OREANDA-NEWS. Fitch Ratings has placed Russian-based Probusinessbank's (PBB) ratings, including its 'B' Long-term Issuer Default Rating (IDR), on Rating Watch Negative (RWN).

The RWN primarily reflects Fitch's concerns about the liquidity of the bank's securities book, given that it is virtually all held outside of Russia and has largely not been traded or refinanced over an extended period of time. The RWN also reflects uncertainty concerning the recent review of the bank by the Central Bank of Russia (CBR) and the potential impact of the recent licence withdrawal from a sister bank.

PBB's consolidated securities book increased to RUB47bn (27% of group assets) at end-1H14 from RUB42bn (25%) at end-2013 and RUB27bn (15%) at end-2012. The portfolio is virtually all held on PBB's balance sheet (comprising 48% of standalone assets at end-8M14), and Russian government bonds make up the bulk of the book.

Unlike most banks in the sector, PBB (i) pledges only a small amount of its securities (about RUB3bn on average) to obtain repo funding from CBR; (ii) holds a portfolio with relatively long duration of around three to four years, compared with peers' typical 1-1.5 years; and (iii) holds a large majority of the portfolio (RUB42bn) in two Cyprus-based custodians which are subsidiaries of Russian privately-owned brokers, in contrast to most Russian banks, which keep their government bonds in the National Settlement Depositary (NSD, a subsidiary of the Moscow Stock Exchange) in order to be able to obtain CBR repo funding. In Fitch's view, the economic rationale for holding such a large unrepoed securities book is somewhat unclear. The agency therefore believes it is necessary to further investigate the nature of these holdings and any potential impact it might have on its assessment of the bank's liquidity, asset quality and solvency.

In September, the CBR withdrew the licence of Bank24.ru, a sister bank of PBB (reportedly for non-compliance with anti-money laundering regulations), only a few months after it was deconsolidated by PBB. According to management, PBB and other group banks were reviewed by the CBR in August, and the results of that review should be available soon.

PBB's 'B' Long-term IDR and 'b' Viability Rating reflect the bank's solid reported pre-impairment profitability and liquidity. However, the ratings also consider the bank's moderate capitalisation, increased credit losses in the bank's retail loan portfolio and contingent risks relating to the acquisition in 1Q14 by the bank's shareholders of a smaller, failed Russian bank, Solidarnost.

RATING SENSITIVITIES
To resolve the RWN, Fitch will seek further clarification on the nature of the bank's securities holdings and consider the impact of this on the bank's liquidity, asset quality and solvency. The agency will also assess the results of the CBR review.

The ratings may be downgraded (potentially by more than one notch) if Fitch believes the securities book is not readily available to the bank as a potential source of liquidity, or if other significant risks arise as a result of the CBR review. However, the ratings may be affirmed if concerns relating to the securities book are alleviated and the CBR review does not identify any new, material issues.