OREANDA-NEWS. August 10, 2015. Fitch Ratings has affirmed the Long-term Issuer Default Ratings (IDRs) of BPS-Sberbank (BPS), Bank BelVEB and Belgazprombank (BGPB) at 'B-' with Stable Outlooks. A full list of rating actions is at the end of this commentary.

KEY RATING DRIVERS
IDRS, SUPPORT RATINGS
The IDRs and Support Ratings of BPS, BelVEB and BGPB reflect Fitch's expectation of the support these banks may receive, in case of need, from their Russian owners. BPS is 98.4%-owned by Sberbank of Russia (BBB-/Negative), BelVEB 97.5%-owned by Vnesheconombank, (VEB; BBB-/Negative), and BGPB is jointly owned by OAO Gazprom (BBB-/Negative) and Gazprombank; (BB+/Negative), which each holds 49.7% stake.

Fitch's view of potential support is based on the majority ownership, common branding (implying high reputational risks in case of a subsidiary default), parent-subsidiary integration (including board representation and operational controls), continued strong commitment of the Russian owners to the Belarus market, the low cost of any support required (each subsidiary accounts for less than 1% of their respective parent entities' consolidated assets) and the track record of support to date.

However, the ratings are constrained at 'B-' by Fitch's view of the rather high risk of transfer and convertibility restrictions being imposed in case of sovereign stress, which could limit the banks' ability to utilise support from their shareholders to service their obligations.

The operating environment remains difficult both due to the country's weak external finances, characterised by low FX reserves (USD4.6bn at 1 July 2015), a large current account deficit (USD1.3bn or 7.3% of GDP in 4M15) and depreciation of the Belarusian rouble (BYR; by 29% against USD in 1H15 and by 24% in 2014), and the recessionary economy. Real GDP contracted 3% in 5M15 and the IMF forecasts the Belarusian economy will stagnate in 2016, mostly due to weaker external demand. Sovereign reliance on Russia for financial support remains high, and Fitch's base case expectation is that this will remain available to help alleviate external pressures and internal imbalances.

Capital support has been limited in 2014-1H15 (except for BGPB receiving a USD150m subordinated loan in 1Q15, equivalent to 61% of end-2014 regulatory capital). There are no immediate recapitalisation plans in 2H15 as growth targets have been cut in the challenging environment. However, Fitch believes capital support will be made available in future, in case of need. In addition, regulatory capital ratios have been helped by the reduced risk weights on FX assets (to 100% from 150%) at end-2014.

Funding support, mostly in foreign currencies, has been forthcoming to date, with parents contributing 16%-31% of subsidiary liabilities at end-2014. Other external refinancing is constrained by the western sanctions on parent banks.

Viability Ratings (VRs)
The banks' VRs take into account risks from the challenging operating environment, and reflect the close correlation between the banks' standalone creditworthiness and the sovereign profile. This is due to sizeable direct and indirect exposure to the public sector through (i) holdings of government bonds and FX derivatives with the National Bank of Belarus (BPS: 144% of Fitch Core Capital (FCC) at end-2014; BelVEB: 55%; BGPB: 81%); and (ii) lending to state-owned corporates. The degree of state ownership is high across the country and many public sector borrowers depend on government support.

Reported NPLs (loans over 90 days overdue) were low at all three banks, in the range of 0.5%-2.5% at end-2014. Downside risks for asset quality are high, as operating conditions have been deteriorating since 2014. Credit risks are also heightened by generally high leverage in the corporate sector, risk concentrations and significant FX lending (BPS: 67% of loans; BelVEB; 81%; BGPB: 78%), including to unhedged borrowers, whose debt servicing capacity could have been affected by the recent BYR devaluation.

In this context, Fitch views regulatory capital ratios (CARs; end-1H15: BPS: 12.7%; BelVEB: 15.7%; BGPB: 19.1%) as only moderate. The transfer of BYR2trn of loans by BPS to MinFin, planned in 3Q15, will provide only marginal uplift for the bank's CAR. Pre-impairment operating profits (net of unpaid interest accruals) were reasonable at 4%-5% of average gross loans at these banks in 2014, providing a moderate additional cushion to absorb losses. However, internal capital generation remains modest (2014: ROAE of 1.6% at BPS; 8.0% at BelVEB; 4.1% at BGPB), and they would be reliant on parental support should asset quality deteriorate sharply.

Refinancing risks are of moderate importance given the availability of funding support from shareholders. Parent funding is also reflected in the banks' loans-to-deposits ratios (end-2014: BPS: 121%; BelVEB; 205%; BGPB: 102%). Customer funding is highly dollarised, in common with the sector as a whole. Retail deposits (21%-35% of liabilities) tend to show volatility in periods of market turbulence, as was the case in December 2014-January 2015, exerting pressure on the banks' liquidity and affecting funding costs.

RATING SENSITIVITIES
IDRS, SUPPORT RATINGS
Changes to the banks' IDRs are likely to be linked to changes in the sovereign credit profile. A further weakening of the sovereign could indicate a greater risk of transfer and convertibility restrictions being introduced, which could result in downward pressure on each of the banks' IDRs.

VRS
The banks' VRs could be downgraded if the weaker operating environment translates into marked deterioration in asset quality and capitalisation, without support being made available.
The potential for positive rating action on either the IDRs or VRs is limited in the near term, given weaknesses in the economy and external finances.

The rating actions are as follows:
BPS-Sberbank, BelVEB and BGPB
Long-term IDRs: affirmed at 'B-'; Outlook Stable
Short-term IDRs: affirmed at 'B'
Viability Ratings: affirmed at 'b-'
Support Ratings: affirmed at '5'