Fitch Affirms AK Bars Bank & Almazergienbank at 'BB-'
KEY RATING DRIVERS
IDRS, NATIONAL RATINGS, SENIOR DEBT, NATIONAL AND SUPPORT RATINGS
ABB's and AEB's IDRs, National and senior debt ratings reflect Fitch's view of potential support the banks may receive, in case of need, from the regional authorities. At end-1H15, ABB was 51% jointly owned by the Republic of Tatarstan (RT; BBB-/Negative) and the RT-controlled Svyazinvestneftekhim (SINEK; BB+/Negative). AEB is 87%-owned by the Republic of Sakha (Yakutia) (Sakha; BBB-/Negative).
Fitch's view of potential support is based on the majority ownership, operational control over the banks (the authorities' representatives sit on boards), and the track record of support (including planned/received capital injections in August 2015). For ABB, the ratings also consider the bank's significant (around 40%) market share in RT, and for AEB its limited size relative to Sakha's budget.
Fitch expects ABB to receive a RUB9.8bn equity injection (equal to 32% of end-2014 equity) from the RT-controlled President State Housing Fund in August 2015. As a result, the stake held by RT and public sector bodies will increase to 64%, reducing previous risks from the indirect non-transparent ownership. ABB has also received RUB12.1bn of Tier 2 capital from Russia's Deposit Insurance Agency. In July 2015, AEB received a RUB0.9bn equity injection (40% of end-2014 equity) from Sakha to support the bank's loan expansion, mostly in the region's infrastructure projects.
However, Fitch views the probability of support as only moderate in each case, and therefore notches down the banks' ratings from their respective parents. The three-notch difference mainly reflects Fitch's view that the local authorities have limited financial flexibility to provide support in a necessary volume and in a timely manner. The notching also reflects AEB's limited systemic importance in its home region, while for ABB it reflects corporate governance risks related to the bank's large related-party and relationship lending and holdings of non-core assets (equal to a combined 4.2x Fitch core capital (FCC) at end-2014), which could make support costly and less politically acceptable.
The affirmation of the banks' National Long-term ratings with Stable Outlooks reflects Fitch's view that the banks' creditworthiness relative to other Russian banks would be unlikely to change significantly in case of a downgrade of their respective shareholders, as the ratings of RT and Sakha are likely to change in tandem with the ratings of the Russian Federation.
VR: ABB
ABB's 'b-' VR reflects weak asset quality, due to a significant share of high-risk assets, tight and vulnerable capitalisation, and negative pre-impairment profitability. On the positive side, the VR reflects stable funding and the bank's significant local franchise.
ABB reported 4% of non-performing loans (NPLs: loans over 90 days overdue) and 1% of restructured loans at end-2014. NPLs were 1.6x covered by reserves. However, asset quality is vulnerable due to significant high-risk corporate or relationship lending and investment property exposures (most of which are reported as performing and not restructured) totalling RUB116bn or 420% of FCC at end-2014. The amount of high-risk exposures increased notably relative to end-2013 due to new lending, revaluation of foreign currency loans and Fitch's reassessment of the risks of certain projects and the bank's relations with some borrowers, which previously were considered lower risk and/or unrelated.
The exposures viewed by Fitch as high risk include:
- RUB53bn (1.9x of FCC) of weakly-secured loans to investment companies with weak financial profiles, some of which, in Fitch's view, could be used to conceal/refinance other problem and/or related party exposures.
- RUB28bn (1x of FCC) of long-term project finance construction projects in RT, which could be related to ABB/RT's administration.
- RUB22bn (0.8x of FCC) of other related-party loans and/or high risk exposures, including a relationship loan to a local electronics retailer, and weakly-performing wholesalers and development companies.
- RUB13bn (0.5x of FCC) of investment property/non-core assets, mostly comprising land and commercial real estate in RT.
Fitch believes the nature and origination of these exposures are risky and that their recoverability may be lengthy/questionable. According to management, RUB27bn of loans to investment companies were repaid in 1H15, but Fitch believes these repayments could have been partially refinanced through other exposures. Also the bank's related-party exposure is likely to have increased, as it refinanced a part of SINEK's USD250m Eurobond due in August 2015.
Also of some concern was interbank placement of brokerage nature of RUB11.5bn (0.4x of FCC) at end-2014, although, according to management, this was repaid in 1H15.
ABB's capital is weak, as reflected by the low 6.8% FCC ratio at end-2014, and is further undermined by the high-risk assets. Fitch does not expect ABB's capital to improve significantly by end-2015, as most of the upcoming RUB9.8bn equity injection will be consumed by losses (the RUB4bn loss in 1H15 could widen to RUB6bn for full year 2015, according to Fitch's estimates).
Liquidity and refinancing risks seem manageable, as the bank had RUB67bn of highly liquid assets at end-1H15, which is sufficient to repay the USD500m eurobond in 4Q15. Customer funding has been resilient during recent market stress, and is viewed as fairly sticky by Fitch.
VR: AEB
AEB's VR factors in the banks limited local franchise, concentrated loan book, moderate profitability and capitalisation, but decent quality of the loan book and reasonable liquidity supported by funding from quasi-sovereign entities.
NPLs were moderate, at 6% of gross loans at end-2014, and around 9% were restructured. Loan impairment reserves fully covered the NPLs. Fitch views the quality of the restructured loans as moderate, as the loans are currently performing and reasonably collateralised. According to management, around 30% of end-2014 NPLs were recovered during 1H15. The retail loan performance was also satisfactory, supported by predominant lending to employees of corporate clients and participation in government-subsidised mortgage programmes.
AEB's regulatory Tier 1 ratio was a solid 11.5% on 1 August 2015 (after a RUB900m injection in July). Fitch considers that the bank's capitalisation is not under significant pressure from asset quality, but may subsequently decrease gradually due to planned rapid growth. The pre-impairment profitability of 4% of average loans provides a moderate additional cushion.
Funding is supported by deposits from quasi-sovereign entities, which are relatively stable. The refinancing risks are limited in the near term. The bank's cushion of highly liquid assets was sufficient to cover 17% of customer deposits at end-1H15.
RATING SENSITIVITIES
IDRS, NATIONAL RATINGS, SENIOR DEBT AND SUPPORT RATINGS -ABB, AEB
ABB's and AEB's support-driven ratings could be downgraded if either (i) their regional parents are downgraded; or (ii) the propensity to provide support reduces, for example, as a result of the manifestation of corporate governance risks in ABB or progress with attraction of a new investor to AEB and the subsequent dilution of Sakha's stake.
The Outlook on ABB could be revised to Stable, thereby potentially reducing the notching between RT and ABB to two notches, if the bank considerably reduces the amount of high-risk assets or the authorities provide sufficient equity to offset the risks associated with them. Upside potential for AEB's ratings is limited due to Sakha's plan to dilute its stake in the bank.
VRs - ABB, AEB
Downward pressure on the banks' VRs could stem from a marked deterioration in asset quality, resulting in capital erosion, in the absence of appropriate support.
AEB's VR could be upgraded if the bank' capitalisation and franchise strengthens and profitability improves. An upgrade of ABB's VR would require significant reduction of high-risk assets and/or capital strengthening.
SUBORDINATED DEBT -ABB
ABB's 'old-style' (without mandatory conversion triggers) subordinated debt is rated two notches below its Long-term IDR. The rating differential reflects one notch for incremental non-performance risk (in Fitch's view, the risk of default on subordinated debt could be moderately higher than on senior obligations in a stress scenario) and one notch for potential loss severity (lower recoveries in case of default). Any changes to the bank's Long-term IDR would likely impact the subordinated debt rating.
The rating actions are as follows:
ABB
Long-term foreign and local currency IDRs: affirmed at 'BB-', Outlook Negative
Short-term foreign currency IDR: affirmed at 'B'
National Long-term rating: affirmed at 'A+(rus)', Outlook Stable
Viability Rating: affirmed at 'b-'
Support Rating: affirmed at '3'
Senior unsecured debt: affirmed at 'BB-'
Senior unsecured debt National rating: affirmed at 'A+(rus)'
AK BARS Luxembourg S.A:
Senior unsecured debt long-term rating: affirmed at 'BB-'
Senior unsecured debt short-term rating: affirmed at 'B'
Subordinated debt: affirmed at 'B'
AEB
Long-term foreign and local currency IDRs affirmed at 'BB-', Outlook Negative
Short-term foreign currency IDR affirmed at 'B'
National Long-term rating affirmed at 'A+(rus)', Outlook Stable
Viability Rating affirmed at 'b'
Support Rating affirmed at '3'
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