OREANDA-NEWS. Fitch Ratings has affirmed Russia-based Gazprombank's (GPB) and its 100% subsidiary Gazprombank (Switzerland) Ltd.'s (GPBS) Long-term Issuer Default Ratings (IDRs) at 'BBB-' with Stable Outlook.

GPB's Long-term IDRs are driven by its Support Rating Floor at 'BBB-' which, in turn, reflects Fitch's view of the high probability that support for the bank will be forthcoming, if needed, from the Russian Federation (BBB/Stable) or other state-controlled entities, most probably, the bank's founder and significant shareholder OAO Gazprom (BBB/Stable). Fitch's view is based on GPB's high systemic importance for the banking sector, a high degree of state control and supervision over the bank through quasi-sovereign entities, a strong track record of support, and high reputational risks of a potential default for the Russian authorities and the bank's state-controlled shareholders.

The one-notch differential between the bank's Long-term IDRs and the sovereign ratings reflects moderate uncertainty about support given that GPB is not directly, majority owned by the state and is of limited strategic importance for Gazprom. GPB neither has the dominant market shares of Sberbank (BBB/Stable) nor the policy role of Vnesheconombank (BBB/Stable), entities for which Fitch equalises their Support Rating Floors with the sovereign.

At end-2013 GPB was the third-largest banking group in the Russian Federation, although its market shares were a moderate 6.4% of sector loans and 7.4% of deposits. The bank focuses primarily on commercial banking services for large domestic corporates. A significant part of its balance sheet relates to acquisition financing and proprietary non-financial investments, predominantly in the natural resources and industrial sectors.

Quasi-sovereign entities directly own a significant, albeit minority, 45.7% combined stake in the bank which is held by Gazprom (35.5%) and Vnesheconombank (10.2%). Supervision remains tight with five of 12 board members currently representing Gazprom (including the chairman Alexei Miller, CEO of Gazprom.) and one representing VEB.

The VR could benefit from an improvement of asset quality through a reduction in concentration levels and lesser exposure to higher-risk projects; a reduction in non-core assets; and a stronger capital base. Weaker performance of some of the bank's larger exposures as a result of idiosyncratic risks and/or a deterioration in the broader operating environment, could result in a downgrade.

GPB's senior unsecured debt ratings are aligned with the bank's Long-term IDR of 'BBB-' and the local-currency issue ratings are also aligned with the National Long-term rating of 'AA+(rus)'. The 'old-style' subordinated debt rating, at 'BB+', is notched down once from the bank's Long-term IDR, as Fitch believes that these issues would likely continue to benefit from state support. Both ratings would likely change in tandem with the Long-term IDR.

The 'new-style' subordinated debt (with principal/ coupon write-down feature) rating, at 'BB-', is notched down once from the bank's VR; this incorporates zero notches for incremental non-performance risk relative to the VR and a notch for higher loss severity.

Fitch has also assigned a final 'BBB-' rating to the bank's USD750m Series 16 senior unsecured loan participation notes issue maturing on 5 September 2019 and carrying the coupon of 4.96% payable semi-annually.

GPBS's Long-term IDR is aligned with that of its parent, reflecting Fitch's view of the high probability that support from GPB would be forthcoming to the subsidiary, if needed.

Fitch classifies GPBS as a core subsidiary, based on GPB's 100% ownership and supervision over the bank, the high level of operational integration between parent and the subsidiary, GPBS's important role for the parent's servicing of its core clients operating in Europe and the high reputation risk for GPB from a default of GPBS, given GPB's considerable capital markets funding and plans to expand further on international markets.

The ratings are also supported by common branding and the small size of the subsidiary (less than 2% of the group's consolidated total assets at end-2013) making it fairly easy to support. That said, the small size means there is no cross-default linkage as GPBS does not qualify as a 'material subsidiary' under GPB's bond covenant definition. Furthermore, full support has not been yet tested in a real stress scenario, although GPB previously helped GPBS to restructure its balance sheet shortly after acquisition in 2009.

GPBS's Long-term IDR will likely change in tandem with the parent's Long-term IDR. Downward pressure could arise if there is a prolonged delay of support when needed, if the parent's propensity to provide assistance weakens, or if the bank is sold to a lower-rated institution. However, Fitch views these scenarios as unlikely.