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Fitch Revises Uralsib Bank's Outlook to Stable; Affirms IDR at 'B'
December 20, 2016 / 5:37 PM / a year ago

Fitch Revises Uralsib Bank's Outlook to Stable; Affirms IDR at 'B'

(The following statement was released by the rating agency) MOSCOW, December 20 (Fitch) Fitch Ratings has revised Russia-based Uralsib Bank's (UB) Outlook to Stable from Negative at 'B', while affirming the Long-Term Issuer Default Rating (IDR) at 'B'. A complete list of rating actions is at the end of this commentary. The revision of the Outlook reflects stabilisation of UB's core capital metrics at reasonable levels, the bank's improved core performance, as well as a strong liquidity and funding profile. It also reflects Fitch's expectations that any further impairment provisioning would likely be gradual and could at least be partly financed by pre-impairment profits. UB's Long-Term IDR of 'B' is driven the standalone credit profile of the bank, as captured in its Viability Rating (VR) of 'b'. It reflects the weak asset quality of UB, the potentially still high provisioning needs of its large problem loans, related-party exposures and investment properties, and its current non-compliance with minimum capital ratios and some other regulatory requirements. The ratings also take into account the risks stemming from UB's planned merger with a related-party bank, BFA Bank and potentially significant support it may provide to a related-party insurance company, SG Uralsib (SGU). KEY RATING DRIVERS - IDRS AND VIABILITY RATING (VR) UB's loan quality has continued to weaken since the bank's rescue in 2H15. As a result of loan book seasoning and continued problem loan recognition, non-performing loans increased to 19% of the portfolio at end-1H16 from 14% at end-1H15 and restructured loans to 10% from 4%. Although Fitch believes most of UB's large high-risk loans are captured in these impaired categories, reserves are yet to stabilise as coverage has weakened to 55% of total impaired loans from 75%. Fitch also expects the merger with BFA to result in some additional asset-quality risks given BFA's light reserve coverage of its own problem loans. However, in light of BFA's small relative size (13% of combined gross loans), Fitch estimates that net impaired loans following the merger could increase only moderately to 0.6x Fitch Core Capital (FCC) from 0.4x at end-1H16. Fitch's view of UB's weak asset quality also takes into account sizeable related-party exposures and investment property risks. Related parties comprised 0.4x FCC at end-1H16 (of which 0.2x FCC was to the previous shareholder's companies) and real estate assets made up a further 0.3x FCC. As a result of the merger, related-party exposures would likely fall to 0.2x FCC, due to the removal of intragroup loans, while investment properties, which Fitch considers overvalued, are unlikely to change relative to core capital. UB's FCC ratio improved to 16% at end-3Q16 from 14% at end-2015, due to deleveraging and equity gains, which were partly driven by the sale of SGU to a related party during the period. UB provided an additional RUB3bn of new equity to SGU in 2Q16 (equal to 5% of UB's FCC) and plans to provide additional capital support that may be significantly larger in volume. UB remains in breach of the minimum capital ratios as well as some other regulatory norms, since it entered into a financial rehabilitation regime imposed by the Deposit Insurance Agency (DIA) in 2015. UB's regulatory Tier 1 and Total ratios of 5.3% and 7.8%, respectively, at end-3Q16 are significantly lower than Basel and FCC ratios because local accounts do not recognise the large equity gains booked under IFRS on the low-cost funding from the DIA. Fitch does not expect UB to improve the ratios to the regulatory minimum levels (in 2017: Tier 1 7.6%, total 9.6%) in the near term, although internal capital generation should be stronger in local accounts (under IFRS, the fair value gains on the DIA funding will be gradually accrued back through the income statement as interest expense). Under the terms of the financial rehabilitation regime, UB does not need to meet minimum regulatory capital requirements. Fitch does not expect capital ratios to change significantly as a result of the merger with BFA. However, the bank's ambitious expansion plans, if implemented, could put pressure on capital ratios, notwithstanding improved internal capital generation. A reduction in deposit costs, together with elimination of some interest expenses as a result of subordinated debt write-downs in 2015, improved UB's net interest margin to 4% in 9M16 from 3% in 2015. This, combined with a reduction in operating expenses, helped the bank to turn around its previously loss-making core performance as pre-impairment profit strengthened to 6% of average loans in 9M16. Adjusting for interest accrued but not received in cash and fair-value gains, pre-impairment profit was a still reasonable 2% of loans. Nevertheless, Fitch expects high impairment charges to continue to put pressure on UB's net income as the bank gradually provides for its problem exposures. Loan impairment charges comprised a high 69% of pre-impairment profit in 9M16, resulting in a modest ROAE of 6%. Fitch's assessment of UB's liquidity and funding profile takes into account the bank's large unencumbered liquid assets, equal to 42% of liabilities at end-3Q16, a highly granular deposit base which the bank has been able to largely restore after some outflows in 2015, and the agency's expectations that UB will maintain only moderate repo funding in the long term. KEY RATING DRIVERS - SUPPORT RATING (SR) AND SUPPORT RATINGS FLOOR (SRF) UB's SR of '5' and SRF of 'No Floor' reflect Fitch's view that extraordinary support from state authorities cannot be fully relied upon in the future. Fitch recognises that financial assistance the bank received in 2015 helped avert losses for its senior unsecured creditors. However, the agency does not believe that such support can be relied upon again, if needed, given the large amount of support already provided, UB's small market shares, and the exhaustion of possibilities to bail in junior obligations to restore the bank's solvency. RATING SENSITIVITIES UB's Long-Term IDR and its VR could be downgraded if asset quality sharply weakens, capitalisation deteriorates or if the merger with BFA results in considerably greater deterioration in UB's financial profile than currently expected by Fitch. Improved reserve coverage of problem exposures, continued solid performance and FCC/Basel capital ratios and a strengthening of regulatory capitalisation could put upward pressure on the ratings. The rating actions are as follows: Long term Issuer Default Rating (IDR): affirmed at 'B'; Outlook revised to Stable from Negative Short term IDR: affirmed at 'B' Viability Rating: affirmed at 'b' Support Rating: affirmed at '5' Support Rating Floor: affirmed at 'No Floor' Contact: Primary Analyst Alexander Danilov Senior Director +7 495 956 2408 Fitch Ratings CIS Limited 26 Valovaya Street Moscow 115054 Secondary Analyst Roman Kornev Director +7 495 956 7016 Committee Chairperson James Watson Managing Director +7 495 956 66 57 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 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 WEB SITE AT 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. Copyright © 2016 by Fitch Ratings, Inc., Fitch Ratings Ltd. and its subsidiaries. 33 Whitehall Street, NY, NY 10004. Telephone: 1-800-753-4824, (212) 908-0500. Fax: (212) 480-4435. Reproduction or retransmission in whole or in part is prohibited except by permission. All rights reserved. In issuing and maintaining its ratings and in making other reports (including forecast information), Fitch relies on factual information it receives from issuers and underwriters and from other sources Fitch believes to be credible. Fitch conducts a reasonable investigation of the factual information relied upon by it in accordance with its ratings methodology, and obtains reasonable verification of that information from independent sources, to the extent such sources are available for a given security or in a given jurisdiction. The manner of Fitch's factual investigation and the scope of the third-party verification it obtains will vary depending on the nature of the rated security and its issuer, the requirements and practices in the jurisdiction in which the rated security is offered and sold and/or the issuer is located, the availability and nature of relevant public information, access to the management of the issuer and its advisers, the availability of pre-existing third-party verifications such as audit reports, agreed-upon procedures letters, appraisals, actuarial reports, engineering reports, legal opinions and other reports provided by third parties, the availability of independent and competent third- party verification sources with respect to the particular security or in the particular jurisdiction of the issuer, and a variety of other factors. Users of Fitch's ratings and reports should understand that neither an enhanced factual investigation nor any third-party verification can ensure that all of the information Fitch relies on in connection with a rating or a report will be accurate and complete. Ultimately, the issuer and its advisers are responsible for the accuracy of the information they provide to Fitch and to the market in offering documents and other reports. In issuing its ratings and its reports, Fitch must rely on the work of experts, including independent auditors with respect to financial statements and attorneys with respect to legal and tax matters. Further, ratings and forecasts of financial and other information are inherently forward-looking and embody assumptions and predictions about future events that by their nature cannot be verified as facts. As a result, despite any verification of current facts, ratings and forecasts can be affected by future events or conditions that were not anticipated at the time a rating or forecast was issued or affirmed. The information in this report is provided "as is" without any representation or warranty of any kind, and Fitch does not represent or warrant that the report or any of its contents will meet any of the requirements of a recipient of the report. A Fitch rating is an opinion as to the creditworthiness of a security. This opinion and reports made by Fitch are based on established criteria and methodologies that Fitch is continuously evaluating and updating. Therefore, ratings and reports are the collective work product of Fitch and no individual, or group of individuals, is solely responsible for a rating or a report. The rating does not address the risk of loss due to risks other than credit risk, unless such risk is specifically mentioned. 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Due to the relative efficiency of electronic publishing and distribution, Fitch research may be available to electronic subscribers up to three days earlier than to print subscribers. For Australia, New Zealand, Taiwan and South Korea only: Fitch Australia Pty Ltd holds an Australian financial services license (AFS license no. 337123) which authorizes it to provide credit ratings to wholesale clients only. Credit ratings information published by Fitch is not intended to be used by persons who are retail clients within the meaning of the Corporations Act 2001

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