December 19, 2016 / 3:27 PM / a year ago

Fitch Places AK BARS on Rating Watch Negative

(The following statement was released by the rating agency) MOSCOW, December 19 (Fitch) Fitch Ratings has placed AK BARS Bank's support-driven ratings on Rating Watch Negative (RWN). A full list of rating actions is at the end of this commentary. KEY RATING DRIVERS IDRS, NATIONAL, SUPPORT AND DEBT RATINGS The RWN reflects the possibility that Fitch will revise downwards its assessment of the ability and/or propensity of the Republic of Tatarstan (RT; BBB-/Stable) to provide support to AK BARS. This in turn is driven by: -the default last week of another large RT-based bank, Tatfondbank (TFB), in which the RT directly and indirectly owns a significant stake, although Fitch acknowledges that there is no direct parallel between TFB and AK BARS, given the latter's greater systemic importance and its longstanding strategic ownership by RT; -potential greater regulatory scrutiny, following TFB's failure, of the RT's role as a bank shareholder and supervisor; -a possible reduction in the ability of the RT to support AK BARS in the event that RT resources are used to (partially) resolve problems at TFB; -potential negative implications for AK BARS' standalone credit profile (and hence of its possible future support needs) as a result of TFB's failure, due for example to possible funding outflows, a weakening of the financial position of some of AK BARS' borrowers (if they suffer losses as a result of TFB's default) or a direct role for AK BARS in the rescue of TFB (although RT officials and AK BARS management have stated that the two banks will not be merged); -some uncertainty about the effectiveness of measures being undertaken to strengthen AK BARS' own solvency, including the quality of capital relief resulting from asset sales to other RT entities. AK BARS's IDRs, Support, National and debt ratings reflect Fitch's view of the moderate probability of support the bank may receive, in case of need, from RT. This assessment takes into account (i) RT's majority ownership; (ii) the close association between the bank and the regional administration (RT's representatives sit on AK BARS's board); and (iii) AK BARS's agent function for RT's budget and systemic importance in the region (market share of around 40%). The three-notch difference between the ratings of RT and the bank reflects the limited flexibility of RT's budget, which may impede its ability to provide support in a necessary amount and in a timely manner at all times given the bank's relatively large size. This risk is offset somewhat by the ability to provide support through RT-affiliated entities, as has been recently demonstrated. The notching also reflects significant corporate governance weaknesses at AK BARS, given its large and weakly-reserved related-party and relationship-based lending exposure, and other high-risk and non-core assets which could make support costly and less politically acceptable. Fitch assessed the volume of such assets at end-1Q16 at RUB141bn, equivalent to a significant 4.9x Fitch Core Capital (FCC) (see 'Fitch Affirms AK BARS Bank's IDR at 'BB-', Downgrades VR to 'ccc'', dated 22 June 2016 at The agency has been informed that during 2Q16-3Q16 high-risk assets were reduced by about RUB35bn as a result of repayments, and the bank is currently finalising a further RUB25bn loan sale. As a result, the volume of high-risk exposures could fall to around RUB81bn, equal to roughly 2.3x end-3Q16 FCC. AK BARS's capitalisation remains weak, as reflected by a 7.4% Tier 1 regulatory capital ratio at end-November 2016, just above the regulatory minimum (7.25% including buffers from 1 January 2017). Some capital relief may be provided by the RUB25bn loan sale (providing this involves a full risk transfer), and the bank expects to improve the Tier 1 capital ratio to 10.5% by end-2Q17, mainly as a result of a RUB10bn equity injection from RT. Liquidity is comfortable at AK BARS. Liquid assets of cash, net short-term interbank and securities eligible for refinance with central bank of Russia, net of near-term wholesale repayments, were suffitient to cover about 30% of customer accounts as of 13 December 2016. RATING SENSITIVITIES IDRS, NATIONAL, SUPPORT AND DEBT RATINGS AK BARS' ratings could be downgraded if (i) the failure and resolution of TFB result in regulatory actions which in Fitch's view could weaken the ability or propensity of RT to provide support to AK BARS; or (ii) if Fitch believes the quality and volume of support made available by the RT to AK BARS is insufficient relative to the risks to its solvency resulting from high-risk asset exposures. The rating actions are as follows: AK BARS Bank: Long-Term Foreign and Local Currency IDRs: 'BB-', placed on RWN Short-Term Foreign Currency IDR: affirmed at 'B' National Long-Term rating: 'A+(rus)', placed on RWN Viability Rating: 'ccc'; unaffected Support Rating: '3', placed on RWN Senior unsecured debt: 'BB-,' placed on RWN Senior unsecured debt National rating: 'A+(rus)', placed on RWN AK BARS Luxembourg S.A: Senior unsecured debt long-term rating: 'BB-', placed on RWN Senior unsecured debt short-term rating: affirmed at 'B' Subordinated debt: 'B', placed on RWN Contact: Primary Analyst Anna Erachina Associate Director +7 495 956 7063 Fitch Ratings CIS Limited 26 Valovaya Street, Moscow 115054 Secondary Analyst Ruslan Bulatov Associate Director +7 495 956 9982 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 on Applicable Criteria Global Bank Rating Criteria (pub. 25 Nov 2016) here Additional Disclosures Dodd-Frank Rating Information Disclosure Form here _id=1016725 Solicitation Status here Endorsement Policy here ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. 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