OREANDA-NEWS. Major foreign banks in Russia are mostly locally funded, which reduces risks for their parents, Fitch Ratings says. Nevertheless, slower economic growth and rouble weakness are likely to put pressure on earnings given the large in-country exposures some international banks have, particularly European ones.

Recent issuance in the Russian bond market is not a new trend for the major foreign banks as they have mainly funded themselves locally for some time. Raiffeisen Bank International (RBI), Unicredit, Societe Generale and Citigroup want to reduce their Russian risks given the weakness in the rouble and the geopolitical tensions. The banks are likely to continue to optimise costs and reduce risks in their Russian operations, so the local subsidiaries may take market opportunities for further domestic bond issuances.

The foreign bank subsidiaries' loans are almost entirely funded by local deposits. ZAO Raiffeisen had a loan-to-deposit ratio of 104% and ZAO Unicredit Bank had a ratio of 107% at end-1H14. Societe Generale's main Russian subsidiary - Rosbank - had a consolidated ratio of 108% (including two specialised mortgage and consumer finance subsidiaries).

ZAO Citibank runs with a much lower ratio, at around 50%, since it has a small loan book given that retail and corporate banking is only roughly half of its business mix, with investment banking making up the remainder. The bank has good access to residual current account balances and cheap short-term deposits.

RBI, Unicredit and Citi's Russian subsidiaries place significant foreign currency liquidity with their parents. They are net creditors to their parent groups. Societe Generale adjusted its strategy in Russia two years ago to build a self-funded business. This has largely been achieved, but given the funding structures of its local subsidiaries, the consolidated Russian subgroup now has net borrowings from the parent at around 12% of liabilities. Further rouble issuance could help them reduce this further.

RBI has the most significant Russian risks relative to the group's capital and earnings. Total asset exposure to Russia was EUR20.5bn or 13% of group assets at end-1H14, equivalent to over 2x Fitch Core Capital (FCC). The group's other key markets in central and eastern Europe have underperformed, so over one-third of RBI's pre-tax profits in 1H14 (adjusted for group items) were from the Russian subsidiary. A shift towards more retail lending has widened margins and supported a sound 27% pre-tax return on equity at the Russian unit.

Nevertheless, the slower economy, weaker rouble and potential escalation of sanctions will weigh on earnings and asset quality. The tail risk arising from RBI's reliance on its profitable Russian unit constrains upside to the group's intrinsic credit profile.

Unicredit, Societe Generale and Citi have in-country Russian exposures equivalent to less than 0.5x FCC, so the risks are more manageable. Profit contribution is also not material, although Societe General took a EUR525m goodwill impairment on its Russian operations in 1Q14. Weaker profits from Russia are likely in the short-term in light of the operating environment and may be a drag on group profits. This is likely to matter more for the two European banks, where growth prospects in its home markets are weaker.

The Russian subsidiaries of Raiffeisen, Unicredit and Citi have Viability Ratings of 'bbb-', while Rosbank's is 'bb+', reflecting our view that these are some of the strongest banks in Russia on a stand-alone basis. The 'BBB' Long-Term Issuer Default Ratings of the four banks reflect the high probability of support from their parent institutions.