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Aug 5 (Reuters) - (The following statement was released by the rating agency)
Fitch Ratings has upgraded Russian Primsotsbank’s Long-term Issuer Default Rating (IDR) to ‘B+’ from ‘B’. The Outlook is Stable. A full list of rating actions is at the end of this rating action commentary.
KEY RATING DRIVERS - IDRS, NATIONAL RATING, VIABILITY RATING
The upgrade of Primsotsbank’s Long-Term IDR, National Rating and Viability Rating (VR) reflect the bank’s extended track record of solid performance, its reasonable asset quality and underwriting standards, limited related party business and comfortable liquidity. Offsetting these factors are the bank’s limited franchise, moderate capitalisation, recent rapid growth and contingent risks from sister bank, Levoberezhny (LB).
Performance remained solid in 2012, with IFRS pre-impairment operating profit and net income equal to 4.7% and 2.2% of average assets, respectively. H113 statutory accounts suggest similar pre-impairment performance (although statutory provisions have been catching up with those under IFRS, somewhat pressuring bottom line profitability in the Russian accounts). Revenues are supported by solid margins and strong commission/trading income earned on money transfers and client foreign currency operations, which benefit from the bank’s location in the Russian Far East and customers’ foreign trade business.
Primsotsbank’s asset quality is reasonable, with non-performing loans (NPLs, over than 90 days overdue) accounting for 4% of gross loans at end-Q113, and renegotiated loans another 6%. Reserves fully covered NPLs, and management expects about half of the restructured loans to be repaid during H213. The corporate book, which comprised 60% of total loans at end-Q113, appears to be of decent quality, based on Fitch’s review of the largest 25 exposures, which comprised about half the corporate portfolio. Reported related party lending was equal to 10% of Fitch core capital (FCC) at end-Q113 (15% at end-2012), although Fitch estimates this could have been moderately higher.
The performance of the bank’s retail lending is satisfactory. NPLs in the unsecured consumer book, which comprised 27% of gross loans at end-Q113, were a moderate 7%. Pay-roll clients comprise about 40% of these exposures, mitigating overall risks, while high rates create a significant margin of safety. Mortgage lending, 10% of gross loans, is predominantly a commission business, with the bank usually selling loans soon after origination.
The bank’s liquidity is supported by deposit collection through its regional branch network, and by negligible wholesale funding. A slowdown of loan growth in H113 (due to capital constraints) has also boosted liquidity, with liquid assets (cash, net short-term interbank and securities eligible for refinance with CBR) covering a significant 35% of customer funding at end-H113. Liquidity risks are also mitigated by moderate deposit concentrations, with the top 20 depositors accounting for 10.5% of customer accounts at end-Q113.
Primsotsbank’s capitalisation weakened in 2012 as a result of rapid growth, and the FCC ratio fell to 10.1% from 12.0% at end-2011. The regulatory capital ratio stood 11.2% at end-H113, but as Fitch understands this could be supported in H213 by a subordinated loan (equal to about 14% of end-H113 regulatory capital). Fitch views the moderate capital levels as a rating weakness, although this is offset by solid internal capital generation and the bank’s demonstrated ability (during the 2008-2009 crisis) to rapidly deleverage its balance sheet.
Fitch views sister bank LB as a somewhat weaker credit than Primsotsbank due to its higher proportion of unsecured lending and even faster growth. However, LB’s recent performance, asset quality and liquidity have been satisfactory, albeit offset, as at Primsotsbank, by rather tight capitalisation. LB is of a similar size to Primsotsbank and based in Novosibirsk in Siberia.
Potential for a further upgrade of Primsotsbank’s ratings is limited, given its moderate franchise and capitalisation. A significant weakening of asset quality or capitalisation, or a marked deterioration in LB’s credit profile, could result in a downgrade of Primsotsbank.
KEY RATING DRIVERS AND SENSITIVITIES - SUPPORT RATING, SUPPORT RATING FLOOR
Primsotsbank’s ‘5’ Support Rating and ‘No Floor’ Support Rating Floor reflect the limited probability of government support, given the bank’s limited franchise. The Support Rating could be upgraded in case of acquisition by a stronger shareholder.
The rating actions are as follows:
Long-Term IDR upgraded to ‘B+’ from ‘B’; Outlook Stable
Short-Term IDR affirmed at ‘B’
National Long-Term Rating upgraded to ‘A-(rus)’ from ‘BBB(rus)'; Outlook Stable
Viability Rating upgraded to ‘b+’ from ‘b’
Support Rating affirmed at ‘5’
Support Rating Floor affirmed at ‘No Floor’