Fitch Affirms 6 Foreign-Owned Russian Banks
At the same time, the agency has affirmed these banks' Long-term Issuer Default Ratings (IDRs) at 'BBB-' with Negative Outlooks. A full list of rating actions is at the end of this commentary.
KEY RATING DRIVERS - VIABILITY RATINGS (VRs)
Following this rating action, RBRU, ZCB and UCB's VRs remain in line with the sovereign's IDRs, while those of RB, RFB and DCB are one notch lower. The affirmation of the VRs reflects Fitch's view that all these banks' reasonable financial metrics, stable liquidity positions, exposure to generally better quality Russian borrowers and low or manageable refinancing risks result in significant resilience to the more challenging operating environment. At the same time, downward pressure on these ratings has increased as a result of the weaker Russian economy, sharp rouble devaluation and increased funding costs.
RBRU, ZCB and UCB remained profitable in 2014, with performance underpinned by below-peers' funding costs, solid operational efficiency and so far moderate credit risk costs reflecting solid asset quality metrics (non-performing loans (NPLs) ratios at low single digits at end-2014). The latter are expected to deteriorate in 2015 as credit risks have heightened both in the corporate and retail segments. This is also due to significant foreign-currency lending at RBRU and UCB (although largely transacted with hedged borrowers), borrower concentrations, sizeable real estate exposure (RBRU) and high share of unsecured retail and corporate lending. However, in Fitch's view, the lending focus on better-quality customers, the prudent underwriting standards followed to date and robust risk management controls should mitigate the impact of growing asset quality pressures.
Capital buffers are solid (Fitch Core Capital (FCC) ratios of 15%-16% for RBRU and UCB at end-3Q14; end-2014 regulatory capital ratio of 15% for ZCB), although capital positions are pressured by upward devaluation of FX-denominated assets. This could be offset, though, through planned deleveraging (RBRU) and/or parental support (credit enhancement for existing exposures or capital injections). Liquidity positions were solid at end-2014, although somewhat undermined by high deposit concentrations at UCB, and deposit funding at each of the banks proved sticky during the market turbulence in December 2014. Refinancing risks are limited, and parent bank funding is moderate.
RB's 'bb+' VR reflects its generally low-risk corporate loan book, at least judging by the largest exposures, the healthy capital position (Fitch estimates the end-2014 FCC ratio at around 15%) and liquidity cushion, and conservative growth plans and management. The VR also takes into account weak operating efficiency, resulting in modest profitability (pre-impairment profit equalled a moderate annualised 3.5% of average loans in 1H14), and the weak quality of the legacy corporate loan portfolio, originated before SG's management gained full operational control over the bank. This portfolio continued to generate impairment charges in 2014 leading to additional pressure on RB's bottom line, although the remaining gross exposure to legacy lending was equal to 4% of the end-2014 corporate loan portfolio (down from 9% at end-2013), and was 85% covered by loan impairment reserves.
RFB's and DCB's 'bb+' VRs reflects the banks' resilient asset quality, as expressed by only moderate increases in credit losses to date, robust pre-impairment profit (equal to a moderate 3.6% and 5.5% of average gross loans in DCB and RFB, respectively, in 2014) and solid capitalisation (FCC ratios of 22% at RFB and 25% at DCB at end-2014). However, at DCB, regulatory capital is only moderate and has been pressured by the inflation of FX-denominated loans (24% of the end-2014 loan portfolio), which are also a source of additional credit risk. On the negative side, the banks' VRs continue to reflect still significant, albeit decreasing, reliance on related party funding (equal to 37% and 29% of non-equity funding at RFB and DCB, respectively, at end-2014). As a mitigating factor, both banks have manageable maturity schedules for their local wholesale funding, although refinancing this in the current market environment could result in a significant increase in funding costs.
RATING SENSITIVITIES - VRs
The VRs could be downgraded if the weaker operating environment translates into marked deterioration in the banks' asset quality and capital metrics, or if prospects for Russia's economy and macroeconomic stability continue to deteriorate significantly. The VRs of RBRU, ZCB and UCB would also likely be downgraded in the event of a sovereign downgrade.
Stabilisation of the sovereign's credit profile and the country's economic prospects would reduce downward pressure on the VRs.
KEY RATING DRIVERS AND SENSITIVITIES - IDRS, SUPPORT RATINGS, DEBT RATINGS, NATIONAL RATINGS
The banks' IDRs, Support Ratings and debt ratings are underpinned by potential support they may receive from their foreign shareholders (for further details see 'Fitch Downgrades Russian Financial Institutions on Sovereign Action', dated 16 January 2015 at www.fitchratings.com).
The banks' IDRs and, where assigned, senior debt ratings are constrained by the Russian Country Ceiling of 'BBB-'. The Negative Outlooks reflect the potential for the banks to be downgraded further if Russia's sovereign ratings are downgraded and the Country Ceiling lowered. A significant weakening of the ability and/or propensity of parent banks to provide support (not expected by Fitch at present) could also result in downgrades of the subsidiaries' ratings.
The affirmation of the entities' National Ratings reflects Fitch's view that they remain among the strongest credits in Russia. The Stable Outlooks on the National Ratings reflect Fitch's view that the creditworthiness of Russian issuers relative to each other would be unlikely to change significantly in case of a further sovereign downgrade.
The rating actions are as follows:
ZAO Raiffeisenbank
Long-term foreign and local currency IDRs: affirmed at 'BBB-'; Outlooks Negative
Short-term foreign currency IDR: affirmed at 'F3'
National Long-term rating: affirmed at 'AAA(rus)'; Outlook Stable
Viability Rating: affirmed at 'bbb-'
Support Rating: affirmed at '2'
Senior unsecured debt: affirmed at 'BBB-(EXP)'/ 'AAA(EXP)(rus)'
Senior unsecured debt: affirmed at 'BBB-'/ 'AAA(rus)'
ZAO Citibank
Long-term foreign currency IDR: affirmed at 'BBB-'; Outlook Negative
Short-term foreign currency IDR: affirmed at 'F3'
National Long-term rating: affirmed at 'AAA(rus)'; Outlook Stable
Viability Rating: affirmed at 'bbb-'
Support Rating: affirmed at '2'
ZAO UniCredit Bank
Long-term foreign and local currency IDRs: affirmed at 'BBB-'; Outlooks Negative
Short-term foreign and local currency IDRs: affirmed at 'F3'
National Long-term rating: affirmed at 'AAA(rus)'; Outlook Stable
Support Rating: affirmed at '2'
Viability Rating: affirmed at 'bbb-'
Rosbank
Long-term foreign and local currency IDRs: affirmed at 'BBB-'; Outlooks Negative
Short-term foreign currency IDR: affirmed at 'F3'
National Long-term rating: affirmed at 'AAA(rus)'; Outlook Stable
Viability Rating: affirmed at 'bb+'
Support Rating: affirmed at '2'
Senior unsecured market linked securities: affirmed at 'BBB-(emr)'
Senior unsecured debt: affirmed at 'BBB-'/'AAA(rus)'
Senior unsecured debt: affirmed at 'F3'
Rusfinance Bank
Long-term foreign and local currency IDRs: affirmed at 'BBB-'; Outlooks Negative
Short-term foreign currency IDR: affirmed at 'F3'
National Long-term rating: affirmed at 'AAA(rus)'; Outlook Stable
Viability Rating: affirmed at 'bb+'
Support Rating: affirmed at '2'
Senior unsecured debt: affirmed at 'BBB-'/'AAA(rus)'
DeltaCredit Bank
Long-term foreign and local currency IDRs: affirmed at 'BBB-'; Outlooks Negative
Short-term foreign currency IDR: affirmed at 'F3'
National Long-term rating: affirmed at 'AAA(rus)'; Outlook Stable
Viability Rating: affirmed at 'bb+'
Support Rating: affirmed at '2'
Senior unsecured debt: affirmed at 'BBB-'/'AAA(rus)'
Senior unsecured debt of DCB Finance Limited: affirmed at 'BBB-(EXP)'
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