OREANDA-NEWS. Fitch Ratings has affirmed BPS-Sberbank's (BPS), Bank BelVEB's and Belgazprombank's (BGPB) the Long-term Issuer Default Ratings (IDRs) at 'B-' with Stable Outlooks. A full list of rating actions is available at the end of this commentary.

KEY RATING DRIVERS

IDRS AND SUPPORT RATINGS

The three banks' IDRs and Support Ratings factor in the likelihood of support they may receive from their Russian shareholders. BPS is 98.4%-owned by Sberbank of Russia (BBB-/Negative), BelVEB 97.5%-owned by Vnesheconombank, (VEB; BBB-/Negative), and BGPB is jointly owned by OAO Gazprom (BBB-/Negative) and Gazprombank; (BB+/Negative), which each hold a 49.7% stake.

Fitch's view of potential support is based on the majority ownership, continued strong commitment of the Russian owners to the Belarus market, common branding (implying high reputational risks in case of a subsidiary default), parent-subsidiary integration (including board representation and operational controls), the track record of support to date and the low cost of any support required (given that each subsidiary accounts for a small part of parent entities' consolidated assets).

The banks' 'B-' Long-Term IDRs reflect the constraint of Belarus' Country Ceiling (B-), which captures transfer and convertibility risks and limits the extent to which support from the foreign shareholders of these banks can be factored into the ratings. The Stable Outlooks on the banks' Long-Term IDRs are in line with that on Belarus' sovereign.

Capital support was made available by the foreign owners in 2015-1Q16 (BGPB, BPS) and Fitch believes it will remain available for all three banks, in case of need. Asset growth is not a priority for the banks in the current difficult economic environment.

BGPB in 1Q15 received a RUB9.9bn subordinated loan from its shareholders, which was equal to 77% of end-2014 regulatory capital. BPS's capital ratios benefitted from risk-sharing arrangements with the parent group during 2014-2015, resulting in significant capital relief (transferred exposures were equal to 3.7x of the bank's end-1Q16 Fitch Core Capital, FCC). In 1Q16, BPS also received from its owner EUR15m subordinated debt (equivalent to 6% of end-2015 regulatory capital). No new equity injections have been made for BelVEB recently or are planned in 2016, but capital ratios are currently reasonable, and capital measures would be considered should the need arise.

Funding support, mostly in foreign currency, has been forthcoming to date, with parents contributing 16%-31% of subsidiary liabilities at end-2015. Other external refinancing is constrained by western sanctions on parent banks and their subsidiaries (except for BGPB).

VRs

The banks' VRs factor in the risks from the challenging operating environment, and the linkage between the banks' credit profiles and that of the Belarusian sovereign due to the large direct exposure of the banks to the authorities and, more generally, the public sector, and the dependence of bank credit quality on the ability of the authorities to support macroeconomic stability and public sector companies.

Direct exposure (including claims on the government and the National Bank) relative to FCC was 2.5x at BPS (end-1Q16), 1.6x at BelVEB (end-2015), and 1.8x at BGPB (end-2015). Loans issued to public sector corporates contributed a further 1.9x at BPS, 2.8x at BelVEB and 0.7x at BGPB. These banks are not involved in new government programme lending (although BPS has a residual exposure at around 8% of gross loans), in contrast with Belarus state-owned banks.

Credit metrics have deteriorated at all three banks since 2014 (albeit to varying degrees), and we expect this trend to continue through 2016 as credit risks have heightened in the recessionary environment. Borrower performance is also affected by external pressures, generally significant leverage in the corporate segment and loan dollarisation (ranging from 74% to 84% for these banks at end-2015), and the share of effectively hedged borrowers is limited.

BPS reported a sharp deterioration in asset quality in 1H16, with non-performing loans (NPLs, more than 90 days overdue) rising to 24.8% of end-1H16 loans from 10% at end-2015 (end-2014: 2.4%), largely driven by the construction and real estate, agro and retail trade segments. These ratios are after the exchange of selected NPLs (equal to 3.7% of end-2014 loans, related to legacy government programme lending) for long-term FX-denominated MinFin bonds, which was arranged by the authorities as a sector balance sheet clean-up in 2015. In addition to NPLs, BPS has identified a further 36% of end-1H16 loans (2.7x end-1Q16 FCC) of higher-risk exposures (these are 'red' and 'black' zone loans net of NPLs), which could be a source of additional asset quality problems in the near term. Reserve coverage of existing NPLs was moderate at 66% at end-1H16 (local GAAP).

At end-2015, reported NPLs at the two other banks were more moderate at 2.8% (BGPB; end-2014: 0.5%) and 2% (BelVEB; end-2014: 1.2%), while restructured exposures contributed a further 3.9% and 11.9% of gross loans, respectively. Loan impairment reserves were sufficient to cover a reasonable 89% of problem exposures (NPLs and restructured) at BGPB, but a more moderate 57% at BelVEB.

Direct market risks have increased due to increases in economic open currency positions (OCP),

Which expose banks to revaluation losses in case of sharp BYR devaluation. This has been driven by regulatory changes in 4Q15, which removed certain foreign currency loan impairment reserves from the OCP calculation. At end-2015, BPS reported a sizeable short economic OCP equal to 36% of equity. However, BGPB reported a moderate short position equal to 7% of equity, and BelVEB reported a small long OCP.

Fitch views regulatory capital ratios (CARs; end-1H16: BPS: 13.2%; BGPB: 17.8%; BelVEB: 14.5%) as only moderate in light of the banks' risk profiles. Pre-impairment operating profits (on a cash basis) remained reasonable in 2015, at 7% of average gross loans (BPS), 12% (BGPB) and 6.6% (BelVEB), although underpinned by sizeable one-off gains from derivatives (6% of average gross loans at BPS and 4.6% at BGPB). Sharply higher loan impairment charges (at 96% of pre-impairment profit at BPS, 49% at BGPB and 85% at BelVEB) affected profitability in 2015. The banks may rely on parental support should asset quality deteriorate sharply.

Refinancing risks are moderate given the availability of funding support from shareholders, while third-party external liabilities were moderate at 7% of non-equity funding at BPS, 11% at BGPB and visible more significant 15.6% at BelVEB. Customer funding (49%-70% of liabilities) is highly dollarized and retail deposits (between 25% and 47% of liabilities) could show volatility at times of stress. At end-1Q16, liquidity cushions (cash and equivalents, net short interbank exposures, securities eligible for refinancing with the central bank and unused credit lines from parents) accounted for 48% of customer funding at BPS, 32% at BGPB and 33% at BelVEB.

RATING SENSITIVITIES

IDRS AND SUPPORT RATINGS

The ratings are dependent on the level of the Belarus' Country Ceiling. The IDRs could be upgraded or downgraded if a change in Belarus's sovereign ratings results in a change in the Country Ceiling.

VRs

The VRs could be downgraded in case of capital erosion due to a marked deterioration in asset quality, without sufficient support being made available by shareholders. The potential for positive rating actions on VRs is limited, given that these are already at the same level as the sovereign rating.

The rating actions are as follows:

BPS, BelVEB, BGPB

Long-term IDR affirmed at 'B-'; Outlook Stable

Short-term IDR affirmed at 'B'

Viability Rating affirmed at 'b-'

Support Rating affirmed at '5'