March 30, 2017 / 3:12 PM / 4 months ago

Fitch Revises Alfa-Bank's Outlook to Stable; Affirms at 'BB+'

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(The following statement was released by the rating agency) MOSCOW/LONDON, March 30 (Fitch) Fitch Ratings has revised the Outlook on Alfa-Bank (Alfa) and its Cyprus-based holding company ABH Financial Limited (ABHFL) to Stable from Negative and affirmed Alfa's Long-Term Issuer Default Rating (IDR) at 'BB+' and ABHFL's Long-Term IDR at 'BB'. A full list of rating actions is at the end of this comment. KEY RATING DRIVERS Alfa The revision of the Outlook on Alfa reflects the stabilisation of the Russian operating environment and, as a result, reduced pressure on the bank's asset quality and performance. Alfa's ratings, which are the highest of a Russian privately-owned bank, reflect its well-developed franchise and access to top tier borrowers/depositors, its sound management, improved asset quality, recovering profitability and good track record of managing through the cycle. The ratings also take into account risks relating to the Russian operating environment, significant cyclicality in the bank's performance and moderate regulatory capitalisation. Alfa's asset quality improved in 2016, with the ratio of non-performing loans (NPLs; more than 90 days overdue) decreasing to 4.2% from 6.9% at end-2015 as a result of recoveries, collateral foreclosures and write-offs. NPLs were fully covered by impairment reserves, and restructured loans were negligible at end-2016. Performance of retail loans (12% of total loans, mainly unsecured personal loans and credit cards) also improved, reflected in NPL origination (calculated as the increase in NPLs plus write-offs to average performing loans; a good proxy for credit losses) decreasing to 7% in 2016 from 9.3% in 2015, comfortably below the Fitch-calculated break-even level of about 14%. Profitability improved in 2016, with the total comprehensive income to average equity ratio increasing to 14% in 2016 from zero in 2015 due to a moderate 50bp net interest margin improvement and a significant reduction in loan impairment charges (LICs) to 1.4% from 3.2% of average loans. Capitalisation is adequate. The consolidated Fitch Core Capital (FCC) ratio, calculated at the ABHFL level, was 15.9% at end-2016, slightly down from 16.7% at end-2015. However, this and the bank's reported Basel I Tier 1 capital ratio (16.2%) benefit significantly from the Basel I-based risk-weighted asset calculation, which does not include charges for market risk and operational risk. Adjusting for these, core capital ratios would have been approximately 13%, Fitch calculates. Regulatory capitalisation at the bank level is significantly tighter, with a core Tier 1 ratio of 8.1% (required minimum including buffers is 6.1%), Tier 1 was higher at 9.6% (7.6%), due to USD700 million AT1 perpetual bonds placed in 2H16, and Total capital 15% (9.6%) at end-2M17. Liquidity is ample. Liquid assets (cash and equivalents, net short-term interbank placements and bonds eligible for repo funding from the Central Bank of Russia) covered customer accounts by 53% at end-2016. Wholesale debt maturing in 2017 was USD1.6 billion at end-2016, equal to a moderate 14% of the liquidity cushion, and Alfa plans to refinance the majority of these facilities. Given Alfa's broad franchise, in Fitch's view there is a moderate probability of support from the Russian authorities, as reflected in the '4' Support Rating and 'B' Support Rating Floor. Alfa's owners have supported the bank in the past, and in Fitch's view, would have a strong propensity to do so again, if required. Their ability to provide support is also likely to be significant, as they seem to have little debt and significant cash reserves following past asset sales. However, Fitch does not formally factor shareholder support into the ratings given the limited visibility of the shareholders' current financial position and Alfa's significant size. ABHFL The affirmation of ABHFL's ratings and Outlook revision reflects Fitch's view that default risk at the bank and the holding company are likely to be highly correlated in view of the high degree of fungibility of capital and liquidity within the group, which is managed as a single entity. The currently limited volume of holding company debt to non-related parties also supports the close alignment of its ratings with Alfa. The one-notch difference between the bank and holding company ratings reflects the absence of any regulation of the consolidated group, the fact that the holding company is incorporated in a different jurisdiction and the high level of double leverage at the holding company. The latter, defined by Fitch as equity investments in subsidiaries divided by holdco equity, was 136% at end-2016. However, if all related party funding was converted into equity, the double leverage ratio would fall to around 114%, or even lower if some equity investments were restated at fair value. DEBT RATINGS ABHFL and Alfa's unsecured debt is rated in line with their Long-Term IDRs. Alfa's 'BB' subordinated debt rating is notched down once from the bank's VR, which incorporates zero notches for incremental non-performance risk and a notch for higher loss severity. Alfa's AT1 perpetual notes are rated 'B', four notches lower than the bank's VR. The notching comprises two notches for higher loss severity relative to senior unsecured creditors and a further two notches for non-performance risk, as Alfa has an option to cancel at its discretion the coupon payments. The latter is more likely if the capital ratios fall in the capital buffer zone, although this risk is somewhat mitigated by Alfa's stable financial profile and policy of maintaining reasonable headroom (about 150bps-200bps) over minimum capital ratios. RATING SENSITIVITIES Fitch will likely maintain a minimum one-notch difference between Alfa's Long-Term IDR and Russia's sovereign rating. An upgrade of Alfa would therefore likely require a sovereign upgrade, while a sovereign downgrade would probably lead to a downgrade of the bank's ratings. Alfa's ratings could also be downgraded in case of a significant deterioration of asset quality and erosion of capital without the latter being replenished by shareholders. ABHFL's ratings are likely to move in tandem with Alfa's. In addition, ABHFL could be downgraded in case of a marked increase in double leverage or significantly increased liquidity risks at the holdco level. Debt ratings are sensitive to changes in Alfa's and ABHFL's issuer ratings. The rating actions are as follows: Alfa-Bank Long-Term Foreign-Currency IDR: affirmed at 'BB+'; Outlook revised to Stable from Negative Long-Term Local-Currency IDR: affirmed at 'BB+'; Outlook revised to Stable from Negative Short-Term Foreign-Currency IDR: affirmed at 'B' Viability Rating: affirmed at 'bb+' Support Rating: affirmed at '4' Support Rating Floor: affirmed at 'B Senior unsecured debt: affirmed at 'BB+' Subordinated debt: affirmed at 'BB' Senior unsecured debt of Alfa Bond Issuance Public Limited Company: affirmed at 'BB+' Subordinated debt of Alfa Bond Issuance Public Limited Company: affirmed at 'BB' Perpetual subordinated debt of Alfa Bond Issuance Public Limited Company: affirmed at 'B' ABH Financial Limited Long-Term Foreign-Currency IDR: affirmed at 'BB'; Outlook revised to Stable from Negative Short-Term Foreign-Currency IDR: affirmed at 'B' Senior unsecured debt of Alfa Holding Issuance plc: affirmed at 'BB'/'BB (emr)' Contact: Primary Analyst Alexander Danilov Senior Director +7 495 956 9901 Fitch Ratings Moscow Valovaya Str, 26 Moscow Secondary Analyst Anton Lopatin Director +7 495 956 9901 Committee Chairperson James Watson Managing Director +7 495 956 6657 Media Relations: Elaine Bailey, London, Tel: +44 203 530 1153, Email: elaine.bailey@fitchratings.com; Julia Belskaya von Tell, Moscow, Tel: +7 495 956 9908, Email: julia.belskayavontell@fitchratings.com. 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