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Fitch Affirms Russian Agricultural Bank at 'BBB-'; Outlook Negative
August 13, 2014 / 3:59 PM / 3 years ago

Fitch Affirms Russian Agricultural Bank at 'BBB-'; Outlook Negative

(The following statement was released by the rating agency) MOSCOW, August 13 (Fitch) Fitch Ratings has affirmed Russian Agricultural Bank's (RusAg) Long-term Issuer Default Ratings (IDRs) at 'BBB-'. The Outlooks are Negative. A full list of rating actions is available at the end of this commentary. KEY RATING DRIVERS - IDRS, NATIONAL RATING, SENIOR DEBT RATINGS, SUPPORT RATING, SUPPORT RATING FLOOR The affirmation reflects Fitch's assessment of potential support from the Russian authorities for the bank, in case of need. In Fitch's view, the propensity to support the bank would likely be high, given the bank's full ownership by the State and its policy role of supporting the agriculture sector, which may become even more important in light of Russia's recently introduced ban on food imports from major western countries. There is no indication so far of a weakened propensity to support foreign creditors of state-owned banks, although tail risks could emerge in case of further escalation of geopolitical tensions and further sanctions. The government's ability to provide assistance is currently sound, in particular considering the moderate size of RusAg's balance sheet relative to the sovereign's available financial resources. RusAg's Long-term IDRs, Support Rating Floor and senior debt ratings are notched down once from the sovereign's ratings due to the only moderate capital injections provided to the bank so far relative to the scale of its asset quality problems, and the absence at present of a confirmed and sufficiently robust recapitalisation plan. Earlier this year, the government included RusAg's future recapitalisation into the state programme of agribusiness development (part of the federal budget) for the next six years, but it has not yet decided on the size and the schedule of capital injections. The bank's management expects the total amount of this recapitalisation to be around RUB100bn. The Negative Outlook on the bank's Long-term IDRs mirrors that on the sovereign and reflects potential deterioration of the government's ability to provide support, given the weakening economy and risks from sanctions. The affirmation of RusAg's debt ratings applies to all debt issued prior to 1 August 2014. KEY RATING DRIVERS - VIABILITY RATING The affirmation of RusAg's Viability Rating (VR) at 'b-' primarily reflects the bank's still weak asset quality and moderate capitalisation. The rating also considers RusAg's modest profitability and significant reliance on wholesale funding. RusAg's asset quality remains weak, with non-performing loans (NPLs, including all loans over 90 days, whether classified as impaired or watch list exposures in the IFRS accounts) comprising a high 15% of the end-2013 loan book. In addition, there were around 8% of rolled-over and/or restructured loans designated as watch list, resulting in total recognised problem/high risk exposures of 23% of the loan book. Reserve coverage of these exposures was a moderate 36%, with the unreserved part amounting to RUB206bn or 94% of Fitch Core Capital (FCC). There is also a risk of further problems being recognised upon seasoning of the predominantly long-term loan book, in particular as exposures are often structured with bullet repayments and subsidised interest rates. The bank has received RUB70bn of equity injections in the last two years, and at end-2013 the FCC ratio stood at 13.2%. Capital is sufficient to fully reserve NPLs without the FCC falling below 8%, but would not be enough to increase reserving of restructured loans or any new potential problems, or support future growth. Internal capital generation is weak with pre-impairment profit (net of accrued but not received interest income) amounting to only RUB9bn (equal to 0.6% of average risk-weighted assets) in 2013. The recent government decision allowing RusAg to convert its RUB25bn subordinated loan from Vnesheconombank into preferred shares would moderately support its regulatory Tier 1 ratio, although the instrument would have weak loss absorption capacity (due to its low 2% conversion trigger) and so would not improve core Tier 1 capital. RusAg's high loans/deposits ratio (190% at end-2013) and the fairly long-term nature of its loan book make the bank's liquidity position somewhat vulnerable to a sustained reduction in access to wholesale funding. However, near-term maturities are moderate and liquidity is comfortable at present, so recently introduced sanctions are unlikely to result in a sharp increase in refinancing risks. At end-1H14, RusAg had USD10bn of foreign liabilities (22% of total non-equity funding) with negligible maturities in 2H14 and USD0.7bn due for repayment in 2015, while the bank held USD4.3bn of liquid assets (including USD0.9bn of foreign correspondent accounts and short-term bank placements). RATING SENSITIVITIES - IDRS, NATIONAL RATING, SENIOR DEBT RATINGS, SUPPORT RATING, SUPPORT RATING FLOOR RusAg's ratings could be downgraded, or the Outlook revised to Stable, in case of a similar rating action on the Russian sovereign. The ratings could be equalised with the sovereign if the support framework for the bank materially strengthens or if future support made available to the bank enables it to operate with consistently stronger capitalisation over an extended period of time. The ratings could be downgraded if capital or liquidity support is not forthcoming when urgently required, or if the bank's policy role is considerably weakened. However, Fitch views these scenarios as unlikely. RATING SENSITIVITIES - VR A further marked deterioration in asset quality could result in a downgrade of the VR. A strengthening of capitalisation, which significantly alleviates asset quality risks, could lead to an upgrade. KEY RATING DRIVERS AND SENSITIVITIES - SUBBORDINATED DEBT The rating of RusAg's subordinated debt continues to be notched off the bank's Long-term IDRs, reflecting Fitch's methodology for rating 'old style' subordinated debt in Russia. Accordingly, an upgrade or downgrade of the subordinated debt rating would follow similar actions on the bank's Long-term IDRs. The rating actions are as follows: Long-term foreign currency IDR: affirmed at 'BBB-'; Outlook Negative Long-term local currency IDR: affirmed at 'BBB-'; Outlook Negative Short-term foreign currency IDR: affirmed at 'F3' National Long-term rating: affirmed at 'AA+(rus)'; Outlook Stable Viability Rating: affirmed at 'b-' Support Rating: affirmed at '2' Support Rating Floor: affirmed at 'BBB-' Senior unsecured debt: affirmed at 'BBB-'/'BBB-(EXP)'/'AA+(rus)'/AA+(EXP)(rus)' Senior unsecured debt of RSHB Capital S.A.: affirmed at 'BBB-'/'AA+(rus)' "Old-style" subordinated debt of RSHB Capital S.A.: affirmed at 'BB+' Contact: Primary Analyst Alexander Danilov Senior Director +7 495 956 2408 Fitch Ratings Moscow Valovaya str., 26 Moscow 115054 Secondary Analyst Sergey Popov Associate Director +7 495 956 9981 Committee Chairperson James Watson Managing Director +7 495 956 6657 Media Relations: Elaine Bailey, London, Tel: +44 203 530 1153, Email:; Julia Belskaya von Tell, Moscow, Tel: +7 495 956 9908, Email: Additional information is available at Applicable criteria, 'Global Financial Institutions Rating Criteria', dated 31 January 2014, are available at Applicable Criteria and Related Research: Global Financial Institutions Rating Criteria here Additional Disclosure Solicitation Status here ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.

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