LONDON--(BUSINESS WIRE)--Fitch Ratings has downgraded the Long-term Issuer Default Ratings (IDRs) of Russia's Alfa Bank to 'BB+' from 'BBB-'. The Rating Outlook remains Negative. At the same time, the agency has downgraded the Viability Rating (VR) of Sberbank to 'bbb-' from 'bbb' and of Gazprombank (GPB) to 'bb-' from 'bb'. The VR of Russian Agricultural Bank (RusAg) has been affirmed at 'b-'. A full list of rating actions is at the end of this commentary.
The support-driven IDRs of Sberbank ('BBB-'/Negative), RusAg ('BB+'/Negative) and GPB ('BB+'/Negative) were reviewed, and downgraded by one notch, earlier this year (see 'Fitch Downgrades Russian Financial Institutions on Sovereign Action, dated 16 January 2015 at www.fitchratings.com) and are unaffected by today's rating actions.
The affirmation of Sberbank's, GPB's and RusAg's debt applies to all debt issued prior to 1 August 2014.
KEY RATING DRIVERS AND SENSITIVITIES - ALFA BANK
The downgrade of Alfa's ratings reflects the weakening of the Russian operating environment, and Fitch's view that it is appropriate to maintain a one-notch differential between the ratings of the bank and the Russian sovereign. The Negative Outlook reflects Fitch's view that economic recession (Fitch expects GDP to contract by 4% in 2015), higher funding costs, rouble devaluation, rising inflation and a potential increase in loan impairment are likely to put pressure on Alfa's credit profile in 2015.
At the same time, Alfa remains the highest-rated Russian privately-owned bank, reflecting its good management and track record of navigating through past Russian crises, and its currently strong balance sheet and solid financial metrics.
Asset quality only moderately deteriorated in 2014: non-performing loans (NPLs) increased to 2.2% of gross loans at end-1H'14 from 1.2% at end-2013, and remained roughly stable in 2H'14, according to management. The weaker Russian economy and higher recent occurrences of corporate defaults and restructurings suggest pressure on asset quality is likely to increase in 2015. However, the overall impairment reserve level, equal to 5% of loans at end-1H'14, provides a significant buffer, comparable to cumulative loan write-offs for 2009-1H'14.
Performance deteriorated in 1H'14 due to the increase in impairment charges, associated with a few corporate defaults and general deterioration in retail lending. Fitch expects profitability to deteriorate further in 2015 due to higher impairment charges and significantly increased funding costs following the sharp increase of the base rate by the Russian Central Bank (CBR), although Alfa has some resilience due to its high share of interest free current accounts.
Basel Tier 1 and total capital ratios stood at a reasonable 11.8% and 16.5%, respectively, at end-1H'14. Regulatory capitalisation is tighter (total ratio of 11% at end-2014), partly due to more conservative loan reserve levels compared to IFRS, but also due to the impact of rouble depreciation on risk-weighted assets in 2H'14. Alfa did not take advantage of regulatory forbearance measures offered by the Central Bank in calculating its year-end regulatory ratios.
To support capitalisation, Alfa may receive new equity from shareholders and/or utilise state support, including potential conversion of RUB39.4bn of subordinated debt received in the last crisis from Vnesheconombank (VEB) into preferred shares or perpetual debt, or participation in the sector recapitalisation programmes of the National Wealth Fund and the Depositary Insurance Agency (DIA).
Alfa experienced about a 5% (FX adjusted) outflow of customer funding in December. Liquidity is still comfortable, with highly liquid assets (cash, shorty-term interbank, unpledged liquid securities) at end-2014 covering around 40% of customer accounts. Wholesale repayments in 2015 are equal to a moderate 2.6% of liabilities, while the bank was able to borrow on wholesale markets in 2014, notwithstanding the challenging backdrop.
Alfa's owners have supported the bank in the past, and, in Fitch's view, would have a strong propensity to do so again, if required. Their ability to provide support is also likely to be significant, as they seem to have little debt and significant cash reserves following recent asset sales; however, Fitch does not formally factor shareholder support into the ratings given limited visibility on the shareholders' current position and Alfa's significant size. Given the bank's broad franchise, there is also a moderate probability of support from the Russian authorities.
A further marked deterioration in Russia's economic prospects, or a weakening of Alfa's asset quality and capitalisation, could result in a downgrade of the bank's ratings. A stabilisation of the operating environment, and a revision of the Outlook on the sovereign ratings to Stable, could result in the Outlook on Alfa's ratings also being revised to Stable.
KEY RATING DRIVERS AND SENSITIVITIES - ABHFL
The downgrade of ABH Financial Limited, Alfa's holding company, reflects the downgrade of the bank. ABHFL's ratings reflect Fitch's view that default risk at the bank and the holding company are likely to be highly correlated in view of the high degree of fungibility of capital and liquidity within the group, which is managed as a single entity. The currently limited volume of holding company debt to non-related parties also supports the close alignment of its ratings with Alfa.
The one-notch difference between the bank and holding company ratings reflects the absence of any regulation of the consolidated group, the fact that the holding company is incorporated in a different jurisdiction and the high level of double leverage at the holding company. The latter, defined by Fitch as equity investments in subsidiaries divided by holdco equity, stood at 150% at end-11M14, although would have been lower if related party liabilities were excluded.
ABHFL's Long-term IDR is above the Cyprus Country Ceiling of 'B', reflecting Fitch's view that the company's ability to repay/pay interest on external liabilities is not dependent on the local financial system.
An upgrade or downgrade of Alfa would be likely to result in a similar rating action on ABHFL. In addition, ABHFL could be downgraded if its planned future debt issuance results in a further marked increase in double leverage or gives rise to significantly increased liquidity risks at the holdco level.
KEY RATING DRIVERS AND SENSITIVITIES - SBERBANK AND SBERBANK LEASING
The downgrade of Sberbank's VR, and hence Long-term local currency IDR, reflects the weakening of the Russian operating environment, and Fitch's view that it is not appropriate to rate the bank above the Russian sovereign. The VR continues to factor in Sberbank's dominant market positions, stable deposit base, currently strong performance relative to the sector and solid liquidity position. Capitalisation remains adequate, but has moderated as a result of the revaluation of foreign currency assets.
Sberbank's asset quality is currently sound, with NPLs only moderately up at 3.5% at end-3Q'14, 1.5x times covered by reserves. However, a more significant deterioration is likely over the next 12-18 months as the economy enters recession. The bank's so far robust pre-impairment profitability (equal to 3.9% of average assets in 9M14) is likely to dampen in 2015 on the back of higher funding costs, which the bank is unlikely to fully pass on to the borrowers, while bottom line results will probably be additionally pressured by increasing impairment charges.
Sberbank's 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 (due to its 45% share in system's retail deposits). Sberbank faced a moderate retail funding outflow (between 2% and 3% on FX-adjusted basis) in December-January, which was offset by the inflow of corporate accounts. External wholesale funding comprised a low 5% of Sberbank's end-2014 liabilities, and 2015 repayments are not onerous.
Fitch estimates that the bank's FCC / risk-weighted assets ratio fell from 10% at end-3Q'14 to around 9% by end-2014 as a result of revaluation of foreign-currency-denominated risk-weighted assets and an unrealized loss on the bank's securities portfolio in December. Regulatory capital ratios (total capital ratio was just 10.6% at end-1M15) benefit from the regulatory forbearance with respect to risk-weighted assets revaluation and will be supported by the forthcoming conversion of a RUB500bn subordinated loan from the Central Bank into Tier-1 compliant perpetual, which should improve total regulatory capital ratio by about 1 percentage point. Sberbank is not included in the government's recapitalisation program that involves Depositary Insurance Agency, but could receive support directly from the CBR if needed, Fitch understands.
A downgrade of the sovereign ratings, a further marked deterioration in Russia's economic prospects, or a weakening of Sberbank's asset quality and capitalisation, could result in a downgrade of the bank's VR. 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.
The downgrade of Sberbank Leasing's Long-term local currency IDR reflects the similar action on Sberbank. Sberbank Leasing's ratings are driven by Fitch's view of the high probability of support from Sberbank, and are likely to move in tandem with the latter's ratings.
KEY RATING DRIVERS AND SENSITIVITIES - GPB
The downgrade of Gazprombank's VR to 'bb-' from 'bb' reflects the bank's reduced, and moderate, capitalisation. This, in Fitch's view, makes the bank more vulnerable in case of a deterioration in the bank's significant volume of potentially risky loan exposures, or as a result of a more general weakening of asset quality due to the more challenging environment. The VR also considers the bank's modest core profitability and considerable exposure to non-banking assets.
At the same time, the VR also reflects 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 recently announced Russian government programmes.
The FCC / risk weighted assets (RWAs) ratio declined to 6.2% at end-3Q'14 from 8.2% at end-2013, and Fitch expects this to have fallen further at end-2014 as a result of the impact of rouble devaluation on RWAs (35% of which comprised foreign currency exposures at end-3Q'14). Fitch views the bank's preferred shares, into which Vnesheconombank converted its subordinated debt in 4Q'14, as good quality loss absorbing capital, in addition to the bank's FCC; however, these are equal to a moderate 93 basis points (bps) of end-9M14 RWAs.
Core capital ratios are unlikely to recover significantly in 2015 given weakened internal capital generation (3% in 9M14). However, regulatory capital should be strengthened as a result of participation in government programmes, in particular the RUB100bn subordinated debt injection approved by the government. At end-January 2015, the regulatory core tier 1 and total capital ratios were 7.5% and 12.7%, respectively, benefitting from the regulatory forbearance implemented by the Central Bank in respect to securities valuations and RWA calculations for foreign currency assets.
Although NPLs remain low (1% of gross loans at end-3Q'14), high-risk exposures made up a significant 8% of the portfolio. These mostly comprised (i) moderately provisioned loans to an indebted metals and mining group (equal to 32% of FCC) and (ii) weakly secured direct and indirect exposures to Ukrainian entities with uncertain recovery prospects (31% of FCC). Gazprombank's capital position is also undermined by equity investments (equal to 36% of FCC) in mostly poorly performing non-banking assets.
Liquidity remains comfortable, although funding depends significantly on large core deposits from major oil and gas companies. Highly-liquid assets at end-November 2014 were equal to approximately 1.3x third-party wholesale debt, or 39% of the total customer deposits. Deposit outflows in December 2015 were moderate. Scheduled wholesale debt repayments in 2015, including a USD1.7bn Eurobonds, are equal to a moderate 5% of liabilities.
The VR could be downgraded in case of a further weakening of capitalisation or significant loan losses. A stabilisation of the operating environment and a gradual increase in the bank's capital ratios would help to stabilise the VR at its current level.
The downgrade of GPB's 'new-style' subordinated debt (with principal/ coupon write-down feature) to 'B+' reflects the downgrade of the VR. The subordinated debt rating is notched down once from the bank's VR; this incorporates zero notches for incremental non-performance risk relative to the VR and a notch for higher loss severity.
KEY RATING DRIVERS AND SENSITIVITIES - RUSAG's VR
The 'b-' VR of RusAg primarily reflects the bank's weak asset quality, moderate capitalization, modest financial performance and significant reliance on wholesale funding.
RusAg's asset quality is weak, with non-performing loans (NPLs, loans over 90 days overdue) comprising a high 16.7% of the end-1H'14 loan book. Reserve coverage of these exposures was a moderate 51%, with the unreserved part amounting to RUB117bn, or 53% of Fitch Core Capital (FCC). RusAg's predominantly long-term loan book, with exposures often structured with bullet repayments and subsidised interest rates creates potential for further increases of credit losses in a weakening operating environment. Restructured and/or rolled-over loans classified in the Watch category comprised a further 8% of loans at end-2013 (the last date on which this was disclosed).
At end-1H'14, the FCC ratio was 13.3%, which Fitch views as moderate given the weak provisioning of NPLs, significant restructured exposures and new potential problems. The bank's RUB25bn preferred shares, into which Vnesheconombank converted its subordinated debt in 4Q'14, were equal to 147 bps of end-9M14 RWAs, and RusAg may also access RUB68.5bn of additional capital under the DIA-administered recapitalisation programme. However, internal capital generation is weak, with pre-impairment profit (net of accrued but not received interest income) amounting to only RUB3.6bn (equal to 0.4% of average risk-weighted assets) in 1H'14.
RusAg's high loans/deposits ratio (174% at end-1H'14) and the fairly long-term nature of its loan book make the bank's liquidity position vulnerable to a sustained reduction in access to wholesale funding (37% of liabilities at end-1H'14). However, near-term maturities are moderate and liquidity is comfortable at present, so recently introduced sanctions are unlikely to result in a sharp increase in refinancing risks. At end-2014, RusAg had USD8bn of foreign liabilities (nearly 20% of total non-equity funding), with USD0.8bn due for repayment in 2015, while the bank held RUB276bn (USD5bn) of liquid assets (cash, short-term bank placements, unencumbered repoable securities and loans eligible for refinancing in CBR).
A further marked deterioration in asset quality could result in a downgrade of the VR. A strengthening of capitalisation, if this is sufficient to significantly alleviate asset quality risks, could lead to an upgrade.
Fitch has taken the following rating actions:
Alfa-Bank
Long-term foreign currency IDR: downgraded to 'BB+' from 'BBB-'; Outlook Negative
Long-term local currency IDR: downgraded to 'BB+' from 'BBB-'; Outlook Negative
Short-term foreign currency IDR: downgraded to 'B' from 'F3'
National Long-term rating: affirmed at 'AA+(rus)'; Outlook Stable
Viability Rating: downgraded to 'bb+' from 'bbb-'
Support Rating: affirmed at '4'
Support Rating Floor: affirmed at 'B
Senior unsecured debt: downgraded to 'BB+' from 'BBB-'/affirmed at 'AA+(rus)'
Subordinated debt: downgraded to 'BB' from 'BB+'
Senior unsecured debt of Alfa Bond Issuance Public Limited Company: downgraded to 'BB+' from 'BBB-'
Senior unsecured debt of ALFA MTN ISSUANCE LTD: downgraded to 'BB+' from 'BBB-'
Subordinated debt of Alfa Bond Issuance Public Limited Company: downgraded to 'BB' from 'BB+'
ABH Financial Limited
Long-term foreign currency IDR: downgraded to 'BB' from 'BB+'; Outlook Negative
Short-term foreign currency IDR: affirmed at 'B'
Senior unsecured debt of Alfa Holding Issuance plc: downgraded to 'BB' from 'BB+'
Sberbank of Russia
Long-term foreign currency IDR: 'BBB-'; Outlook Negative; unaffected
Long-term local currency IDR: downgraded to 'BBB-' from 'BBB'; Outlook Negative;
Short-term foreign currency IDR: 'F3'; unaffected
Short-term local currency IDR: affirmed at 'F3'
National Long-term rating: affirmed at 'AAA(rus)'; Outlook Stable
Viability Rating: downgraded to 'bbb-' from 'bbb'
Support Rating: '2'; unaffected
Support Rating Floor: 'BBB-'; unaffected
Senior unsecured debt Long-term Rating: downgraded to 'BBB-(EXP)' from 'BBB(EXP)' and withdrawn
Senior unsecured debt National Long-term Rating: affirmed at 'AAA(EXP)(rus)' and withdrawn
Commercial paper of SB Securities S.A. Short-term Rating: affirmed at 'F3' and withdrawn
Senior unsecured debt of SB Capital S.A. Long-term Rating (RUB bond ISIN XS0882561821): downgraded to 'BBB-' from 'BBB'
Senior unsecured debt of SB Capital S.A. Long-term Rating (except RUB bond ISIN XS0882561821): 'BBB-'; unaffected
Senior unsecured debt of SB Capital S.A. loan participation note programme Long-term and Short-term Ratings: affirmed at 'BBB-'/'F3' and withdrawn
'Old-style' and 'New-style' subordinated debt of SB Capital S.A.: 'BB+'; unaffected
Sberbank Leasing
Long-term foreign currency IDR: 'BBB'; Outlook Negative; unaffected
Long-term local currency IDR: downgraded to 'BBB-' from 'BBB'; Outlook Negative
Short-term foreign currency IDR: 'F3'; unaffected
National Long-term rating: affirmed at 'AAA(rus)'; Outlook Stable
Support Rating: '2'; unaffected
Gazprombank:
Long-term foreign and local currency IDR: 'BB+'; Outlook Negative; unaffected
Short-term foreign currency IDR: 'B'; Unaffected
National Long-term rating: 'AA+(rus)'; Outlook Stable; Unaffected
Viability Rating: downgraded to 'bb-' from 'bb'
Support Rating'3'; unaffected
Support Rating Floor: 'BB+'; unaffected
Senior unsecured debt: 'BB+'/ 'AA+(rus)'; unaffected
Senior unsecured debt of GPB Eurobond Finance PLC: 'BB+'; Unaffected
'Old-style' subordinated debt of GPB Eurobond Finance PLC: 'BB'; Unaffected
'New-style' subordinated debt of GPB Eurobond Finance PLC: downgraded to 'B+' from 'BB-'
Russian Agricultural Bank
Long-term foreign currency IDR: 'BB+'; Outlook Negative, unaffected
Long-term local currency IDR: 'BB+'; Outlook Negative, unaffected
Short-term foreign currency IDR: 'B', unaffected
Viability Rating: affirmed at 'b-'
National Long-term rating: 'AA+(rus)'; Outlook Stable, unaffected
Support Rating: '3', unaffected
Support Rating Floor: 'BB+', unaffected
Senior unsecured debt: 'BB+'/ 'AA+(rus)', unaffected
Senior unsecured debt of RSHB Capital S.A.: 'BB+'/ 'AA+(rus)', unaffected
'Old-style' subordinated debt of RSHB Capital S.A.: 'BB', unaffected
Additional information is available at www.fitchratings.com.
Applicable criteria, 'Global Financial Institutions Rating Criteria', dated 31 January 2014, are available at www.fitchratings.com.
Applicable Criteria and Related Research:
Global Financial Institutions Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=732397
Additional Disclosure
Solicitation Status
http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=979718
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