Fitch: Senior Creditor Bail-in Gains Traction in Russia
Russia's bank resolution legislation lacks key tools including the ability to bail-in unsecured liabilities according to the Financial Stability Board's February 2015 peer review of Russia. Development of a bank resolution framework in Russia will probably advance slowly and we think it unlikely that changes are imminent as the banking sector is battling with economic recession, rising loan impairments and bottom-line losses.
Sovereign support underpins our ratings of only two Russian commercial banks: Russian Agricultural Bank (BB+/Negative), a state-owned policy bank, and Gazprombank (BB+/Negative), whose main shareholder, Gazprom, is majority state-owned. Bail-in legislation would not necessarily result in an automatic downgrade of the long-term ratings of these issuers. Our opinion might be that, given their ownership, their policy role (RusAg) and a strong corporate shareholder (Gazprombank), support may still be available.
Changes in resolution legislation are not likely to trigger rating changes for privately-owned Russian banks as their ratings are based on fundamental strength. We do not factor strong expectations of sovereign support into their ratings because of their small market shares and the mixed record of dealing with mid-sized bank failures, which in some cases have resulted in losses for senior creditors. However, we do acknowledge that while the system is under stress, support for at least the larger privately-owned institutions designated as domestic systemically important banks (D-SIBs), including Alfa Bank (BB+/Negative) is possible. The D-SIBs have had access to potential capital support under a broader range of government recapitalisation facilities over the last twelve months than smaller institutions.
Russia's banks are facing loan quality deterioration, with impairments rising to 8% of total loans at end-June 2015 and credit impairment charges expected to exceed 3% of total loans by year-end. The net interest margin has contracted significantly as funding costs are high, resulting in weak overall profitability. Excluding non-core revenues, the banking sector's underlying loss exceeded RUB100bn (USD1.5bn) in the seven months to end-July.
Further details are in the research published recently and available by clicking the links.
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