Fitch Downgrades Asian-Pacific Bank and SKB; Affirms Bystrobank
KEY RATING DRIVERS
ALL BANKS' IDRS, NATIONAL LONG-TERM RATINGS AND VIABILITY RATINGS (VRS)
The downgrades of APB and SKB reflect (i) a deterioration (more marked at APB) of asset quality, particularly in unsecured retail loan books, and weakened core profitability (especially at SKB), as a result of which pre-impairment results are insufficient to cover increased credit losses; (ii) a significant increase at APB of risky related party exposures; and (iii) a weakening of both banks' capitalisation.
The affirmation of Bystro's ratings reflects moderate deterioration in its credit profile amid the challenging operating environment, modestly positive performance (albeit helped by weak provisioning of restructured unsecured retail loans) and a relatively solid capital cushion, which be sufficient to absorb moderate losses (at the level which would have resulted from full provisioning of restructured loans) over an extended period of time.
The Negative Outlooks on all three banks' ratings reflect the potential for further deterioration in their credit profiles within the next 12-18 months, as asset quality, especially of retail loans, remains vulnerable to economic stress, rising unemployment, the fall in real incomes following rouble devaluation and high inflation, and already high borrower leverage. Funding costs are likely to go down over time, but this may not be sufficient to compensate for elevated credit losses. In case of APB and SKB, the Negative Outlooks also reflect the risks of further capital weakening and/or withdrawals. The latter risk at APB stems from the potential need to support other businesses of the bank's shareholders and/or to finance potential buyouts of the bank's minority shareholders. At SKB it stems from the need to repay significant debt at the shareholder (Sinara Group; SG) level, which was raised in 2013 to buy the bank's shares.
APB'S IDRS, VR AND NATIONAL LONG-TERM RATING
In 1H15 APB would have lost around 12% of end-2014 equity if not for a capital injection effectively in the form of shares of a sister M2M Private Bank and positive revaluation of AFS securities. The weakening performance was mainly due to increased impairment charges, of which 86% related to unsecured retail loans (51% of gross loans at end-1H15), as respective credit losses (NPL origination, defined as net increase on NPLs plus write-offs and divided by average performing loans) hiked to 26% in 1H15 from 21% in 2014. According to management, credit losses somewhat moderated recently, which is reflected by modestly profitable performance in Russian regulatory accounts for two months, but sustainability of this trend is yet to be tested. APB's corporate, SME and mortgage loan books are of somewhat better quality, with NPL origination rates of 0.3%, 6.5% and 2.1%, respectively, in 1H15. Overall NPLs were at 19.3% (91% covered by reserves) at end-1H15, up from 14.7% (89%) at end-2014.
Fitch estimated APB's related party/relationship exposures increased significantly (though partly reflecting revaluation of foreign-currency loans), to RUB8.7bn (60% of Fitch core capital) at end-1H15, up from RUB3.4bn (24%) at end-3Q14. Most of these loans are unsecured and, as Fitch understands, issued to finance other businesses of shareholders, some of which are quite leveraged, while others are also weakly performing. There is also a risk of increase of related party exposures/other forms of capital withdrawals due to potential buyouts of minority shareholders.
APB's capitalisation has weakened with FCC and regulatory Tier 1 capital ratios of 11.4% and 7.7%, respectively, at end-10M15, down from 12.9% and 8.1% at end-2014. Management expects the regulatory core Tier 1 and Tier 1 ratios to fall to approximately 7.3% following the merger, and the regulatory capital ratios may fall by a further 1.4ppts as a result of the planned increase of risk-weighting of junior mortgage securitisation tranches from 2016, although Fitch understands there are ways Russian banks can rebook these exposures to avoid a capital hit. Additionally, the bank may receive RUB1.1bn of Tier 2 capital under state recapitalisation programme, although it has not yet applied for it.
APB's liquidity position is healthy, with a cushion of liquid assets covering 31% of customer funds at end-3Q15. The redemptions of wholesale and money market debt in 4Q15-9M16 are modest at RUB4.3bn (4% of end-3Q15 liabilities) and should be manageable. At the same time, the bank's liquidity may be sensitive to the deterioration of the bank's credit profile.
SKB'S IDRS AND VR
NPLs made up a high 18.3% of total loan at end-1H15, fully covered by impairment reserves. Credit losses in unsecured retail loans (80% of total loan book) increased insignificantly to 11.4% in 1H15 (11.2% in 2014) after having jumped to 14.1% in 2013. Corporate loans are generally of moderate quality.
Exposure to SG was equal to 41% of FCC at end-1H15 and reasonably well secured. SG is also a net creditor to the bank with related party funding exceeding lending by 2.5 times.
Core pre-impairment profit fell to only 6.8% of average loans in 1H15 from 8.4% in 2014, as funding costs went up. Net profitability decreased consequently (ROE of -17.8% in 1H15), but was supported by a significant one-off RUB1.7bn gain of questionable quality from sale of deeply overdue loans (already written off from balance sheet). If not for this gain, SKB would have lost about 30% of equity in 1H15. A further RUB0.7bn of similar gains was recorded in 3Q15.
Capitalisation is tight, with the FCC ratio a low 7.1% at end-1H15, and a regulatory Tier 1 capital ratio of 7.6% at end-9M15 providing a very small buffer to absorb losses (about 2% of loans). Fitch is also concerned about contingent risks associated with the purchase in 2013 by SG of a 25% stake in SKB from EBRD. This purchase was partially financed with long-term loan from a third party bank, which could put pressure on SKB's capitalisation should the bank upstream dividends to service this facility (SKB paid RUB0.9bn of dividends since EBRD exited). However, this risk could be mitigated if the shareholder uses dividends from his main asset, OJSC TMK, to service the loan.
SKB is 94% funded by customer accounts and deposits as of 1H15 (87% as of end-2014), the majority of which (68%) are accounts of individuals. The bank has a sufficient liquidity cushion to withstand a moderate 26% of deposit outflow as of 9M15. The risk of significant outflow is also mitigated by the long track record of these funds.
BYSTROBANK'S IDRS, VR, NATIONAL LONG-TERM RATING
Bystro's NPLs increased to 14.6% of gross loans (85% reserved) at end-9M15 from 12.4% (77%) at end-2014. Additionally restructured loans increased to 4.2% of gross loans at end-9M15 from 2% at end-2014, mainly due to unsecured retail loans being prolonged. Increased use of restructurings (without making provisions) allowed the bank to show a modest profit in 1H15 (annualised ROAE of 1.5%).
Bystro's capital position was moderate with an FCC ratio of 13.9% at end-1H15. However, this should be viewed together with unreserved NPLs and restructured loans (together 40% of FCC). Regulatory capitalisation is tighter with a total capital ratio of 12.8% at end-10M15, but would not have been affected if the bank had properly reserved restructured loans, as provisions in regulatory accounts were significantly larger than in IFRS.
Bystro's liquidity position is comfortable with liquid assets of 27% of end-9M15 customer accounts and roughly negligible wholesale refinancing needs.
RATING SENSITIVITIES
ALL BANKS' IDRS, VRS, NATIONAL LONG-TERM RATINGS
Further asset quality pressure leading to continued weak performance and capital erosion may result in negative rating action. For APB and SKB, the downgrade may also follow a further material increase of related party exposures and/or capital withdrawals. Increased pressure on APB's statutory capitalisation from regulatory changes to risk-weightings, if not addressed, could also lead to a downgrade.
Upside rating potential is limited, although gradual improvement of asset quality metrics resulting in sustainably profitable performance and capitalisation strengthening could stabilise the ratings at their current level. For APB and SKB the revision of the Outlooks to Stable is also contingent on reduction of capital withdrawal/related party risks.
KEY RATING DRIVERS AND SENSITIVITIES - APB'S SENIOR UNSECURED DEBT
APB's senior unsecured debt is rated in line with its Long-term IDR, reflecting Fitch's view of average recovery prospects (corresponding to a Recovery Rating of '4'), in case of default.
KEY RATING DRIVERS AND SENSITIVITIES - SUPPORT RATINGS AND SUPPORT RATING FLOORS
The '5' Support Ratings and 'No Floor' Support Rating Floors of the three banks reflect their relatively small size and limited franchises, making extraordinary capital support from the state, in case of need, less likely. In Fitch's view, support from the banks' private shareholders also cannot be relied upon. An upgrade of these ratings is unlikely in the foreseeable future, although acquisition by a stronger owner could lead to an upgrade of the Support Rating.
The rating actions are as follows:
Bystro
Long-term foreign and local currency IDRs: affirmed at 'B'; Outlooks Negative
Short-term foreign currency IDR: affirmed at 'B'
National Long-term Rating: affirmed at 'BBB(rus)'; Outlook Negative
Viability Rating: affirmed at 'b'
Support Rating: affirmed at '5'
Support Rating Floor: affirmed at 'No Floor'
APB
Long-term foreign and local currency IDRs: downgraded to 'B-' from 'B+'; Outlooks Negative
Short-term foreign currency IDR: affirmed at 'B'
National Long-Term Rating: downgraded to 'BB(rus)' from 'A-(rus)'; Outlook Negative
Viability Rating: downgraded to 'b-' from 'b+'
Support Rating: affirmed at '5'
Support Rating Floor: affirmed at 'No Floor'
Senior unsecured debt: downgraded to 'B-'/'BB(rus)' from 'B+'/'A-(rus)', Recovery Rating 'RR4'
SKB
Long-term foreign currency IDR: downgraded to 'B-' from 'B'; Outlook Negative
Short-term foreign currency IDR: affirmed at 'B'
Viability Rating: downgraded to 'b-' from 'b'
Support Rating: affirmed at '5'
Support Rating Floor: affirmed at 'No Floor'.
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