July 4, 2017 / 5:01 PM / 16 days ago

Fitch Affirms 3 Foreign-Owned Belarus Banks at 'B-'/Stable

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(The following statement was released by the rating agency) MOSCOW, July 04 (Fitch) Fitch Ratings has affirmed BPS-Sberbank's (BPS), Bank BelVEB's and Belgazprombank's (BGPB) Long-Term Issuer Default Ratings (IDRs) 'B-' with Stable Outlooks. A full list of rating actions is at the end of this commentary. KEY RATING DRIVERS IDRS, SUPPORT RATINGS The IDRs and Support Ratings factor in the likelihood of support the three banks may receive from their Russian shareholders. BPS is 98.4%-owned by Sberbank of Russia (Sberbank; BBB-/Stable), BelVEB 97.5%-owned by Vnesheconombank, (VEB; BBB-/Stable), and BGPB is jointly owned by PJSC Gazprom (BBB-/Stable) and JSC Gazprombank (BB+/Stable), with a 49.7% stake each. Fitch's view of potential support is based on the majority ownership, continued strong commitment of the Russian owners to the Belarus market, common branding (implying high reputational risks in case of a subsidiary default), parent-subsidiary integration (including board representation and operational controls), the track record of support to date and the low cost of any support required (given that each subsidiary accounts for a small part of parent entities' consolidated assets). BPS's and BGPB's regulatory capitalisation was supported in 2015-1Q16 by the provision of subordinated debt, while BPS also benefitted from risk-sharing arrangements with the parent group since 2014, resulting in significant capital relief (transferred risky exposures were equal to 2.8x of the bank's end-1Q17 Fitch Core Capital (FCC)). While there are no plans for equity injections in the near term, we believe that parental capital support will be available for all three banks, in case of need. Funding support, mostly in foreign currency, is available for the banks, with the parents contributing 33%-38% of subsidiary liabilities at end-2016. The banks' 'B-' Long-Term IDRs reflect the constraint of Belarus's 'B-' Country Ceiling, which captures transfer and convertibility risks and limits the extent to which support from the foreign shareholders of these banks can be factored into the ratings. The Stable Outlooks on the banks' Long-Term IDRs are in line with that on Belarus's. Viability Ratings (VRs) The banks' VRs of 'b-' factor in risks from a challenging operating environment, and the linkage between the banks' credit profiles and that of the Belarusian sovereign due to the large direct exposure of the banks to the authorities and, more generally, the public sector. This makes the banks' asset quality dependent on the state of government finances and the ability of the authorities to support macroeconomic stability and the public sector. At end-2016, direct exposure to the sovereign (including claims on the government and the central bank) relative to FCC was 2.4x at BPS, 1.5x at BGPB and 2.1x at BelVEB. Loans issued to public sector corporates contributed a further 0.8x at BPS, 1x at BGPB and 2.8x at BelVEB. In contrast with Belarusian state-owned banks, these banks are not involved in new government programme lending, although BPS has a residual exposure at below 10% of gross loans. More broadly credit risks remain high as the economy is sluggish and borrower performance remains constrained by generally significant leverage in the corporate sector and high loan dollarisation (BPS: 70%; BGPB: 75%; BelVEB: 84% of loans), while the share of hedged borrowers is limited. Asset quality metrics have weakened across the board during 2015-2016. We expect this trend to continue through 2017 as operating conditions remain challenging. BPS's asset quality is somewhat worse than peers'. Its individually impaired loans (as per IFRS accounts) grew to a high 57% of end-1Q17 loans (36% at end-2015), reflecting deterioration in borrowers' financial performance and/or collateral value. The bank's own assessment suggests that about 38% of loans are of higher-risk, on top of non-performing loans (NPLs, loans over 90 days overdue) of 21% of loans at end-1Q17 (end-2015: 10%), of which many are in the construction and real estate segment (CRE). BPS's asset quality ratios were helped by the transfer of high-risk loans in 2Q17 (5% of total loans at end-1Q17) to the parent bank, which also guaranteed some of the high-risk exposures (a further 40% of loans at end-1Q17). BGPB's and BelVEB's individually impaired loans were also high at respectively, 51% and 32% of gross loans at end-2016 (end-2015: 49% and 34%). At the same time, reported NPLs were small at 1.6% at BGPB and 0.3% at BelVEB, helped by loan restructuring/rollovers and also reflecting both banks' more limited exposure to the troubled CRE segment. However, judging by the high volume of impaired loans, we believe, that asset quality is vulnerable. Fitch views capitalisation as modest given the banks' risk profiles and high levels of individually impaired loans, which net of reserves, stood at 1.7x FCC at BPS, 2x at BGPB and 1.5x at BelVEB. At end-5M17, all three banks' regulatory Tier 1 and Total capital adequacy ratios were above the required minimums of 7.25% and 11.25% (including buffers): BPS at 12.8% and 21%, BGPB at 9.7% and 17.4%, and BelVEB at 8.3% and 15.5%. These capital cushions allowed only limited loss absorption capacity equal to 6% of loans at BPS, 5% at BGPB and 1.7% at BelVEB, without breaching regulatory minimum levels (including buffers). Pre-impairment profitability (net of accrued interest not received in cash) was solid at 6.8% of average gross loans at BPS, 7.9% at BGPB and more moderate at 4.9% at BelVEB in 2016. However, in Fitch's view there is some uncertainty about the ability of some borrowers to service loans out of their own cash flows rather than through receipt of new credit. Provisioning requirements remained high at all three banks in 1Q17, wiping out 61%-79% of their annualised pre-impairment profits. The majority of funding is from domestic customers, but is highly dollarised (over 65% of customer accounts at the three banks). Deposits have been stable recently, limiting immediate liquidity pressure and banks' liquidity is also supported by limited third-party wholesale repayments and availability of undrawn committed liquidity lines from the parent institutions. At end-5M17, liquidity cushions (cash and equivalents, net of short third-party interbank exposures, securities eligible for refinancing with the central bank and unused credit lines from parents) accounted for over 100% of customer funding at BPS, 62% at BGPB and 20% at BelVEB. RATING SENSITIVITIES IDRS AND SUPPORT RATINGS The IDRs could be upgraded or downgraded if a change in Belarus's sovereign ratings results in a change in the Country Ceiling, although this is currently unlikely given the Stable Outlook on the sovereign rating. VRs Downgrades of VRs could result from capital erosion due to further marked deterioration in asset quality without sufficient and timely support being made available by parents. Upgrades of VRs above the sovereign rating are extremely unlikely given the high sovereign exposure/dependence of many borrowers on some form of sovereign support. The rating actions are as follows: BPS, BGPB, BelVEB Long-Term IDR affirmed at 'B-'; Outlook Stable Short-Term IDR affirmed at 'B' Viability Rating affirmed at 'b-' Support Rating affirmed at '5' Contact: Primary Analyst Anna Erachina Associate Director +7 495 956 7063 Fitch Ratings CIS Limited Valovaya Street, 26 Moscow 115054 Secondary Analyst Ilya Sarzhin Analyst +7 495 956 9983 Committee Chairperson Alexander Danilov Senior Director +7 495 956 2408 Media Relations: Peter Fitzpatrick, London, Tel: +44 20 3530 1103, Email: peter.fitzpatrick@fitchratings.com. Additional information is available on www.fitchratings.com Applicable Criteria Global Bank Rating Criteria (pub. 25 Nov 2016) here Additional Disclosures Dodd-Frank Rating Information Disclosure Form here Solicitation Status here#solicitation Endorsement Policy here ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. 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