BB' from 'BB-'; off RWP; Outlooks Stable
National Long Term Rating: upgraded to 'AA(rus)' from 'A+(rus)'; off RWP; Outlook Stable; Withdrawn
Short-Term Foreign Currency IDR: affirmed at 'B'
Viability Rating: downgraded to 'b+' from 'bb-'
Support Rating Floor: affirmed at 'No Floor'; Withdrawn
Support Rating: upgraded to '3' from '5'; off RWP
Long-term senior unsecured debt: upgraded to 'BB' from 'BB-'; off RWP
National long-term senior unsecured debt: upgraded to 'AA(rus)' from 'A+(rus)'; off RWP; Withdrawn
Company: Bank ZENIT
|Full company name||Bank ZENIT (PJSC)|
|Country of risk||Russia|
|Country of registration||Russia|