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Fitch Affirms 4 Russian State-Controlled Banks; Outlooks Stable
December 7, 2016 / 4:56 PM / a year ago

Fitch Affirms 4 Russian State-Controlled Banks; Outlooks Stable

(The following statement was released by the rating agency) MOSCOW, December 07 (Fitch) Fitch Ratings has affirmed the Long-Term Foreign and Local Currency Issuer Default Ratings (IDRs) of Sberbank of Russia (Sberbank), Vnesheconombank (VEB) and their leasing subsidiaries, Sberbank Leasing and JSC VEB-Leasing, at 'BBB-'. Fitch has also affirmed the Long-Term IDRs of Gazprombank JSC (GPB), its subsidiary Gazprombank (Switzerland) Ltd (GPBS), and Russian Agricultural Bank (RusAg) at 'BB+'. The Outlooks on the IDRs of all seven entities are Stable. A full list of the rating actions is provided at the end of this commentary. KEY RATING DRIVERS IDRS, SUPPORT RATINGS, SUPPORT RATING FLOORS (SRFs), NATIONAL RATINGS The affirmation of the Long-Term Foreign Currency IDRs and Support Rating Floors (SRFs) of Sberbank and VEB at the sovereign level of 'BBB-', and those of RusAg and GPB at 'BB+', reflects Fitch's view of a very high propensity of the Russian authorities to support the banks, in case of need, due to: (i) majority state ownership (100% of VEB and RusAg is government-owned; 50%+1 share in Sberbank is owned by the Central Bank of Russia (CBR)), or a high degree of state control and supervision by quasi-sovereign entities (GPB), most significantly by the bank's founder and shareholder PJSC Gazprom (BBB-/Stable); (ii) the exceptionally high systemic importance of Sberbank as expressed by its dominant market shares (approximately 30% of system assets and 46% of retail deposits at end-3Q16), VEB's status as a development bank, RusAg's important policy role of supporting the agricultural sector and GPB's high systemic importance for the banking sector; (iii) the track record of capital support to VEB, GPB and RusAg; and (iv) high reputational risks of a potential default for the Russian authorities/state-controlled shareholders. The affirmation of VEB's ratings also reflects Fitch's expectation that the bank will receive in the near- to medium-term sufficient and timely government support to address weaknesses in its solvency and foreign currency liquidity and enable it to service its obligations to creditors. Sberbank's IDRs are also underpinned by the bank's stand-alone credit profile, as reflected in the 'bbb-' Viability Rating (VR). The ratings of GPB and RusAg are one notch lower than those of Sberbank and VEB as the banks do not have the exceptional systemic importance of the former or the development bank status of the latter. The notching from the sovereign also reflects (i) delays in provision of significant equity support by the state to RusAg, and potential remaining capital needs of the bank; and (ii) that GPB is not directly majority-owned by the state. The affirmation of the IDRs of Sberbank-Leasing, VEB Leasing and GPBS in line with those of their parents reflects Fitch's view that they are highly-integrated core subsidiaries. DEBT RATINGS The senior unsecured debt ratings (including the debt issued by special purpose vehicles) are aligned with the respective institutions' IDRs. The ratings of 'old-style' subordinated debt issues are notched down once from the Long-Term IDRs. 'New-style' subordinated debt is rated one notch lower than the banks' VRs due to loss-absorption triggers. The 'new-style' issues have coupon/principal write-down features, which will be triggered if: (i) the bank's regulatory core Tier 1 capital adequacy ratio decreases below 2%; or (ii) the Deposit Insurance Agency (DIA) acquires a controlling stake in the bank or provides financial assistance to it as part of an approved bankruptcy prevention plan. The latter is possible if a bank breaches any of its mandatory capital ratios or is in breach of certain other liquidity and capital requirements. The ratings of debt issued by Sberbank, VEB, RusAg, GPB and their subsidiaries apply to debt issued prior to 1 August 2014. VIABILITY RATINGS (VRs) SBERBANK Sberbank's 'bbb-' VR reflects (i) the bank's exceptionally strong competitive position due to dominant market shares in the Russian banking sector, (ii) the significant share of interest-free current accounts and generally low cost and stable funding base and thus robust net interest margin and pre-impairment profitability; and (iii) moderate credit losses through the credit cycle resulting in significant earnings generation. Sberbank's NPLs equalled 4.9% of end-9M16 gross loans (2015: 5%), while an additional 4.6% were restructured impaired exposures (2015: 4.3%), but not NPLs. NPLs and restructured impaired exposures were reasonably covered at 73% by loan impairment reserves at end-3Q16. Fitch estimates that Sberbank's loan impairment charges (LICs) fell to 1.9% of gross loans in 9M16 from 2.5% in 2015 and we expect a further moderate reduction, probably to 1.5%, in 2017 due to the bottoming out of the economy (Fitch forecasts Russian GDP growth of 1.3% in 2017, after a contraction of 0.5% in 2016). LICs should be comfortably covered by Sberbank's robust pre-impairment profit (5.5% of average gross loans in 9M16, annualised), allowing the bank to post strong bottom line result of around 20% of average equity in 2017 (9M16: 21%). Sbebank's Fitch capital core (FCC) ratio improved to 11.4% at end-3Q16 (2015: 9.1%). The regulatory Tier 1 ratio was also adequate, at 8.9% at end-3Q16, which is a comfortable position even in view of increasing capital requirements (due to the gradual phasing-in of capital buffers), which mandate D-SIBs to have a ratio of 7.6% from January 2017 and 8.5% from January 2018. We believe that capital ratios will increase further due to strong profit generation and limited loan growth plans (we expect the latter to be in single-digits in 2017), although a potential increase in dividend pay-outs due to government budget requirements may somewhat constrain capital accretion. Sberbank's strong funding profile is underpinned by the bank's dominant 46% share in sector retail deposits and significant 20% share of on demand customer funding in liabilities resulting in a rlow average funding cost of about 4.7% in 3Q16 (2015: 5.8%). Reliance on wholesale funding (10% of liabilities) is reducing and Sberbank's wholesale funding repayments in 2017 are limited to USD3bn (1% of end-3Q16 total liabilities). At end-3Q16, Sberbank held a significant cushion of liquid assets (in both local and foreign currencies) and its overall liquidity buffer exceeded 20% of total liabilities. GPB The affirmation of the VR at 'bb-' reflects Fitch's expectations of stabilising asset quality and capitalisation metrics due to the exit of the Russian economy from recession, the recent restructuring of the exposure to a distressed metals and mining producer (4% of gross loans or 0.3x Basel I Tier I capital at end-9M16), improved recovery prospects with respect to other large high-risk exposures (7% of gross loans or 0.6x Tier I capital), and RUB85bn of capital injections planned by Gazprom in the near-term, which will add up to 1.8ppts to the Tier 1 ratio. NPLs increased marginally to 3% of gross loans at end-9M16 from 2% at end-2015. The increase in non-overdue impaired loans was somewhat more significant, to 23% from 20%, due to the restructuring of the metals and mining loans. In this context Fitch views the bank's loan impairment reserves of 8.4% of loans at end-9M16 as only moderate. Additional asset quality risks may stem from GPB's large exposures to poorly performing non-banking subsidiaries (0.4x Tier I capital at end-9M16). The FCC ratio was a low 2.7% at end-9M16, roughly in line with end-2015's 3%. However, additional high-quality loss-absorbing capital, comprising preferred shares owned by the Russia's Finance Ministry and DIA, made up a further 4% of risk-weighted assets at end-9M16. The upcoming capital injections could lift FCC and the regulatory core Tier I ratio (7.8% at end-October 2016) by up to 1.3ppts and the regulatory Tier I (8%) and Total capital (12.3%) ratios by up to 1.8ppts each. Earnings generation is modest, but improved to an annualised 5% of average equity in 9M16 compared with net losses equal to 15% of average equity in 2015. Liquidity remains robust as primary liquidity sources (cash and short-term bank placements) made up a sizeable 15% of liabilities at end-9M16 and unencumbered debt securities and loans repo-able with the CBR comprised a further 18%. Wholesale debt repayments in 2017 equal a small 2.4% of end-9M16 liabilities. RusAg RusAg's VR of 'b-' reflects the bank's vulnerable capitalisation due to a significant volume of unreserved problem exposures and poor internal capital generation. Positively, the VR also takes into account the bank's currently comfortable liquidity buffer. At end-1H16, RusAg's NPLs were 17.8% of gross loans, and were moderately covered by loan impairment reserves (LIRs) at 54%, with the unreserved part amounting to 80% of IFRS equity. Additionally, non-NPL watch-list loans made up a further 2.3% of total loans and further downside risks stem from the bank's restructured exposures (33% of total loans, partly overlapping with NPLs). The quality of the 20 largest groups of borrowers (30% of total loans at end-3Q16) is broadly adequate, while smaller exposures represent higher risks, especially given that many of these have subsidised interest rates and grace periods for principal repayments. The quality of retail lending is reasonable, as reflected by a NPL origination ratio (calculated as the net increase in NPLs plus write-offs and sales divided by average performing loans) of a low 1.8% (annualised) in 1H16. RusAg's FCC ratio was a low 3.6% at end-1H16; however, its Basel II and regulatory Tier 1 capital ratios of 7.4% and 9.7%, respectively, were supported by preferred share capital held by Russia's Finance Ministry and DIA, which Fitch views as good-quality loss-absorbing capital. Fitch estimates that at end-10M16 the bank's regulatory capital cushion was sufficient to increase LIR up to 13% without breaching minimum capital requirements. RusAg expects RUB15bn (equal to around 0.6% of end-10M16 regulatory RWAs) of further capital support in 2017 as part of the agricultural sector development programme (part of the state budget) but this recapitalisation is only moderate relative to the size of unreserved NPLs and other potential credit risks. RusAg has significant reliance on wholesale funding (31% of end-3Q16 liabilities, down from 39% at end-2015), of which half was in foreign currency. Given foreign sanctions, external refinancing is not possible, so the bank has been substituting this locally. Refinancing needs for 2017 are moderate, comprising mostly eurobonds and local bonds together amounting to RUB215bn (9% of liabilities). At end-3Q16, RusAg held around RUB460bn (equivalent to USD7.3bn) of liquid assets (cash, short-term bank placements and unencumbered repo-able securities), which were sufficient to repay all wholesale funding until end-2018. However, the bank plans to substitute the maturing obligations by attracting customer deposits, although the cost of this funding remains high (9% in 9M16) putting downward pressure on the bank's net interest margin (NIM; 3% in 9M16). RATING SENSITIVITIES IDRS, SRs, SRFs AND NATIONAL RATINGS Rating actions on the IDRs of all of the entities covered in this commentary will most likely follow those on Russia's sovereign ratings. Additional downside pressure on GPB's support-driven ratings could stem from a marked reduction in the stake owned by quasi-sovereign entities or if the links between the bank and the Russian authorities weaken significantly. The potential introduction of bail-in legislation, which is currently being discussed in Russia, would not necessarily result in an automatic downgrade of the SRFs of state-owned commercial banks, because we believe that, given the banks' ownership and policy roles pre-emptive support would still be available to them. However, if in our view the potential bail-in legislation materially reduces the authorities' propensity to support the state-owned commercial banks, then Fitch may downgrade the SRF of Sberbank, and the IDRs of GPB and RusAg. A significant weakening of the propensity of parent banks to provide support (not expected by Fitch at present) to subsidiary entities could result in downgrades of the subsidiaries' ratings. DEBT RATINGS The senior unsecured and 'old-style' subordinated debt ratings would likely change in tandem with the respective banks' Long-Term IDRs. Changes in the VRs would likely be matched by corresponding changes in the 'new-style' subordinated debt ratings. VRs Sberbank's VR could be downgraded if Russia is downgraded, reflecting the potential negative impact of a weaker operating environment on the bank's credit metrics, or due to a material intrinsic weakening of Sberbank's asset quality and capital, although Fitch views either of these scenarios as unlikely in the near-term. An upgrade of Sberbank's VR would require an upgrade of the sovereign rating and a notable improvement in the operating environment. GPB's and RusAg's VRs could be downgraded in case of a weakening of asset quality or capitalisation. An upgrade would require a substantial reduction in legacy problem loans or a marked improvement in capitalisation. The rating actions are as follows: Sberbank of Russia Long-Term Foreign and Local Currency IDRs: affirmed at 'BBB-'; Outlooks Stable Short-Term Foreign and Local Currency IDRs: affirmed at 'F3' National Long-Term Rating: affirmed at 'AAA(rus)'; Outlook Stable Viability Rating: affirmed at 'bbb-' Support Rating: affirmed at '2' Support Rating Floor: affirmed at 'BBB-' SB Capital S.A. Senior unsecured debt: affirmed at 'BBB-' 'Old-style and 'New-style' subordinated debt: affirmed at 'BB+' Vnesheconombank Long-Term Foreign and Local Currency IDRs: affirmed at 'BBB-'; Outlooks Stable Short-Term Foreign Currency IDR: affirmed at 'F3' National Long-Term Rating: affirmed at 'AAA(rus)'; Outlook Stable Support Rating: affirmed at '2' Support Rating Floor: affirmed at 'BBB-' Senior unsecured debt: affirmed at 'BBB-' VEB Finance PLC: Senior unsecured debt: affirmed at 'BBB-' Gazprombank JSC: Long-Term Foreign and Local Currency IDRs: affirmed 'BB+'; Outlooks Stable Short-Term Foreign Currency IDR: affirmed at 'B'; National Long-Term Rating: affirmed at 'AA+(rus)'; Outlook Stable Viability Rating: affirmed at 'bb-' Support Rating: affirmed at '3' Support Rating Floor: affirmed at 'BB+' Senior unsecured debt: affirmed at 'BB+'/ 'AA+(rus)' GPB Eurobond Finance PLC: Senior unsecured debt: affirmed at 'BB+' 'Old-style' subordinated debt: affirmed at 'BB' 'New-style' subordinated debt: affirmed at 'B+' Russian Agricultural Bank Long-Term Foreign and Local Currency IDRs: affirmed at 'BB+'; Outlooks Stable Short-Term Foreign Currency IDR: affirmed at 'B' National Long-Term Rating: affirmed at 'AA+(rus)'; Outlook Stable Viability Rating: affirmed at 'b-' Support Rating: affirmed at '3' Support Rating Floor: affirmed at 'BB+' Senior unsecured debt: affirmed at 'BB+'/ 'AA+(rus)' RSHB Capital S.A.: Senior unsecured debt: affirmed at 'BB+'/ 'AA+(rus)' Gazprombank (Switzerland) Ltd Long-Term Foreign Currency IDR: affirmed at 'BB+'; Outlook Stable Short-Term Foreign Currency IDR: affirmed at 'B' Support Rating: affirmed at '3' Senior unsecured debt: affirmed at 'BB+' Sberbank Leasing Long-Term Foreign and Local Currency IDRs: affirmed at 'BBB-'; Outlooks Stable Short-Term Foreign Currency IDR: affirmed at 'F3' National Long-term rating: affirmed at 'AAA(rus)'; Outlook Stable Support Rating: affirmed at '2' JSC VEB-Leasing Long-Term Foreign and Local Currency IDRs: affirmed at 'BBB-'; Outlooks Stable Short-Term Foreign Currency IDR: affirmed at 'F3' National Long-Term Rating: affirmed at 'AAA(rus)'; Outlook Stable Support Rating: affirmed at '2' Senior unsecured debt: affirmed at 'BBB- '/ 'AAA(rus)' Contacts: Primary Analysts Alexander Danilov (RusAg, Gazprombank) Senior Director +7 495 956 2408 Fitch Ratings CIS Ltd 26 Valovaya Street Moscow 115054 Dmitri Vasiliev (Sberbank) Director +7 495 956 5576 Fitch Ratings CIS Limited 26 Valovaya Street, Moscow 115054 Anton Lopatin (Vnesheconombank) Director +7 495 956 7096 Fitch Ratings CIS Ltd 26 Valovaya Street Moscow 115054 Aslan Tavitov (Sberbank Leasing, VEB Leasing) Director +44 20 3530 1788 30 North Colonnade London E14 5GN Roman Kornev (GPBS) Director +7 495 956 7016 Fitch Ratings CIS Limited 26 Valovaya Street, Moscow 115054 Secondary Analysts Anton Lopatin (Sberbank) Director +7 495 956 7096 Ruslan Bulatov (Vnesheconombank, Sberbank Leasing, VEB Leasing) Associate Director +7 495 956 9982 Roman Kornev (GPB) Director +7 495 956 7016 Sergey Popov, CFA (RusAg) Associate Director +7 495 956 9981 Dmitri Vasiliev (GPBS) Director +7 495 956 5576 Committee Chairperson James Watson Managing Director +7 495 956 6657 Media Relations: Elaine Bailey, London, Tel: +44 203 530 1153, Email:; Julia Belskaya von Tell, Moscow, Tel: +7 495 956 9908, Email: Additional information is available at NBFI criteria has been used for Sberbank Leasing and VEB-Leasing, whereas the Bank criteria has been used for other five bank entities. Applicable Criteria Global Bank Rating Criteria (pub. 25 Nov 2016) here Global Non-Bank Financial Institutions Rating Criteria (pub. 15 Jul 2016) here Additional Disclosures Dodd-Frank Rating Information Disclosure Form here _id=1016033 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. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEB SITE AT 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. 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