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Fitch Downgrades Credit Bank of Moscow to 'BB-'; Affirms Bank Saint Petersburg at 'BB-'
June 21, 2017 / 5:08 PM / 6 months ago

Fitch Downgrades Credit Bank of Moscow to 'BB-'; Affirms Bank Saint Petersburg at 'BB-'

(The following statement was released by the rating agency) MOSCOW/LONDON, June 21 (Fitch) Fitch Ratings has downgraded the Long-Term Issuer Default Ratings (IDRs) of Credit Bank of Moscow (CBM) to 'BB-' from 'BB'. Fitch has also affirmed Bank Saint-Petersburg's (BSPB) Long-Term IDRs at 'BB-'. The Outlooks on both banks are Stable. A full list of rating actions is at the end of this commentary. KEY RATING DRIVERS - IDRS AND VRS The downgrade of CBM mainly reflects the increased volume of exposures that Fitch considers to be potentially high risk. The downgrade also reflects significant double leverage at the level of CBM's holdco, which may mean upstreaming of dividends and/or liquidity from the bank is required to help service the holdco's debt. Given these risks, Fitch believes the bank's credit profile is more commensurate with a 'BB-' rating. The two banks' IDRs continue to be driven by their intrinsic financial strength, as reflected in their Viability Ratings (VR) of 'bb-'. The VRs in turn reflect the banks' significant franchises, adequate performance and capital adequacy, and comfortable funding and liquidity profiles. However, the ratings also take into account potential weaknesses in the banks' asset quality and the still challenging operating environment. CBM CBM's reported asset quality metrics are adequate: non-performing loans (NPLs; 90 days overdue) were a low 2% at end-1Q17. However, Fitch also identified a significant volume (RUB127 billion at end-2016, equal to 1.2x end-1Q17 Fitch Core Capital (FCC)) of potentially risky loans, reverse repos, interbank and bond placements, which are currently performing, although some were restructured. These increased from RUB74 billion at end-1Q16, mostly due to Fitch's reassessment of the riskiness of some exposures, but also due to moderate additional net issuance. These potentially risky exposures include: - RUB57 billion (52% of FCC at end-1Q17) of high risk corporate loans to borrowers with high leverage/weak financial performance - RUB17 billion (16%) related-party construction exposure - RUB31 billion (29%) of weak reverse repo exposures with high counterparty risks and/or weak, illiquid collateral with limited discounts - RUB22 billion (20%) of blank interbank and bond exposures to weak Russian financial institutions, which could be fiduciary in nature; according to CBM, this exposure reduced to RUB5 billion (5%) in June 2017 Of somewhat lower credit risk, are exposures (through loans, reverse repos and interbank placements) to two large Russian banks and two property developers of a combined RUB65 billion (61% of FCC at end-1Q17). Some of these exposures may be fiduciary, in Fitch's view. CBM's ability to absorb losses on these exposures is significant, driven primarily by its robust pre-impairment profit, which was equal to about RUB44 billion (or 6% of average gross loans) in 2016. Loan impairment charges have also been significant (equal to 4.7% of loans in 2016, and an annualised 2.9% in 1Q17), but net income has remained sound (ROE of 11% in 2016 and 17.6% (annualised) in 1Q17). CBM's regulatory core capital buffer is moderate. At end-May 2017, the regulatory core Tier 1 and Tier 1 ratios were 7.1% and 10.5% (the latter boosted by the USD700 million perpetual AT1 issue in May), exceeding the regulatory minimum levels (including capital conservation buffer) by 1.4pts and 3.3pp, respectively. The FCC ratio was a more solid 10.8% at end-1Q17, supported mainly by lower provisioning in IFRS as opposed to regulatory accounts. CBM's capitalisation should also be viewed in the context of significant 1.6x double-leverage at the level of the bank's holding company, Concern ROSSIUM, which also holds stakes in non-financial businesses. The holdco had around RUB40 billion of debt at end-1Q17 and is largely reliant on upstreaming of liquidity and dividends to service this, potentially representing a significant burden for CBM. Liquidity risk is reasonably well managed, despite significant balance sheet concentrations, because lumpy placements are covered with related asset exposures and liquidity. Thus large customer deposits placed by CBM's biggest corporate client and most of short-term direct repo funding are used to fund a large reverse repo exposure collateralised by quasi-sovereign bonds and some corporate loans. Fitch estimates that even if the largest customer leaves CBM, at end-1Q17 the bank's remaining liquidity buffer net of refinancing needs for 2017 (these include mostly short-term money market placements and put options on local bonds) would be sufficient to repay 15% of other customer deposits. Fitch conservatively deducts from the liquidity buffer some of CBM's short-term interbank and reverse repo placements equalling to RUB92 billion (4% of end-1Q17 liabilities) as in the agency's view these are long-term credit exposures rather than short-term money market placements. BSPB BSPB's asset quality is reasonable given reserve and collateral coverage of problem exposures. NPLs accounted for 5% of gross loans at end-1Q17, while restructured exposures made up a further 10%. NPLs were fully covered by reserves. The coverage of NPLs and restructured loans was 79%, which is reasonable as most restructured exposures are performing and secured by revenue-generating real estate with reasonable LTVs of about 60%. Capitalisation is satisfactory. The FCC ratio rose slightly to 13% at end-1Q17 from 12% at end-2016 due to deleveraging. The regulatory Tier 1 ratio was a lower 9.5% at end-4M17 (compared with the minimum 7.25%, including the capital conservation buffer), mainly due to higher provisions in local GAAP. BSPB is planning a RUB3 billion equity injection in 3Q17, which would boost capital ratios by about 0.6pp. BSPB's net interest margin has remained reasonable at around 4% over the credit cycle. Commission and trading income has also been rather stable at 1%-2% of average assets in 2013-1Q17. These underpin BSPB's pre-impairment profit, which has been approximately equal to a solid 5% of average gross loans, enabling the bank to absorb credit losses and remain profitable. The bank's ROE was 7% in 2016 and the target for 2017 is 10%, which seems achievable based on 1Q17 results. The bank is mainly funded by customer accounts, which made up 79% of funding net of direct repos at end-1Q17. Customer funding is diversified, with 60% being rather granular retail accounts and the 20 largest depositors (mainly corporate) making up only 15% of the total. Repo funding is sizable (17% of liabilities) and used to finance carry trades in short-term market instruments. BSPB has an adequate cushion of liquid assets, which net of market funding maturing within one year covered customer accounts by a comfortable 22% at end-4M16. SUPPORT RATINGS AND SUPPORT RATING FLOORS The '5' Support Ratings of CBM and BSPB reflect Fitch's view that support from the banks' private shareholders cannot be relied upon. The Support Ratings and Support Rating Floors of 'No Floor' also reflect that support from the Russian authorities, although possible given the banks' significant deposit franchises, cannot be relied upon due to their still small size and lack of overall systemic importance. DEBT RATINGS CBM's senior unsecured debt is rated in line with the bank's Long-Term IDRs. The banks' subordinated debt ratings are notched down once from the banks' VRs, which incorporates zero notches for incremental non-performance risk and one notch for higher loss severity relative to senior unsecured debt holders. The rating of CBM's perpetual additional Tier 1 notes has been affirmed at 'b-' and is now three notches below the bank's 'bb-' VR. The affirmation reflects reduced notching of these instruments at low rating levels. The notching reflects (i) incremental non-performance risk relative to the bank's VR due to the option to cancel coupon payments at CBM's discretion; and (ii) likely high loss severity in case of non-performance due to the instrument's deep subordination. RATING SENSITIVITIES Upside potential for CBM's ratings would require a marked improvement of its asset quality and a strengthening of capitalisation through higher core capital ratios and/or reduced risks stemming from double leverage at the holdco level. An upgrade of BSPB's ratings would require a strengthening of its franchise and credit metrics. Negative rating pressure for both banks may stem from a sharp asset quality deterioration resulting in material capital erosion or a significant liquidity squeeze. The rating actions are as follows: Credit Bank of Moscow Long-Term Foreign- and Local-Currency IDRs: downgraded to 'BB-', Outlooks Stable Short-Term Foreign-Currency IDR: affirmed at 'B' Viability Rating: downgraded to 'bb-' from 'bb' Support Rating: affirmed at '5' Support Rating Floor: affirmed at 'No Floor' Senior unsecured debt: downgraded to 'BB-' from 'BB' and to 'BB-(exp)' from 'BB(exp)' CBOM Finance Plc (Ireland) Senior unsecured debt: downgraded to 'BB-' from 'BB' Subordinated debt: downgraded to 'B+' from 'BB-' Hybrid capital instrument: affirmed at 'B-' Bank Saint Petersburg PJSC Long-Term Foreign- and Local-Currency IDRs: affirmed at 'BB-', Outlooks Stable Short-Term Foreign-Currency IDR: affirmed at 'B' Viability Rating: affirmed at 'bb-' Support Rating: affirmed at '5' Support Rating Floor: affirmed at 'No Floor' Subordinated debt (issued by BSPB Finance plc): affirmed at 'B+' Contact: Primary Analysts Dmitry Vasiliev (CBM) Director +7 495 956 5576 Fitch Ratings CIS Limited 26 Valovaya Street Moscow 115054 Roman Kornev (BSPB) Director +7 495 956 7016 Fitch Ratings CIS Limited 26 Valovaya Street Moscow 115054 Secondary Analysts Roman Kornev (CBM) Director +7 495 956 7016 Artem Beketov (BSPB) Analyst +7 495 956 9932 Committee Chairperson James Watson Managing Director +7 495 956 6657 Media Relations: Julia Belskaya von Tell, Moscow, Tel: +7 495 956 9908, Email:; Peter Fitzpatrick, London, Tel: +44 20 3530 1103, Email: Additional information is available on 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. 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