August 1, 2014 / 11:43 AM / 3 years ago

Fitch: Support, Low Refi Risk Limit Russian Bank Sanctions Hit

(The following statement was released by the rating agency) LONDON, August 01 (Fitch) New sanctions announced this week by the European Union and the United States, combined with increased international tension, will not materially impair the credit profiles of either Russia or the banks directly affected by the sanctions in the near term, Fitch Ratings says. The banks' foreign-currency, short-term maturities are moderate and liquidity is comfortable, which reduces the possibility of a sharp increase in refinancing risk. The banks also benefit from a high probability of support from the Russian authorities, in case of need. Fitch affirmed Russia's Long-Term rating at 'BBB' with a Negative Outlook on Friday, and assumed that capital markets will remain closed to Russian entities in 2014-2015, meaning that external corporate and bank debt will need to be refinanced domestically. Paying down external FX debt, while attracting no fresh external borrowing, would exert downward pressure on the Central Bank of Russia's FX reserves. In its forecast, Fitch assumes that reserves fall from USD472bn at present to USD450bn by end-2014 and USD400bn by end-2015, with downside risks in the case of higher capital flight or intervention to support the rouble. Non-public external debt has remained flat in 1H14, showing that companies and banks have refinanced most of their maturing obligations externally. The ratings of the state-related banks, in particular Vnesheconombank (VEB, BBB/Negative) Sberbank of Russia (BBB/Negative), Russian Agricultural Bank (RusAg, BBB-/Negative) and Gazprombank (BBB-/Negative), are underpinned by Fitch's expectation of the high probability of support from the Russian authorities, in case of need. The Negative Outlooks reflect that of the Russian sovereign. In Fitch's view, Russian sovereign support for these banks is unlikely to diminish following the announcement of the sanctions, and the agency does not anticipate any change in the willingness of the banks or the authorities to ensure that outstanding debt is serviced. The US sanctions now cover RusAg, VEB, Gazprombank, VTB Bank (unrated) and Bank of Moscow (a subsidiary of VTB). The EU sanctions cover Sberbank, VTB, Gazprombank, VEB and RusAg, but not their EU subsidiaries. The scope of the US and EU measures differ (see below) and some forms of external borrowing by Russian state-owned banks are still possible. However, in Fitch's view the sanctions imposed, combined with the risk of further measures being introduced in the future, will significantly constrain the banks' access to foreign funding. Sberbank had USD35bn of foreign liabilities (equal to a modest 8% of its total non-equity funding) at end-1Q14 and RusAg USD10bn (a higher 22%) at end-1H14. Near-term maturities are moderate and liquidity is comfortable, so the sanctions are unlikely to result in a sharp increase in refinancing risks. Sberbank had USD14bn of external funding maturing between end-1Q14 and end-2014 (mostly bilateral/ECP funding, rather than eurobonds/syndications), and USD6bn in 2015, while liquid assets were USD68bn equivalent (including the parent bank's USD8.4bn of foreign correspondent accounts and short-term bank placements) at end-1H14. RusAg has no material foreign liabilities maturing in 2H14, USD0.7bn maturing in 2015, and held USD4.3bn of liquid assets (including USD0.9bn of foreign correspondent accounts and short-term bank placements) at end-1H14. For details on the external debt and refinancing requirements of VEB and Gazprombank, refer to Russian Sanctions Negative, But Ratings Unaffected For Now, published on 17 July. Based on Russian statutory accounts, Fitch calculates that state-related banks, including their domestic subsidiaries, had total external liabilities of about USD137bn at end-1Q14, equal to 64% of the USD214bn outstanding for the banking system as a whole (reduced to USD207bn at end-1H14). However, about USD20bn of state-related banks' external liabilities comprised customer accounts, presumably sourced primarily from foreign subsidiaries of Russian corporates. Some of their external liabilities are also represented by very short-term bank facilities, which are not covered by either EU or US sanctions. At end-1H14, Russian banks' balances on foreign correspondent accounts and short-term (up to three month) placements in foreign banks comprised USD70bn. Although some of this amount represents funding of subsidiaries or fiduciary deposits, in Fitch's view the sector still has sufficient liquid foreign assets to pay down maturing external debt in the near term. At end-1Q14, banks had USD86bn of external debt maturing within 24 months, although USD21bn of this was on demand, which may primarily be customer funding. However, banks are likely to need significant additional state funding to continue to increase corporate lending and help Russian companies refinance their foreign liabilities. The EU sanctions announced this week include a prohibition on EU entities purchasing new securities with a maturity exceeding 90 days issued by the sanctioned state-owned Russian banks. However, other financial services, including placing of deposits and granting of loans, are not restricted. The US sanctions prohibit US persons from transacting in, providing financing for, or otherwise dealing in new debt of longer than 90-days maturity or new equity for VTB, RusAg and Bank of Moscow. On 16 July, the United States had already introduced similar restrictions for VEB and Gazprombank. The sanctions do not currently prevent Russian banks accessing liquidity held at foreign banks. The EU and US sanctions do not refer to credit ratings directly. Fitch is still assessing the effect of the sanctions on its ability to maintain ratings on the sanctioned entities. On Wednesday, Fitch downgraded to 'BBB' from 'BBB+' the ratings of 13 foreign-owned Russian banks, bringing them into line with those of the Russian sovereign. The foreign-owned banks comprise approximately 7% of banking sector assets and have very limited foreign third party debt. The downgrades were driven by the lowering of Russia's Country Ceiling last Friday, reflecting Fitch's view that potential sanctions and deteriorating relations with the EU and US pose risks to Russia's financial integration with the rest of the world, increasing transfer and convertibility risk. Contact James Watson Managing Director Financial Institutions +7 495 956 9901 Fitch Ratings CIS Limited 26 Valovaya Street Moscow 115054 Alexander Danilov Senior Director Financial Institutions +7 495 956 2408 David Weinfurter Managing Director Financial Institutions +44 20 3530 1505 Media Relations: Elaine Bailey, London, Tel: +44 203 530 1153, Email:; Julia Belskaya von Tell, Moscow, Tel: +7 495 956 9908, Email: The above article originally appeared as a post on the Fitch Wire credit market commentary page. The original article can be accessed at All opinions expressed are those of Fitch Ratings. Applicable Criteria and Related Research: Russian Sanctions Negative, But Ratings Unaffected For Now here Russian Banks Datawatch 1H14 - PDF here ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.

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