OREANDA-NEWS. January 19, 2016. Fitch Ratings has affirmed Austria-based Raiffeisen Bank International AG's (RBI) Long-term Issuer Default Rating (IDR) at 'BBB' with a Negative Outlook, Short-term IDR at 'F3' and Viability Rating (VR) at 'bbb'. Fitch has subsequently withdrawn RBI's ratings for commercial reasons. A full list of rating actions is at the end of this rating action commentary.

KEY RATING DRIVERS - IDRs, VR
RBI's Long-term IDR is driven by its standalone creditworthiness as expressed by its VR. The affirmation of the VR at 'bbb' reflects the bank's adequate flexibility to deal with recurring challenges in heterogeneous CEE markets. RBI has established local franchises in Austria and 15 foreign markets, predominantly in Central and Eastern Europe (CEE), where it is a leading universal bank. We view RBI's management capabilities, execution and strategic positioning as solid but with only modest positive VR implications. This is because unlike its domestic peers, Erste Group Bank AG and UniCredit Bank Austria AG (both BBB+/Stable/bbb+), RBI lacks a stabilising retail franchise in Austria and is significantly more exposed to volatile, higher-risk markets.

The Negative Outlook on the Long-term IDR reflects the uncertain asset quality and earnings implications of the weak economic environment in Russia (BBB-/Negative), by far RBI's main profit contributor, the recession in Ukraine (CCC) and execution risk from its deleveraging plan. The bank's ability to absorb multiple shocks is also being challenged by large non-performing non-core Asian clients affected by the depressed energy markets and adverse legislation in CEE countries.

RBI is reacting with a three-year deleveraging plan launched in 1Q15 to free up capital and reallocate resources more selectively across CEE. This should result in more balanced profit contributions across CEE by reducing its earnings reliance on Russia. While we expect some capital to be reallocated to more vulnerable south eastern European markets, the relative profit contributions of its subsidiaries in the solid Czech and Slovak markets are also likely to increase. However, the positive risk implications are diluted by the bank's decision to exit the Polish market, one of the largest and most resilient in CEE (albeit only modestly profitable for RBI so far).

RBI's stock of non-performing loans (NPL) net of foreign exchange (FX) effects was stable in 9M15, but its shrinking loan book and adverse FX developments inflated its NPL ratio by 80bp to 12.1%. The NPL ratios are very high in Ukraine (56%, excluding restructured loans, which we consider high relative to the Ukrainian unit's equity), Asia (36%), Slovenia (36%) and Hungary (23%). We view NPL coverage as adequate in most markets. Additional provisioning needs in Ukraine should remain sizeable but increasingly manageable as loan impairment charges (LICs) have so far largely matched the extreme deterioration incurred since 2013. The asset quality downside is significantly larger in Russia, where the stock of NPLs was fairly stable until end-2014 but the NPL ratio increased by half to 8.6% in 9M15.

RBI's fully-loaded common equity Tier 1 (CET1) ratio improved to 10.8% in 9M15 (including its 1H15 profit) from 10.0% and is broadly in line with those of its Austrian peers. However, after several years of weak internal capital generation, RBI's capitalisation remains vulnerable to LICs, FX volatility, uncertain restructuring costs, high recurring regulatory costs and potentially further adverse legislation in CEE, which put it at risk of falling behind foreign and domestic peers as well as increasingly stringent market and regulatory requirements.

The restructuring is addressing these challenges adequately, in our view, and RBI has achieved some risk-weighted asset (RWA) relief from a series of small measures in 2015 (sales of subsidiaries and portfolio, securitisation, termination or shrinkage of non-core segments). However, execution is vulnerable to market and legislative changes, which complicate the deleveraging plan's largest single measure, the Polish unit's sale, which has yet to be concluded.

RBI's solid and resilient pre-impairment profits compare favourably with those of its peers. However, risk and restructuring costs compounded by FX volatility are likely to result in weak performance and capital generation in 2016. The deleveraging plan entails a 20% reduction of RWAs compared with end-3Q14 at group level and in Russia, implying lower future earnings from this key market. Cost discipline and more focused lending should somewhat mitigate this in the long term and RBI is well on track to achieve the 20% cost reduction planned by end-2017 (compared with 2014 at constant prices and FX rates).

RBI's local deposit franchises in CEE fund half of its assets and have improved in recent years. Wholesale funding reliance is significant but maturities are well distributed. 'F3' is the lower possible Short-term IDR for the Long-term IDR of 'BBB' and is constrained by the Negative Outlook. We believe that Raiffeisen Banking Group (RBG), Austria's largest retail banking group and RBI's majority owner via Raiffeisen Zentralbank AG, could provide short-term liquidity support if needed. However, RBI's IDRs do not reflect this because of RBI's limited integration into and large size relative to RBG, which could constrain the latter's ability to support.

KEY RATING DRIVERS - SUPPORT RATING AND SUPPORT RATING FLOOR (SRF)
The Support Rating of '5' and SRF of 'No Floor' reflect Fitch's view that senior creditors can no longer rely on full extraordinary state support. This is driven by the EU's Bank Recovery and Resolution Directive (BRRD), which has been fully transposed, with its bail-in tool, into Austrian law, effective from 1 January 2015.

RATING SENSITIVITIES
Not applicable.

The rating actions are as follows:

Raiffeisen Bank International AG
Long-Term IDR: affirmed at 'BBB'; Outlook 'Negative' and withdrawn
Short-Term IDR: affirmed at 'F3' and withdrawn
Viability Rating: affirmed at 'bbb' and withdrawn
Support Rating: affirmed at '5' and withdrawn
Support Rating Floor: affirmed at 'No Floor' and withdrawn