OREANDA-NEWS. Fitch Ratings has affirmed Russia-based URALSIB Bank's (UB) and its subsidiary Uralsib Leasing Group's (ULG) Long-term Issuer Default Rating (IDR) at 'B+'. The Rating Outlook is Negative.

The affirmation of ratings with a Negative Outlook reflects Fitch's view that the credit profile remains under downward pressure from extremely weak capitalisation, slow progress with reduction of large non-core assets and related-party exposures, poor operating performance, and a moderate liquidity position.

Positively the ratings are supported by the bank's granular corporate loan book of generally decent quality, adequately performing retail lending and a solid retail deposit collection capability. Fitch also give some credibility to the bank's capital-raising plan and its efforts to improve profitability by rebalancing the loan book in favour of higher-yielding retail loans, by re-pricing corporate loans and cost cutting.

The major weakness is capitalisation (Fitch Core Capital [FCC] ratio of 8.9% at end-2013) in light of the large holdings of non-core assets and related-party exposures cumulatively equalling to 1.5x of FCC at end-2013.

The ratings could be downgraded if capital-raising plan fails or if capitalisation and/or its quality erodes further due to either deterioration of performance, downward adjustments to some of the asset valuations or any new material capital withdrawals by the shareholder. A major liquidity squeeze could also lead to a downgrade.

Ratings could stabilise at the current level if the bank is able to raise new capital by end-2014 to support regulatory capitalisation, as well as delivering on its target to improve core profitability thereby reducing the need for external capital in the face of future capital deductions for non-core/financial assets.

ULG's IDRs are equalised with the parent's IDRs based on Fitch's view that ULG is a core subsidiary and would likely be supported by UB in case of need. This view is based on majority 87.6% ownership by UB, a significant level of supervision by the parent through the Board of Directors and at management level, high reputational risk for UB of ULG's potential default due to, among other things, the entities' common branding.

ULG's IDRs are likely to move in tandem with the parent's ratings. Although Fitch believe UB currently retains flexibility to provide support, Fitch could start notching down ULG's ratings from UB's if the latter's ability to provide timely support to the leasing subsidiary deteriorates significantly as a result of weakened financial standing and/or regulatory limitations.