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Fitch Downgrades Sviaz-Bank to 'BB-'; Affirms 2 Other Russian Banks
May 26, 2017 / 3:01 PM / 2 months ago

Fitch Downgrades Sviaz-Bank to 'BB-'; Affirms 2 Other Russian Banks

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(The following statement was released by the rating agency) MOSCOW, May 26 (Fitch) Fitch Ratings has downgraded Sviaz-Bank's (SB) Long-Term Issuer Default Ratings (IDRs) to 'BB-' from 'BB'. Fitch has also affirmed the Long-Term IDRs of Globexbank (GB) at 'BB-' and Eurofinance Mosnarbank (EMB) at 'B+'. The Outlooks on SB and GB are Negative. EMB has a Stable Outlook. A full list of rating actions is at the end of this rating action commentary. KEY RATING DRIVERS IDRS, SUPPORT RATING, SUPPORT RATING FLOOR (SRF), SENIOR DEBT SB and GB The downgrade of SB's IDR by one notch to 'BB-', thus equalising it with GB, reflects Fitch's view that the probability of both banks being supported by their sole shareholder state-owned Vnesheconombank (VEB; BBB-/Stable) is now broadly similar due to them being defined in VEB's new strategy as non-strategic investments to be sold by end-2017. However, in Fitch's view the sale may take longer or not happen at all due to VEB's sale price expectations, generally low investor interest in banking assets and weaknesses in the banks' stand-alone profiles, which are reflected in low Viability Ratings (VRs) of 'b' and 'b-' for SB and GB, respectively. At the same time, SB's and GB's Long-Term IDRs of 'BB-' and Support Ratings of '3' continue to reflect the moderate probability of support, in case of need, from VEB, taking 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. However, the IDRs are three notches below that of VEB due to: (i) the banks' limited strategic importance for VEB and (ii) VEB's stated intention to sell the banks. The Negative Outlooks on both banks' IDRs reflect Fitch's view that selling the banks to highly-rated new owners, for example quasi-sovereign entities or foreign banks, is less likely than to more lowly-rated private entities. The latter would likely result in a downgrade of the banks' Support Ratings, and therefore also their Long-Term IDRs. SB's senior unsecured debt ratings were downgraded by one notch in line with the bank's Long-Term Local-Currency IDR. The rating on RU000A0JS710 local bonds was withdrawn as almost the entire issue had been repaid early. The ratings of debt issued by SB apply to debt issued prior to 1 August 2014. EMB EMB's ratings reflect the bank's standalone profile, as expressed by a VR of 'b+', and do not take into account potential support from the Russian and Venezuelan authorities. This is due to continued delays to the ratification of an intergovernmental agreement, initially signed by Russia (BBB-/Stable) and Venezuela (CCC) in 2011 to transform the bank into an international financial institution (IFI), equally owned by the two governments directly or through government agencies. Currently, EMB is owned by Gazprombank (BB+/Stable; 25% plus one share), VTB Bank (25% plus one share) and the National Development Fund of Venezuela (50% minus two shares). VRs SB and GB The affirmation of SB's and GB's VRs at, respectively, 'b' and 'b-' reflects that the moderate improvements in their credit profiles expected when the ratings were previously reviewed have largely taken place, mainly as a result of recapitalisation/clean-up undertaken by VEB in 2016-1Q17. GB's VR is one notch lower than SB's, reflecting a weaker financial position, including more vulnerable asset quality, a still high real estate exposure, weaker performance and a tighter capital position. SB's asset quality is acceptable, with non-performing loans (NPLs, overdue more 90 days) comprising a moderate 8% of gross loans at end-2016 (120% reserved). Restructured loans made up a further 5% of loans, but these are mostly performing or covered by hard collateral with reasonable loan-to-values (LTVs). GB's NPLs ratio was a higher 27% at end-2016, but reserve coverage of these was a solid 112%. However, further risks stem from 10% of impaired restructured loans (total restructured loans are a higher 26%), which are weakly reserved, and investment property (a further 0.5x Fitch Capital Core (FCC) ratio). Positively, in 2016 VEB (through its subsidiary, VEB-Capital) bought from GB a 30% stake in real-estate developer Rose Group, resulting in this entity being deconsolidated from GB's accounts; the bank's remaining 43% stake (equal to 20% of FCC) is expected to be bought out in 2017. VEB also refinanced GB's high-risk RUB7 billion loan exposure to the real estate and construction sector in 2016 and plans to refinance a further RUB4 billion by mid-2017, which will reduce the volume of restructured loans. Given the banks' asset quality problems, VEB recapitalised them in 2016, albeit with some delay, by injecting RUB15 billion of new equity into GB and converting into common equity subordinated debt of RUB15 billion in GB and RUB16 billion in SB. Consequently GB and SB's FCC ratios both improved to 10% at end-2016 from 1% and 4% at end-2015, respectively. However, GB's capitalisation is weaker, as it is undermined by a substantial share of non-provisioned restructured loans, while its pre-impairment profit was negative in 2016-1Q17. The banks' performance has been weak (both reported a 66% negative return on average equity in 2016), as they created substantial reserves. However, SB's underlying profitability is somewhat better, as it was break-even on a pre-impairment basis, while GB had a small pre-provision loss. Liquidity is acceptable at both banks, although somewhat tighter in GB. Liquid assets covered, respectively, 30% and 15% of SB's and GB's liabilities at end-4M16. Refinancing risks are limited given a low share of wholesale funding. EMB The affirmation of EMB's Long-Term IDRs reflects limited changes to the bank's credit profile since the previous review in December 2016, and our expectation of stable performance and credit metrics in the next 12-18 months. EMB's ratings are constrained by a limited and concentrated franchise, moderate profitability, volatile funding and a lack of a defined alternative strategy in case the transformation plan is cancelled. At the same time, the ratings factor in EMB's solid capitalisation, ample liquidity and reasonable asset quality. Credit risk stems primarily from EMB's sizeable securities book (around 43% of assets at end-2016), interbank placements (21%), loan book (8%) and off-balance sheet contingencies (equal to 23% of assets). These are of mostly good quality, while higher-risk Venezuelan exposures (in the form of sovereign and quasi-sovereign bonds) were a moderate 17% of FCC at end-2016. The securities book is of good quality (excluding the aforementioned Venezuelan bonds) with the majority rated 'BB+' and above, and Fitch estimates that about 80% of the portfolio was repo-able with the Central Bank of Russia. Interbank exposure is entirely investment-grade. The loan book is small with NPLs (13% of gross loans) being 1.3x covered by reserves at end-2016. A further 36% of loans were restructured, but EMB received a state guarantee for more than half of these (20% of end-2016 loans) in January 2017. Off-balance sheet exposures are of moderate risk and mostly represented by covered letters of credit. EMB's tier 1 and total regulatory capital ratios were a strong 21.8% and 23.9%, respectively, at end-4M17, providing a solid buffer against market and credit risks. EMB's profitability is moderate (return on assets of 0.8% and return on equity of 2.6% in 2016) reflecting the bank's high share of low-yielding liquid assets and a high equity base. EMB's balance sheet has been volatile, driven by sporadic inflows of large short-term placements by Venezuelan entities, reflecting the bank's focus on trade finance and settlement operations. However, these have been prudently covered with liquid assets. At end-2016, EMB's total available liquidity, net of potential debt repayments within one year, was sufficient to repay a high 39% of customer accounts. RATING SENSITIVITIES SB and GB SB's and GB's IDRs and SRs could be downgraded if (i) the Russian Federation, and hence VEB, are downgraded; (ii) if the propensity of VEB to provide support weakens; or (iii) banks are sold to lower rated/unrated investors (in which case the IDRs will be downgraded to the level of the banks' respective VRs). Upgrades are less likely, but could stem from (i) a higher propensity of VEB to support them, for example, if the sale does not happen and VEB incorporates them into its strategy, or (ii) if the banks are sold to a highly rated strategic investor. SB's and GB's VRs could be downgraded in case of significant asset quality deterioration or weak performance resulting in material capital erosion without timely recapitalisation. Upside is limited and would require a significant improvement of the banks' asset quality and core profitability. EMB Should EMB become an IFI, this would likely lead to an upgrade of its IDRs, although the level of the ratings would depend on the ratings of Russia and Venezuela, Fitch's assessment of the bank's policy role and the extent of the shareholders' capital commitments. Capital deterioration as a result of a significant increase in leverage or material losses, or contingent risks from the shareholders would lead to a downgrade. Upside for EMB's VR is currently limited given the bank's narrow franchise and moderate performance. The rating actions are as follows: SB Long-Term Foreign and Local Currency IDRs: downgraded to 'BB-' from 'BB'; Outlooks Negative Short-Term Foreign Currency IDR: affirmed at 'B' Viability Rating: affirmed at 'b' Support Rating: affirmed at '3' Senior unsecured debt (RU000A0JS1F5 and RU000A0JS793): downgraded to 'BB-' from 'BB' Senior unsecured debt (RU000A0JS710): downgraded to 'BB-' from 'BB' and withdrawn GB Long-Term Foreign and Local Currency IDRs: affirmed at 'BB-'; Outlooks Negative Short-Term Foreign Currency IDR: affirmed at 'B' Support Rating: affirmed at '3' Viability Rating: affirmed at 'b-' EMB Long-Term Foreign and Local Currency IDRs: affirmed at 'B+'; Outlooks 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' Contact: Primary Analysts Anton Lopatin (SB, GB) Director +7 495 956 7096 Fitch Ratings CIS Ltd 26 Valovaya Street, Moscow 115054 Sergey Popov (EMB) Associate Director +7 495 956 9981 Secondary Analysts Ruslan Bulatov (SB, GB) Associate Director +7 495 956 9982 Maria Kuraeva (EMB) Associate Director +7 495 956 9901 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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