OREANDA-NEWS. Fitch Ratings has assigned Russia-based Bank of China (Eluosi) (BOC (Eluosi)) a Long-term foreign currency Issuer Default Rating (IDR) of 'BBB+' with a Negative Outlook.

KEY RATING DRIVERS
BOC (Eluosi)'s ratings are driven by a high probability of support, if needed, from the bank's parent, Bank of China (BOC, A/Stable). This reflects the full ownership by and high level of integration with BOC, common branding and the low cost of potential support considering the bank's small size relative to the parent.

Fitch classifies BOC (Eluosi) as a 'strategically important' subsidiary for BOC due to the strong operational and risk management integration, solid track record of support (including equity injections and a long-term subordinated loan) and high reputational risks for the parent in case of the subsidiary's default. However, the ratings also capture the bank's limited impact on the group's performance (comprising less than 0.1% of consolidated assets) and the subsidiary's limited franchise.

The Negative Outlook on BOC (Eluosi)'s IDRs reflects the likelihood of a downgrade of Russia's Country Ceiling of 'BBB+' given the Negative Outlook on Russia's sovereign ratings. Russia's Country Ceiling captures transfer and convertibility risks and limits the extent to which support from the foreign parent of the bank can be factored into the Long-term foreign currency IDR. The bank's Long-term local currency IDR also takes into account Russian country risks.

Fitch has not assigned a Viability Rating to BOC (Eluosi) due to its rather narrow franchise, significant reliance on parent funding and high level of management and operational integration with the parent bank.

The bank's balance sheet is fairly small (RUB13.4bn at end-2013), of which about two-third comprises liquid assets, while the loan book (dominated by lower-risk, large Russian companies from the energy, forestry and mining sectors) accounts for a low 11% of total assets. The bank's funding is mainly represented by customer accounts, which make up a high 80% of total liabilities. The bank's capitalisation is strong with the regulatory N1 ratio at a healthy 38.5% as of 1 April 2014.

RATING SENSITIVITIES
BOC (Eluosi)'s IDRs could be downgraded if the Russian Country Ceiling and sovereign ratings are downgraded. The ratings could also be downgraded if (i) the parent bank is downgraded by two notches or more; (ii) the parent bank sells its Russian subsidiary to a financially weaker owner; or (iii) Fitch changes its view of the willingness of the parent to support its subsidiary. However, Fitch does not currently expect any of these scenarios to materialise.

An upgrade of BOC (Eluosi)'s ratings would be contingent on an upgrade of the Russian Country Ceiling. A revision of the sovereign Outlook to Stable would result in a similar action on the bank's ratings.

The Stable Outlook on the bank's National Rating reflects Fitch's view that the bank's creditworthiness relative to other Russian issuers is unlikely to change significantly as a result of the potential sovereign downgrade.