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Fitch Downgrades AK BARS to 'B'; Outlook Negative; Withdraws Ratings
June 16, 2017 / 2:47 PM / 5 months ago

Fitch Downgrades AK BARS to 'B'; Outlook Negative; Withdraws Ratings

(The following statement was released by the rating agency) LONDON, June 16 (Fitch) Fitch Ratings has resolved AK BARS Bank's (ABB) Rating Watch Negative (RWN) by downgrading the bank's Long-Term Issuer Default Ratings (IDRs) to 'B' from 'BB-'. A Negative Outlook has been assigned. Fitch has also affirmed the Viability Rating (VR) of the bank at 'ccc'. At the same time Fitch has withdrawn the bank's ratings for commercial reasons. Fitch will no long provide rating and analytical coverage of AK BARS Bank. A full list of rating actions is at the end of this commentary. The downgrade of ABB's IDRs reflects the extended weak record of support provided to the bank by its majority shareholder Republic of Tatarstan (RT, (BBB-/Stable)), which has been insufficient to materially improve the bank's credit profile, as reflected in the VR of 'ccc'. Fitch placed ABB on RWN on 16 December 2016 due to potential negative implications for its standalone credit profile and future support from the failure of Tatfondbank's (TFB), in which RT controlled a significant stake. TFB's default seems to have had limited direct impact on ABB's credit profile as, according to ABB's management, this has not caused either RT, ABB or its borrowers to incur material losses. However, regulatory oversight over banks in the region has increased following the failure of TFB and some smaller lenders. In Fitch's view, this may make it more difficult for ABB to defer recognition of losses on high-risk assets and hence material capital support may be required, while RT's own capacity to provide this is limited. The Negative Outlook on the bank's ratings reflects uncertainty over RT's ability to help clean up the bank's balance sheet and improve its solvency and therefore the risk of regulatory intervention. KEY RATING DRIVERS IDRS, SENIOR DEBT AND SUPPORT RATINGS The IDRs, Support Rating and senior debt ratings continue to reflect potential support the bank may receive from RT. This view factors in the majority ownership; the supervision over the bank and the close association of the bank with the regional authorities, through the representatives of the shareholder sitting in ABB's Board of Directors; the bank's notable systemic role in the region; and the large share of funding from the budget of RT and public sector entities (37% of the bank's liabilities at end-1Q17). RT currently controls - directly or indirectly - a more than 80% stake in the bank, including as a result of the recent share issue acquired by two RT-owned entities, PAO Tatneft (BBB-/Stable) and JSC Svyazinvestneftekhim (SINEK, BB+/Stable). However, Fitch now views the probability of support to be limited, as reflected in 'B' Long-Term IDRs of the bank. This view takes into account (i) the so far weak track record of capital support provided to the bank, as this has been either in non-cash form or did not result in genuine de-risking of the balance sheet due to the emergence of new high-risk assets, (ii) a significant volume of high-risk assets and the bank's weak core performance, which could make support costly and less politically acceptable; (iii) the limited flexibility of the budget to provide support promptly, and (iv) the indirect ownership of the bank (the direct share of the RT is only 20%). VR ABB's VR reflects the bank's weak asset quality and core profitability and limited capitalisation. It also factors in the bank's moderate liquidity position, supported by funding from entities related to RT. The amount of high-risk assets net of reserves remained significant at RUB106 billion or 2.5x of Fitch Core Capital (FCC) at end-2016, albeit reduced from RUB141 billion or 4.6x FCC at end-2015. The decrease of RUB35 billion is smaller than the total proceeds from the sale of RUB32 billion of high-risk assets to the Housing Fund under the President of RT (HFPT) and to other RT-affiliated entities and RUB19 billion of extra provisions created in 2016. This is because (i) some of the sold loans were issued in 2016, (ii) some new high-risk loans were issued; and (iii) Fitch reassessed risks on some exposures. The net amount of high-risk assets at end-2016 included: -RUB19.5 billion (0.5x FCC) of receivables from an RT-related company in the form of listed shares; -RUB5.6 billion (0.1x FCC) of investments in promissory notes of a SINEK-affiliated company; -RUB31.3 billion (0.8x FCC) of long-term construction/real estate exposures (with considerable non-completion risk) related to the bank, or the local business elite; -a RUB9.9 billion (0.2x FCC) loan to HFPT to purchase high-risk real estate from the bank; -RUB3.9 billion (0.1x FCC) of unsecured or weakly secured loans to investment companies; -RUB22 billion (0.5x FCC) of other related-party/relationship loans and/or high-risk exposures; -RUB13.5 billion (0.3x FCC) of investment property/non-core assets, mostly comprising land and commercial real estate in RT. Capitalisation remains weak in the context of these high-risk exposures. The FCC ratio was 9.4% at end-2016 and the regulatory Tier 1 ratio was 8% at end-April 2017, only moderately above the regulatory minimum level of 7.25%, including buffers. The recently registered RUB10 billion equity injection should raise capital ratios by approximately 2 ppts, but this would only moderately improve the bank's loss absorption capacity, allowing ABB to reserve about 16% of its high risk exposures without breaching minimum regulatory capital requirements. ABB's pre-impairment profit net of one-offs and revaluation results was equal to a low 0.5% of average loans in 2016, which means that the bank will not be able to strengthen its solvency through internal capital generation. After material deposit outflows in 1Q17 due to the instability caused by Tatfondbank's default, ABB's liquidity position stabilised, helped by funding support from RT and two organisations close to the budget of Tatarstan. As a result, the share of the budget of RT and of the two public sector entities in the bank's funding increased to 37% at end-1Q17 from 18% at end-2015. The bank is therefore dependent on this funding, as the liquidity buffer (of cash, net short-term interbank placements and unpledged liquid securities) net of near-term wholesale obligations was sufficient to withstand only about 20% outflow of customer funding (16% of liabilities) at end-April 2017. SUBORDINATED DEBT ABB's 'old-style' (without mandatory conversion triggers) subordinated debt is rated two notches below the bank's Long-Term IDR. This reflects Fitch's view of weak recovery prospects in case of default. RATING SENSITIVITIES Not applicable. The ratings were withdrawn after the following rating actions: AK BARS Bank Long-Term Foreign and Local Currency IDRs downgraded to 'B' from 'BB-'; off RWN; Outlook Negative Short-Term Foreign Currency IDR affirmed at 'B' Support Rating downgraded to '4'from '3'; off RWN Senior unsecured debt long-term rating downgraded to 'B' from 'BB-'; off RWN; Recovery Rating assigned at 'RR4' Viability Rating affirmed at 'ccc' AK BARS Luxembourg S.A. Senior unsecured debt long-term rating downgraded to 'B' from 'BB-'; off RWN; Recovery Rating assigned at 'RR4' Senior unsecured debt short-term rating affirmed at 'B' Subordinated debt rating downgraded to 'CCC' from 'B'; off RWN; Recovery Rating assigned at 'RR6' Contact: Primary Analyst Anna Erachina Associate Director +7 495 956 7063 Fitch Ratings CIS Limited 26 Valovaya Street, Moscow 115054 Secondary Analyst Ruslan Bulatov Associate Director +7 495 956 9982 Committee Chairperson James Watson Managing Director +7 495 956 6657 Media Relations: Julia Belskaya von Tell, Moscow, Tel: +7 495 956 9908, Email:; Peter Fitzpatrick, London, Tel: +44 20 3530 1103, Email: Additional information is available on Applicable Criteria Global Bank Rating Criteria (pub. 25 Nov 2016) here Additional Disclosures Dodd-Frank Rating Information Disclosure Form here Solicitation Status here#solicitation Endorsement Policy here ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. 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