October 10, 2017 / 4:31 PM / a year ago

Fitch Revises Absolut's Outlook to Stable; Affirms at 'B+'

(The following statement was released by the rating agency) MOSCOW, October 10 (Fitch) Fitch Ratings has revised Absolut Bank's (Absolut) Outlooks to Stable from Negative. The bank's Long-Term Issuer Default Ratings (IDRs) have been affirmed at 'B+'. A full list of rating actions is at the end of this rating action commentary. The revision of the Outlooks on Absolut's IDRs to Stable reflects anticipated moderation of the currently high credit risks and hence reduced pressure on the bank's capital position, once the planned recovery and transfer of some assets considered risky by Fitch to the bank's shareholder, Non-State Pension Fund Blagosostoyanie (NPFB), ultimately controlled by JSC Russian Railways (BBB-/Positive), is completed. NPFB has a track record of providing liquidity and capital support to the bank. Absolut's credit profile, however, remains undermined by (i) the persistently high amount of potentially risky assets and non-core exposures (partly related to consolidation of rescued Baltinvestbank), and (ii) sluggish pre-impairment performance, which offers limited protection against additional credit losses. As a result, the solvency is likely to remain reliant on buy-out of risky assets and capital injections by the bank's shareholder. KEY RATING DRIVERS IDRS AND VR Absolut's non-performing loans (NPLs) were a high 10% at end-1H17, up from 9% at end-2016. Restructured loans made up a further 13% at end-1H17, although Fitch reviewed the bulk of these and assesses most of them as of moderate risk. However, in the agency's view, Absolut's asset quality is additionally undermined by significant exposures to the construction/real estate sector and other potentially risky assets, which include (net of reserves): -RUB27 billion (84% of adjusted end-1H17 Fitch core capital (FCC), see below) of construction/real estate exposure including high-risk loans (33%), investment property (28%) and bonds of construction/real estate companies (23%; of somewhat lower credit risk); -RUB12 billion (36%) of other high-risk loans, mostly including unreserved NPLs but also some higher-risk restructured loans; -RUB7 billion (20%) of unrated or non-traded securities; and -RUB8 billion (24%) of credit exposures to some Russian private banks and their related companies, which, in Fitch's view, could be fiduciary in nature. According to Absolut's and NPFB's management, of these potentially risky assets, those worth around 0.3x of FCC will be transferred onto NPFB's balance sheet by end-2017 and a further 0.5x of FCC by end-2018. Additionally the bank plans to achieve some moderate recoveries from the remaining amount of risky assets (0.9x of FCC) in the medium-term, as some are partially mitigated by hard collateral, although they could still be a source of impairment. Absolut's modest pre-impairment profit would be enough to reserve only 9% of the residual amount of potentially risky assets, providing only a limited safety cushion. Performance is weakened by thin margins (the net interest margin stood at a low 3.4% in 1H17) and low cost efficiency (cost/income ratio of 74%, dragged down by Baltinvestbank). At end-1H17, Absolut's FCC was 10%, but would have been 12% after adjusting for a RUB5 billion equity injection from the shareholder in September 2017. The regulatory capital ratios at end-8M17, adjusted for the injection, would have been 10% Tier 1 and 14% Total, allowing Absolut to absorb RUB9 billion of additional losses (equal to 32% of the residual risky exposures post transfer to NPFB) without breaching minimum capital requirements, but excluding an additional 1.25% capital conservation buffer. NPFB contributed RUB13 billion of equity in 2015-9M17, and Fitch believes further support may be needed to bolster solvency. Absolut's liquidity is rather tight, in Fitch's view, although NPFB's senior management confirmed their commitment to support the bank's liquidity in case of need. At end-1H17, the bank's highly liquid assets, net of the planned RUB9 billion repayment of Deposit Insurance Agency's deposit maturing in December 2017 and RUB5 billion of short-term interbank funding, were equal to 12% of customer deposits. Wholesale funding repayments in 2018-2019 are limited. NPFB could provide additional liquidity on top of the RUB8 billion already deposited/placed in the bank. SUPPORT RATING AND SUPPORT RATING FLOOR The '5' Support Rating (SR) reflects Fitch's view that support from the bank's shareholder, although possible, cannot be reliably assessed, due to Fitch not rating NPFB. Fitch understands that according to Russian legislation on non-government pension funds, NPFB should transform into a joint stock company by end-2018 and that Russian Railways therefore may become its majority owner. Fitch will assess the implication of this for support to Absolut in due course upon more clarity on NPFB's ownership structure post transformation and the owner's strategy for the fund and the bank. The Support Rating and Support Rating Floor (SRF) of 'No Floor' also reflect that support from the Russian authorities cannot be relied upon due to the bank's small size and lack of overall systemic importance. Accordingly, the IDRs are based on the bank's intrinsic financial strength, as reflected in the bank's Viability Rating (VR). SENIOR UNSECURED DEBT RATING Absolut's senior unsecured debt rating is in line with the bank's Long-Term IDR, which reflects Fitch's view of average recovery prospects, in case of default. SUBORDINATED DEBT RATING Absolut's 'new-style' Tier 2 subordinated debt rating of 'B' remains one notch below the bank's VR. The notching includes (i) zero notches for additional non-performance risk relative to the VR, as Fitch believes this instrument would only absorb losses once the bank reaches, or is very close to, the point of non-viability; (ii) one notch for loss severity, reflecting below-average recoveries in case of default. RATING SENSITIVITIES IDRS, VR AND SUPPORT RATINGS Downside pressure could stem from potential asset quality deterioration if this results in erosion of profitability and capital, absent of capital support from NPFB. Also delays to or abolition of plans to transfer the risky assets to NPFB may also trigger a negative rating action. Fitch believes the potential consolidation of Absolut by Russian Railways could be positive for the bank's ratings, depending on the company's strategy for NPFB and the bank. Otherwise any upside for Absolut's ratings is limited given significant asset quality risks, but successful work-outs of problem exposures and a stronger capital buffer would be credit-positive. SENIOR UNSECURED DEBT AND SUBORDINATED DEBT Absolut's senior unsecured and subordinated debt ratings are sensitive, respectively, to changes in the bank's Long-Term IDR and VR. The rating actions are as follows: Long-Term Foreign and Local Currency IDRs: affirmed at 'B+'; Outlooks revised to Stable from Negative Short-Term Foreign Currency IDR: affirmed at 'B' Viability Rating: affirmed at 'b+' Support Rating: affirmed at '5' Support Rating Floor: affirmed at 'No Floor' Senior unsecured debt: affirmed at 'B+'/Recovery Rating 'RR4' Subordinated debt: affirmed at 'B'/Recovery Rating 'RR5' In accordance with Fitch's policies Absolut Bank appealed and provided additional information to Fitch that resulted in a rating action which is different to the original rating committee outcome. Contact: Primary Analyst Dmitry Vasiliev Director +7 495 956 5576 Fitch Ratings CIS Limited 26 Valovaya Street Moscow 115054 Secondary Analyst Artem Beketov Analyst +7 495 956 9932 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. Additional information is available on www.fitchratings.com Applicable Criteria Global Bank Rating Criteria (pub. 25 Nov 2016) here Additional Disclosures Dodd-Frank Rating Information Disclosure Form here Solicitation Status here Endorsement Policy here ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. 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