Fitch Affirms Russia's Almazergienbank at 'BB-'; Outlook Negative
KEY RATING DRIVERS
IDRS, NATIONAL AND SUPPORT RATINGS
AEB's IDRs, National and Support Ratings reflect the moderate probability of support the bank may receive from 86% owner, The Russian Republic of Sakha (Yakutia) (Sakha; BBB-/Negative). The probability of support is underpinned by the regional authorities' operational control over the bank and the track record of capital and liquidity support, including RUB900m of fresh equity (about 4% of end-3Q15 risk-weighted assets (RWAs)) received in 3Q15.
AEB's IDRs are three notches below those of Sakha, reflecting (i) the limited flexibility of the local authorities to provide extraordinary support swiftly, (ii) AEB's only limited importance for the region, and (iii) the region's intention to attract a strategic investor in the bank, potentially leading to a dilution of Sakha's majority stake. However, the ratings currently do not factor in the potential change of control in the bank since there has been no firm interest from potential investors, while the disposal process could be lengthy.
The Negative Outlook on AEB's Long-Term IDRs mirrors that of Sakha and indicates that the bank's ratings would be downgraded in case its parent's ratings are downgraded. The Stable Outlook on the National Long-Term Rating reflects Fitch's view that the bank's creditworthiness relative to other Russian banks is unlikely to change significantly in case of a downgrade of its shareholder, as the ratings of Sakha are likely to change in tandem with the ratings of the Russian Federation.
VR
AEB's 'b' VR reflects the bank's concentrated loan book, as well as modest profitability and capitalisation. Positively, the VR continues to factor in the reasonable quality of AEB's loan book and comfortable liquidity that is supported by funding from sub-sovereign entities.
NPLs (loans over 90 days overdue) at end-1Q16 represented a moderate 6.6% of AEB's gross loans and were 1.2x covered by LIRs (loan impairment reserves), while a further 11% of loans were restructured and weakly reserved. However, most of the bank's top 25 largest exposures (40% of total loans, including restructured) are of low to moderate risk, being issued mainly to companies benefiting from municipal contracts or having close ties with the local authorities.
The quality of AEB's retail book (36% of total loans) was reasonable (retail NPLs at 6.5% at end-1Q16), supported by a high share of mortgages and cash lending to payroll clients of AEB. Fitch estimates the bank's retail NPL origination (a proxy for credit losses, calculated as net increase in NPLs plus write-offs divided by average performing loans) was a low 2.6% in 2015-1Q16.
The bank's Tier 1 regulatory capital adequacy ratio (N1.2) fell to a moderate 9.8% at end-5M16, from a more comfortable 11.6% at end-2015, due to increased LIRs in 1Q16. Current capitalisation is sufficient for an increase in the bank's LIRs to up to 13% of gross loans, from the current 8% before breaching regulatory capital requirements. The bank's core pre-impairment profit (3.8% of average gross loans in 2015) provides reasonable additional loss absorption capacity. Also, AEB expects to receive RUB250m of additional equity (1% of end-5M16 RWAs) in 4Q16.
AEB's net profitability was moderate (ROAE 6.3% in 2015), mainly supported by one-off gains from a revaluation of investment real estate assets (RUB146m, or 88% of net income). Profitability in 2016 will remain subdued due to additional loan reserves, either already made or potential.
AEB's funding profile is dominated by customer accounts (92% of liabilities at end-2015), of which nearly 70% were retail, resulting in low concentration (top-20 largest accounts made up only 21% of total deposits). Most corporate deposits were attracted from sub-sovereign entities controlled by Sakha and therefore considered sticky in nature. The bank's end-5M16 liquidity buffer (cash and cash equivalents, short-term interbank placements and securities eligible for repo with CBR), net of near-term wholesale repayments, was adequate at 18% of deposits.
RATING SENSITIVITIES
IDRS, NATIONAL AND SUPPORT RATINGS
AEB's support-driven ratings could be downgraded if either (i) Sakha is downgraded; or (ii) the propensity of the parent to provide support diminishes, for example, as a result of a new investor in AEB leading to a dilution of Sakha's stake.
VR
Downward pressure on AEB's VR could stem from a marked deterioration in asset quality leading to capital erosion, in the absence of parental support. The bank's VR could be upgraded if the bank's capitalisation strengthens and profitability improves.
The rating actions are as follows:
AEB
Long-Term Foreign and Local Currency IDRs affirmed at 'BB-', Outlook Negative
Short-Term Foreign Currency IDR affirmed at 'B'
National Long-Term Rating affirmed at 'A+(rus)', Outlook Stable
Viability Rating affirmed at 'b'
Support Rating affirmed at '3'
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