OREANDA-NEWS. Fitch Ratings has affirmed the Long-term foreign and local currency Issuer Default Ratings (IDRs) of Sberbank of Russia (Sberbank) and Vnesheconombank (VEB) and their leasing subsidiaries, Sberbank Leasing and JSC VEB-Leasing, at 'BBB-'.

Fitch has also affirmed the Long-term IDRs of Gazprombank OJSC (GPB), its subsidiary Gazprombank (Switzerland) Ltd (GPBS), and Russian Agricultural Bank (RusAg) at 'BB+'. The Outlooks are Negative. A full list of the rating actions is provided at the end of this commentary.

KEY RATING DRIVERS

IDRS, SUPPORT RATINGS, SUPPORT RATING FLOORS (SRFs), NATIONAL RATINGS
The affirmation of the Long-term foreign currency IDRs and SRFs of Sberbank and VEB at the sovereign level of 'BBB-', and those of RusAg and GPB at 'BB+', reflects Fitch's view of a very high propensity of the Russian authorities to support the banks, in case of need, due to:

(i) majority state ownership (50%+1 share in Sberbank; 100% of VEB and RusAg), or a high degree of state control and supervision by quasi-sovereign entities (GPB), most significantly by the bank's founder and shareholder PJSC Gazprom (BBB-/Negative);
(ii) the exceptionally high systemic importance of Sberbank as expressed by its dominant market shares (approximately 30% of system assets and 44% of retail deposits at end-10M15), VEB's status as a development bank, RusAg's important policy role of supporting the agricultural sector and GPB's high systemic importance for the banking sector;
(iii) the track record of support to the banks, including recent large recapitalisations of GPB and RusAg through core Tier 1 eligible preferred share issues acquired by the state Depository Insurance Agency (DIA). Fitch considers this as good quality loss-absorbing capital, and assigns it 100% equity credit;
(iv) and high reputational risks of a potential default for the Russian authorities/state-controlled shareholders.

Sberbank's IDRs are also underpinned by the bank's stand-alone credit profile, as reflected in its 'bbb-' Viability Rating (VR).

The ratings of GPB and RusAg are one notch lower than those of Sberbank and VEB as the banks do not have the exceptional systemic importance of the former or the development bank status of the latter. The notching from the sovereign also reflects (i) previous delays in provision of significant equity support by the state to RusAg, and potential remaining capital needs of the bank; and (ii) that GPB is not directly majority-owned by the state.

The designation of these banks by the Central Bank of Russia as domestic systemically important institutions (D-SIBs) does not have material implications for Fitch's support view. The designation applies equally to large foreign- and privately-owned banks, as well as state-owned lenders, and implies more stringent oversight of the banks rather than a confirmation of any intention to support creditors. The potential introduction of bail-in legislation - which is currently being discussed in Russia, but is unlikely to be implemented in the near-term, in Fitch's view - would not necessarily result in an automatic downgrade of the SRFs of state-owned commercial banks, because we believe that, given the banks' ownership and policy roles pre-emptive support would still be available to them. Bail-in legislation would in any case not apply to VEB, as a development bank.

The affirmation of VEB's ratings reflects Fitch's expectation that the bank will receive in the near- to medium-term sufficient and timely government support to address weaknesses in its solvency and foreign currency liquidity and enable it to service its obligations to creditors. However, uncertainty remains about how support for VEB will be structured, the volume of the support measures and the timeline for their implementation.

The affirmation of the IDRs of Sberbank-Leasing, VEB Leasing and Gazprombank Switzerland in line with those of their parent reflects Fitch's view that they are highly-integrated core subsidiaries.

The affirmation of the entities' National Ratings reflects Fitch's view that they remain among the strongest credits in Russia. The Stable Outlooks on the National Ratings reflect Fitch's view that the creditworthiness of Russian issuers relative to each other are unlikely to change significantly in case of a sovereign downgrade.

DEBT RATINGS
The senior unsecured debt ratings (including the debt issues issued by special purpose vehicles) are aligned with the respective institutions' IDRs.

The ratings of 'old-style' subordinated debt issues are notched down once from the Long-term IDRs. 'New-style' subordinated debt is rated one notch lower than the banks' VRs due to loss-absorption triggers. The 'new-style' issues have coupon/principal write-down features, which will be triggered if: (i) the bank's regulatory core Tier 1 capital adequacy ratio decreases below 2%; or (ii) the DIA acquires a controlling stake in the bank or provides financial assistance to it as part of an approved bankruptcy prevention plan. The latter is possible if a bank breaches any of its mandatory capital ratios or is in breach of certain other liquidity and capital requirements.

The ratings of debt issued by Sberbank, VEB, RusAg, GPB and their subsidiaries apply to debt issued prior to 1 August 2014.

SBERBANK's VR
Sberbank's 'bbb-' VR reflects (i) the bank's significant pricing power due to dominant market shares in the Russian banking sector, (ii) only moderate asset quality deterioration to date, (iii) profitable performance through the cycle, and (iv) cheap stable funding base and ample liquidity.

Sberbank's VR is sensitive to Russia's sovereign rating (BBB-/Negative) due to significant exposure to sovereign debt (0.5x of end-1H15 Fitch Core Capital (FCC)) and to the broader economic environment, with the contribution of foreign subsidiaries to Sberbank's assets and earnings remaining only moderate.

Sberbank's asset quality has deteriorated moderately, with NPLs rising to 5.4% at end-3Q15 (1.1x covered by reserves) from 3.2% at end-2014. Consequently, loan impairment charges (LICs) increased to 2.6% of loans in 9M15 from 2.3% in 2014 and 1.1% in 2013. We expect LICs to stabilise in 2016 and not exceed 2.5%, as the most acute problems (e.g. Mechel, Transaero and Ukrainian risks) have been heavily reserved. Therefore LICs should be comfortably covered by the bank's pre-impairment profitability (equal to around 4% of average loans in 9M15, annualised), which may also improve by about 0.5-1.0pts in 2016 if funding costs continue to decrease. Performance trends, as for other Russian banks, are also sensitive to further significant external shocks.

Sberbank's capitalisaiton is reasonable, as reflected by its 9% FCC ratio at end-3Q15. The regulatory Tier 1 ratio was also adequate, at 8.6% at end-3Q15, although this received a 40bps uplift due to exchange rate forbearance. The bank should comfortably comply with the increased 5.3% minimum core tier 1 requirement (including additional capital buffers for D-SIBs) with effect from 1 January 2016. Due to moderate loan growth plans and a reasonable internal capital generation capacity, capital ratios should at least remain stable in 2016.

Sberbank's strong liquidity position is underpinned by a significant cushion of liquid assets (both in local and in foreign currency) and a granular and fairly stable deposit base. Similarly to most other banks in the sector, Sberbank faced moderate funding outflows in December 2014, but since 2Q15 has enjoyed a steady inflow of customer funding (the loans/deposits fell to a reasonable 105% at end-3Q15, from 120% at end-2014). Wholesale debt is moderate (5% of end-3Q15 liabilities) and Sberbank's external refinancing needs in 2016 are modest, with the next repayment peak in February-March 2017 (USD3bn excluding trade finance; less than 2% of the bank's liabilities).

GPB'S VR
GPB's 'bb-' VR reflects the bank's moderate capitalisation, recently loss-making performance and significant volume of high-risk exposures/ non-banking assets that might require significant additional impairment provisions. At the same time, the VR factors in the bank's prominent market positions, its generally lower-risk lending focused on larger and stronger Russian corporates and secured retail products, its currently comfortable liquidity and access to capital under Russian government programmes.

The NPL ratio was a low 2.3% at end-3Q15 (1% at end-2014). However, a further 9% of loans, although technically not NPLs, are high-risk and were a source of increased impairment charges in 9M15. These exposures comprise: (i) M&A loans to a fertiliser-producing group, which were partially secured by equities of Ukrainian enterprises (23% of adjusted Fitch Eligible Capital (FEC) at end-1H15); and (ii) a secured exposure to Mechel (26%). High risks also stem from GPB's large equity investments in mostly poorly performing non-banking subsidiaries (37% of FEC) and other, mostly illiquid, equity investments (30% of FEC).

FEC includes FCC and preferred shares issued in December 2014 and August 2015, which Fitch views as good quality, loss-absorbing capital. FEC at end-1H15 was adjusted for the August issue in calculating risk exposures relative to capital. Fitch views capitalisation as vulnerable, notwithstanding recent injections, due to still moderate ratios, large exposures to high-risk assets and operating losses. The FEC was 7.1% at end-3Q15, up only moderately from 6.1% at end-2014, as pressure from impairment-driven losses (the total comprehensive loss was equal to 4.8% of average equity in 9M15, annualised) and rouble devaluation partly offset the benefit of the preferred share issue (bought by the DIA). The regulatory core Tier 1 ratio was 8.8% at end-October 2015, in part due to utilisation of regulatory forbearance on exchange rates used to calculate regulatory risk-weighted assets (RWAs).

GPB's liquidity remains comfortable, partially reflecting the bank's treasury role for Gazprom and other large oil and gas companies. The highly-liquid assets at end-1H15, net of senior unsecured debt repayments to end-2016, were equal to a solid 30% of total customer deposits.

RUSAG'S VR
RusAg's 'b-' VR reflects the bank's weak asset quality, vulnerable capitalisation given sizable unreserved problem loans and weak internal capital generation, and high reliance on wholesale funding. The VR also takes into account the bank's improved capital position following recent injections and the currently adequate liquidity position.

RusAg's NPLs were a high 18% of the end-1H15 total loan book. Reserve coverage of these exposures was only a moderate 54%, with the unreserved part amounting to 91% of FEC. In addition, restructured and/or rolled-over loans classified in the Watch category comprised a further 6% of loans at end-2014 (latest available disclosure). Further downside risks stem from the bank's predominantly long-term loans, which are often structured with bullet repayments and subsidised interest rates.

RusAg's FEC ratio was a moderate 7.3% at end-1H15, but adjusted for a December RUB69bn capital injection from the DIA and a RUB22bn loss in 3Q15, this should have improved to about 9.5%. The regulatory Tier 1 ratio of 8.6% at end-10M15 would rise to 11.6%, after adjusting for the capital injection. Current loss-absorbing capital ratios are broadly in line with those at end-2014, as operating losses (negative ROAE of 53% in 9M15) have largely offset the DIA contribution.

RusAg expects RUB20bn (equal to 1% of RWAs) of further capital support in 2016-2017 as part of an agricultural sector development programme (part of the state budget) and potentially RUB60bn (3%) in 2018-2020, but these amounts are moderate relative to risks of further impairment in the loan book.

RusAg's high loans/deposits ratio (158% at end-3Q15) reflects the bank's significant reliance on wholesale funding (45% of end-3Q15 liabilities), half of which is from foreign creditors. Refinancing needs for 2016 are moderate, comprising eurobonds of RUB52bn and USD161m (combined, equal to 3% of liabilities). At end-3Q15, RusAg had RUB460bn (USD7bn) of liquid assets (cash, short-term bank placements, unencumbered repo-able securities and loans eligible for refinancing in CBR), which were sufficient to repay all wholesale funding to end-2018. Domestic wholesale funding can largely be refinanced on the local market.

RATING SENSITIVITIES

IDRS, SRs, SRFs, NATIONAL RATINGS AND DEBT RATINGS
The Negative Outlooks on all of the entities covered in this commentary reflect the potential for them to be downgraded if Russia's sovereign ratings are downgraded and the Country Ceiling is lowered. A significant weakening of the propensity of parent banks to provide support (not expected by Fitch at present) could also result in downgrades of the subsidiaries' ratings.

GPB's support-driven ratings could also come under downward pressure if there is a marked reduction in the stake owned by quasi-sovereign entities and/or if the links between the bank and the Russian authorities weaken significantly.

The senior unsecured and 'old-style' subordinated debt ratings would likely change in tandem with their respective banks' Long-term IDRs. Changes in the VRs would likely be matched by corresponding changes in the 'new-style' subordinated debt ratings.

VR
Sberbank's VR could be downgraded if the sovereign ratings are downgraded, reflecting further marked deterioration in Russia's economic prospects, or a weakening of Sberbank's asset quality and capital. A stabilisation of the operating environment, and a revision of the Outlook on the sovereign ratings to Stable, could help to stabilise the rating at its current level.

GPB's VR could be downgraded in case of weakening of its asset quality or capitalisation. A stabilisation of the operating environment and the bank's capital ratios would help to stabilise the VR at its current level.

RusAg's VR could be downgraded in case of a further marked deterioration in its asset quality that is not promptly cured by capital support. A further strengthening of capitalisation leading to reduced asset quality risks could result in an upgrade of the VR.

The rating actions are as follows:

Sberbank of Russia
Long-term foreign and local currency IDRs: affirmed at 'BBB-'; Outlooks Negative
Short-term foreign and local currency IDRs: affirmed at 'F3'
National Long-term Rating: affirmed at 'AAA(rus)'; Outlook Stable
Viability Rating: affirmed at 'bbb-'
Support Rating: affirmed at '2'
Support Rating Floor: affirmed at 'BBB-'

SB Capital S.A.
Senior unsecured debt long-term rating: affirmed at 'BBB-'
Subordinated debt long-term rating: affirmed at 'BB+'

Vnesheconombank
Long-term foreign and local currency IDRs: affirmed at 'BBB-'; Outlook Negative
Short-term foreign currency IDR: affirmed at 'F3'
National Long-term rating: affirmed at 'AAA(rus)'; Outlook Stable
Support Rating: affirmed at '2'
Support Rating Floor: affirmed at 'BBB-'
Senior unsecured debt: affirmed at 'BBB-'
Senior unsecured debt of VEB Finance PLC: affirmed at 'BBB-'

Gazprombank:
Long-term foreign and local currency IDRs: affirmed 'BB+'; Outlook Negative
Short-term foreign currency IDR: affirmed at 'B';
National Long-term rating: affirmed at 'AA+(rus)'; Outlook Stable
Viability Rating: affirmed at 'bb-'
Support Rating: affirmed at '3'
Support Rating Floor: affirmed at 'BB+'
Senior unsecured debt: affirmed at 'BB+'/ 'AA+(rus)'
Senior unsecured debt of GPB Eurobond Finance PLC: affirmed at 'BB+'
'Old-style' subordinated debt of GPB Eurobond Finance PLC: affirmed at 'BB'
'New-style' subordinated debt of GPB Eurobond Finance PLC: affirmed at 'B+'

RusAg
Long-term foreign currency IDR: affirmed at 'BB+'; Outlook Negative
Long-term local currency IDR: affirmed at 'BB+'; Outlook Negative
Short-term foreign currency IDR: affirmed at 'B'
Viability Rating: affirmed at 'b-'
National Long-term rating: affirmed at 'AA+(rus)'; Outlook Stable
Support Rating: affirmed at '3'
Support Rating Floor: affirmed at 'BB+'
Senior unsecured debt: affirmed at 'BB+'/ 'AA+(rus)'
Senior unsecured debt of RSHB Capital S.A.: affirmed at 'BB+'/ 'AA+(rus)'
'Old-style' subordinated debt of RSHB Capital S.A.: affirmed at 'BB'

Gazprombank (Switzerland) Ltd
Long-term foreign currency IDR: affirmed at 'BB+'; Outlook Negative
Short-term foreign currency IDR: affirmed at 'B'
Support Rating: affirmed at '3'
Senior unsecured debt: affirmed at 'BB+'

OJSC VEB-Leasing
Long-term foreign currency IDR: affirmed at 'BBB-'; Outlook Negative
Long-term local currency IDR: affirmed at 'BBB-'; Outlook Negative
Short-term foreign currency IDR: affirmed at 'F3'
National Long-term rating: affirmed at 'AAA(rus)'; Outlook Stable
Support Rating: affirmed at '2'
Senior unsecured debt: affirmed at 'BBB- '/ 'AAA(rus)'
Senior unsecured debt of VEB Leasing Investment Ltd: affirmed at 'BBB-'

Sberbank Leasing
Long-term foreign currency IDR: affirmed at 'BBB-'; Outlook Negative
Long-term local currency IDR: affirmed at 'BBB-'; Outlook Negative
Short-term foreign currency IDR: affirmed at 'F3'
National Long-term rating: affirmed at 'AAA(rus)'; Outlook Stable
Support Rating: affirmed at '2'