OREANDA-NEWS. Fitch Ratings has affirmed Chelindbank's (Chelind) Long-term Issuer Default Rating (IDR) at 'BB-' and Primsotsbank and Bank Levoberezhny's Long-term IDRs at 'B+'. The Outlooks have been revised to Stable from Negative. A full list of rating actions is at the end of this commentary.

KEY RATING DRIVERS - ALL BANKS' IDRS, VRs AND NATIONAL RATINGS
The banks' IDRs and National Ratings are driven by their standalone profiles as reflected by their Viability Ratings (VRs). The ratings reflect the banks' limited franchises (but more notable presence on regional markets), moderate asset quality deterioration to date, solid loss absorption capacity, comfortable liquidity and limited refinancing needs. None of the three banks are using the Central Bank's regulatory forbearance in respect to exchange rates to support their regulatory capital ratios.

Chelind's higher ratings relative to Primsotsbank and Levoberezhny, reflect the bank's track record of stronger capitalisation, somewhat better asset quality and lower risk appetite. Primsots' and Levoberezhny's credit profiles are closely correlated given their common ownership, although inter-company balances and risk sharing have so far been limited.

The revision of the banks' Outlooks to Stable reflects the so far limited negative impact of the economic downturn on the banks' credit profiles. The banks have demonstrated a strong ability to absorb incremental credit-related losses through pre-impairment profit, and have sufficient capital cushions to withstand moderate future increases in loss rates. Core profitability remained satisfactory at each of the banks in 1H15, notwithstanding margin contraction, and Fitch expects this to improve in 2H15, supported by a decrease in funding costs in line with the lower base rate. Liquidity risk is moderate, given limited deposit outflows during the market volatility at end-2014 and the banks' comfortable liquidity cushions.

CHELIND'S IDRS, VR AND NATIONAL RATING
Chelind's non-performing loans (NPLs, more than 90 days overdue) moderately increased to 6.4% at end-1H15 from 4.3% at end-2014, in line with Fitch's expectations, while restructured loans added a further 4%. However, total problem loans (NPLs plus restructured) were fully covered by reserves.

The bank's net interest margin narrowed somewhat to 7.3% in 1H15 from 8.5% in 2014 due to higher funding costs, but still remained solid, at above peer median. Additionally Chelind's 1H15 pre-impairment profitability (annualised, equal to around 21% of equity) improved compared with 2014 (13%) thanks to higher trading gains. The latter will likely fall in 2H15, but as for other banks, margin recovery driven by reductions in the policy rate and funding costs should support pre-provision results.

Chelind's capitalisation and loss absorption metrics are the strongest in its peer group, with a Fitch Core Capital (FCC) ratio at 18.3% and statutory capital adequacy ratio at 17.5% at end-1H15. This allowed the bank to reserve an additional 10% of gross loans (up to around 21% in total) without breaching the minimal capital adequacy requirements. Fitch believes that the bank's capital should be preserved, at least in the near term, thanks to its conservative growth plans and ability to absorb incremental credit-related losses through income.

At end-3Q15, Chelind's total available liquidity net of potential near-term debt repayments covered around 37% of its customer accounts. Liquidity is also supported by the rather stable cash generation from the loan book, equal to around 8% of total customer accounts each month.

PRIMSOTSBANK'S IDRS, VR AND NATIONAL RATING
Primsots' NPLs comprised 7% of gross loans at end-1H15, and a further 5% were restructured. Reserve coverage of the combined NPLs and the restructured was a comfortable 96%. Corporate loans (44% of gross loans), were of reasonable quality, based on a review of the largest 25 borrowers (50% of corporate book). Retail loans (40% of gross loans) were mostly unsecured (67% of retail loans), although 50% of unsecured retail were made to lower-risk borrowers (pay-roll clients, or customers with a positive credit history with the bank). Annualised losses in 1H15 were equal to 6% of average performing unsecured loans, lower than a year before, and Fitch estimates that unsecured loans will be profitable for the bank as long as annualised losses are below 10%. The SME portfolio (16% of loans, mostly issued under MSP Bank programmes), was granular and generated only 2% of NPLs (annualised in 1H15).

Primsots' regulatory total capital adequacy ratio (CAR) was 12% at end-1H15, providing a moderate 4% capacity to reserve loan losses before the CAR falls below the regulatory minimum of 10%. However, the bank's loss absorption capacity is supported by significant pre-impairment profit, in 1H15 equal to 6% of average loans (annualised, net of accrued interest).

Near-term wholesale repayments are limited, and the bank's liquid assets were sufficient to cover 40% of customer accounts at end-8M15.

LEVOBEREZHNY'S IDRS, VR AND NATIONAL RATING
The higher NPLs at Levoberezhny (12.8% of gross loans at end-1H15) are due to its significant exposure to the retail segment (53% of loans). NPLs were fully covered by reserves at end-1H15. Losses on the unsecured retail book were a reasonable 6% (annualised) in 1H15, lower than in 2014, and below Fitch's estimate of the break-even loss rate of 11%. Retail performance was supported by the bank's predominant lending to lower-risk borrowers, with salaried employees of corporate clients, individuals with positive credit histories with the bank and pensioners comprising 80% of unsecured loans at end-1H15.

Restructured loans were a further 5% of gross loans and stemmed from the corporate and SME portfolios. Although lowly reserved, these mostly had adequate collateral and were performing after restructuring.

Levoberezhny's regulatory CAR, 12.6% at end-1H15, provided a limited 4% cushion to reserve loans. However, the bank's loss absorption capacity is supported by solid pre-impairment profit (annualised, equal to 5% of average loans, net of accrued interest, in 1H15).

The end-8M15 liquidity cushion, net of only limited near-term wholesale repayments, was sufficient to withstand the outflow of 55% customer deposits.

KEY RATING DRIVERS - SUPPORT RATINGS AND SUPPORT RATING FLOORS
The banks' '5' Support Ratings and Support Rating Floors of 'No Floor' reflect Fitch's view that support from the Russian authorities cannot be relied upon given the banks' limited deposit franchises and overall systemic importance. Support from the banks' private shareholders is also not factored into the ratings.

RATING SENSITIVITIES
The ratings could be downgraded if the weaker operating environment translates into a markedly higher deterioration of the banks' asset quality than currently expected by Fitch, to the extent that this significantly erodes their capitalisation. Upside potential for the banks' ratings is limited given the weaker economic outlook.

The rating actions are as follows:

Chelindbank
Long-term foreign currency IDR: affirmed at 'BB-', Outlook revised to Stable from Negative
Short-term foreign currency IDR: affirmed at 'B'
Viability Rating: affirmed at 'bb-'
Support Rating: affirmed at '5'
Support Rating Floor: affirmed at 'No Floor'
National Long-term Rating: affirmed at 'A+(rus)', Outlook revised to Stable from Negative

Primsotsbank
Long-Term foreign currency IDR affirmed at 'B+'; Outlook revised to Stable from Negative
Short-Term foreign currency IDR affirmed at 'B'
Viability Rating affirmed at 'b+'
Support Rating affirmed at '5'
Support Rating Floor affirmed at 'No Floor'
National Long-Term Rating affirmed 'A-(rus)'; Outlook revised to Stable from Negative

Novosibirsk Social Commercial Bank Levoberezhny, OJSC
Long-Term foreign and local currency IDRs affirmed at 'B+'; Outlooks revised to Stable from Negative
Short-Term foreign currency IDR affirmed at 'B'
Viability Rating affirmed at 'b+'
Support Rating affirmed at '5'
Support Rating Floor affirmed at 'No Floor'
National Long-Term Rating affirmed 'A-(rus)'; Outlook revised to Stable from Negative