OREANDA-NEWS. Fitch Ratings has affirmed OTP Bank Russia's (OTPR) Long-term Issuer Default Rating (IDR) at 'BB' with a Stable Outlook and Viability Rating (VR) at 'b+'. A full list of rating actions is available at the end of this commentary.

KEY RATING DRIVERS

OTPR's Long- and Short-term IDRs, National Long-term Rating and Support Rating are driven by potential support, in case of need, from the parent bank, Hungarian OTP Bank Plc (OTPH). Fitch believes that the parent would have a high propensity to support OTPR in light of its majority (98%) ownership, high level of integration, reputational damage for the parent from a potential default at OTPR, and common branding. However, Fitch believes that the Russian subsidiary is unlikely to contribute to the group's results in the near future.

The affirmation of the bank's VR at 'b+' reflects its focus on the overheated Russian consumer finance market, which is now suffering from weak asset quality, negative bottom line profitability and limited near-term recovery prospects. On the positive side, however, the VR reflects OTPR's so far adequate capitalisation and healthy funding profile.

OTPR's asset quality metrics deteriorated sharply in 1H15 as credit losses (defined as the increase in loans 90 days overdue during the period plus write-offs, divided by average performing loans) rose to 24% (annualised) in 1H15, from 15% in 2014 and 16% in 2013. Although the bank has tightened its underwriting standards and early warning indicators suggest reasonable credit quality metrics on newly generated loans, Fitch expects asset quality to remain weak in 2016 due to the worsening economic environment, a drop in borrowers' real disposable incomes, the increased cost of living and rising unemployment.

OTPR's pre-impairment profit was equal to 11% of average loans in 1H15, squeezed by higher funding costs, and was insufficient to absorb the bank's credit losses. Bottom line losses in 1H15 resulted in the bank losing 12% of its regulatory capital. A gradual pick up of new lending in 2H15, and an expected gradual decrease in funding costs as deposits reprice, may help OTPR reduce the magnitude of losses (already achieved in June-August). However, Fitch does not expect the bank to return to sustainably profitable performance in the foreseeable future, as loan impairment charges are unlikely to moderate in the near term.

Capitalisation is adequate to date as expressed by a reasonable 16.1% Fitch Core Capital (FCC) ratio at end-1H15. OTPR managed to absorb considerable losses in 1H15 and still maintained adequate capital ratios by means of de-leveraging (loan book contracted 17%), but the capital position remains vulnerable to deterioration of the credit quality of new lending. The regulatory capital position (the regulatory total capital ratio equalled 13.7% at end-8M15) is weakened by higher risk-weights on high-yielding consumer finance loans. Funding and liquidity is a rating strength, as OTPR has limited refinancing needs in 1H15-2016 and its granular customer funding (80% of end-1H15 liabilities) is reasonably covered (25%) by the liquidity cushion.

RATING SENSITIVITIES

A rating action on OTPR's IDRs is possible if Fitch changes its view on OTPH's ability and propensity to support its Russian subsidiary.

OTPR's VR could be downgraded if the bank does not manage to achieve meaningful asset quality and performance improvement and/or its capital position deteriorates. Upside potential in the current economic environment is limited.

The rating actions are as follows:

Long-term foreign currency IDR: affirmed at 'BB', Outlook Stable
Short-term foreign currency IDR: affirmed at 'B'
Long-term local currency IDR: affirmed at 'BB', Outlook Stable
National Long-term rating: affirmed at 'AA-(rus)', Outlook Stable
Support Rating: affirmed at '3'
Viability Rating: affirmed at 'b+'.