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Fitch Affirms Alfa-bank at 'BB+'; Outlook Stable
December 4, 2017 / 3:04 PM / 11 days ago

Fitch Affirms Alfa-bank at 'BB+'; Outlook Stable

(The following statement was released by the rating agency) MOSCOW/LONDON, December 04 (Fitch) Fitch Ratings has affirmed Alfa-Bank's (Alfa) Long-Term Issuer Default Rating (IDR) at 'BB+' and its Cyprus-based holding company ABH Financial Limited (ABHFL) at 'BB' with Stable Outlooks. A full list of rating actions is at the end of this commentary. KEY RATING DRIVERS Alfa The affirmation of Alfa's Viability Rating (VR) and IDR, which are the highest among Russian privately-owned banks, reflect its well-developed franchise and access to top tier borrowers/depositors, sound management, improved asset quality, moderate profitability, ample liquidity, adequate core capitalisation and good track record of managing through the cycle. The ratings also take into account risks relating to the Russian operating environment, significant cyclicality in the bank's performance and moderate regulatory capitalisation. Alfa's asset quality improved in 2016-1H17 with the ratio of non-performing loans (NPLs; more than 90 days overdue) decreasing to 2.9% at end-1H17 from 7.2% at end-1H17, as a result of recoveries, collateral foreclosures and write-offs. NPLs were fully provisioned, while restructured loans were negligible. Total net corporate loans viewed by Fitch as of potentially higher risk were USD1.2 billion at end-1H17 (22% of Fitch Core Capital; FCC), while risks are moderately mitigated by completed real estate objects pledged against these exposures with reasonable loan-to-value ratios. Retail loans performance also improved, reflected in the NPL origination ratio (calculated as the increase in NPLs plus write-offs to average performing loans, annualised) decreasing to 4% in 1H17 from 7% in 2016 and 9% in 2015, well below the Fitch-calculated break-even level of about 14%. Profitability also recovered with a ratio of total comprehensive income to average equity (annualised) of 20% in 1H17, up from 14% in 2016 and zero in 2015 due to net interest margin improvement by about 50bp and a reduction in loan impairment charges due to foreclosures and NPL recoveries. Impairment charges fell to 1.4% of average loans in 2016 from 3.2% in 2015, and in 1H17 annualised provision recoveries were equal to 0.5% of average loans. Capitalisation is adequate. The consolidated FCC ratio, calculated at the ABHFL level, was 15.7% at end-1H17, slightly down from 16.7% at end-2015 (15.9% at end-2016). However, this and the bank's reported Basel I Tier 1 capital ratio (15.8%) benefit significantly from the Basel-I-based risk-weighted asset calculation, which does not include charges for market risk and operational risk. Adjusting for these, Fitch calculates that core capital ratios would have been approximately 13%. Regulatory capitalisation at the bank level is significantly tighter, with a core Tier 1 ratio of 7.7% (required minimum including buffers is 6.1%) at end-10M17. The Tier 1 ratio was a higher at 8.9% (7.6%) due to the USD700 million AT1 perpetual bonds placed in 2016, and the total capital ratio 11% (9.6%). Liquidity is ample. Liquid assets (cash and equivalents, net of short-term interbank placements and bonds eligible for repo funding from the Central Bank of Russia), covered customer accounts by 47% at end-9M17. Wholesale funding maturing in the next 12 months at the same date was about USD2 billion, equal to a moderate 17% of the liquidity cushion. Given Alfa's broad franchise, in Fitch's view there is a moderate probability of support from the Russian authorities, as reflected in the '4' Support Rating and 'B' Support Rating Floor. 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 past asset sales. However, Fitch does not formally factor shareholder support into the ratings given the limited visibility of the shareholders' current financial position and Alfa's significant size. ABHFL The affirmation of ABHFL's ratings reflects 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, was 156% at end-1H17. However, if all related party funding was converted into equity, the double leverage ratio would fall to around 127%, or even lower if some equity investments were restated at fair value. DEBT RATINGS ABHFL and Alfa's unsecured debt is rated in line with their Long-Term IDRs. Alfa's 'BB' subordinated debt rating is notched down once from the bank's VR, which incorporates zero notches for incremental non-performance risk and a notch for higher loss severity. Alfa's AT1 perpetual notes are rated 'B', four notches lower than the bank's VR. The notching comprises two notches for higher loss severity relative to senior unsecured creditors and a further two notches for non-performance risk, as Alfa has an option to cancel at its discretion the coupon payments. The latter is more likely if the capital ratios fall in the capital buffer zone, although this risk is somewhat mitigated by Alfa's stable financial profile. RATING SENSITIVITIES Alfa's ratings could be upgraded in case of a further improvement in the Russian operating environment and consistently robust bank financial metrics in terms of asset quality, performance and capitalisation. An upgrade of the sovereign rating (BBB-/Positive) would be a pre-requisite for an upgrade of Alfa, as Fitch is likely to maintain at least a notch difference between the ratings of the sovereign and the bank. However, a sovereign upgrade would not automatically result in an upgrade of Alfa, given the still challenging operating environment. Alfa's ratings could be downgraded in case of a significant deterioration of asset quality and erosion of capital without the latter being replenished by shareholders. A downgrade of the sovereign (not currently expected given the Positive Outlook on the rating) would also likely lead to a downgrade of the bank. Debt ratings are sensitive to changes in Alfa's and ABHFL's issuer ratings. The rating actions are as follows: Alfa-Bank Long-Term Foreign-Currency IDR: affirmed at 'BB+'; Outlook Stable Long-Term Local-Currency IDR: affirmed at 'BB+'; Outlook Stable Short-Term Foreign-Currency IDR: affirmed at 'B' Viability Rating: affirmed at 'bb+' Support Rating: affirmed at '4' Support Rating Floor: affirmed at 'B Senior unsecured debt: affirmed at 'BB+' Subordinated debt: affirmed at 'BB' Senior unsecured debt of Alfa Bond Issuance Public Limited Company: affirmed at 'BB+' Subordinated debt of Alfa Bond Issuance Public Limited Company: affirmed at 'BB' Perpetual subordinated debt of Alfa Bond Issuance Public Limited Company: affirmed at 'B' ABH Financial Limited Long-Term Foreign-Currency IDR: affirmed at 'BB'; Outlook Stable Short-Term Foreign-Currency IDR: affirmed at 'B' Senior unsecured debt of Alfa Holding Issuance plc: affirmed at 'BB'/'BB (emr)' Contact: Primary Analyst Anton Lopatin Director +7 495 956 9901 Fitch Ratings Moscow Valovaya Str, 26 Moscow Secondary Analyst Dmitry Vasiliev Director +7 495 956 9901 Committee Chairperson James Watson Managing Director +7 495 956 6657 Media Relations: Julia Belskaya von Tell, Moscow, Tel: +7 495 956 9908, Email: julia.belskayavontell@fitchratings.com; Peter Fitzpatrick, London, Tel: +44 20 3530 1103, Email: peter.fitzpatrick@fitchratings.com. 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