Fitch Revises Uralsib Bank's Outlook to Stable; Affirms IDR at 'B'
20 Dec 2016 12:25 PM
Fitch Ratings-Moscow-20 December 2016: Fitch Ratings has revised Russia-based Uralsib Bank's (UB) Outlook to Stable from Negative at 'B', while affirming the Long-Term Issuer Default Rating (IDR) at 'B'.
A complete list of rating actions is at the end of this commentary.
The revision of the Outlook reflects stabilisation of UB's core capital metrics at reasonable levels, the bank's improved core performance, as well as a strong liquidity and funding profile. It also reflects Fitch's expectations that any further impairment provisioning would likely be gradual and could at least be partly financed by pre-impairment profits.
UB's Long-Term IDR of 'B' is driven the standalone credit profile of the bank, as captured in its Viability Rating (VR) of 'b'. It reflects the weak asset quality of UB, the potentially still high provisioning needs of its large problem loans, related-party exposures and investment properties, and its current non-compliance with minimum capital ratios and some other regulatory requirements.
The ratings also take into account the risks stemming from UB's planned merger with a related-party bank, BFA Bank and potentially significant support it may provide to a related-party insurance company, SG Uralsib (SGU).
KEY RATING DRIVERS - IDRS AND VIABILITY RATING (VR)
UB's loan quality has continued to weaken since the bank's rescue in 2H15. As a result of loan book seasoning and continued problem loan recognition, non-performing loans increased to 19% of the portfolio at end-1H16 from 14% at end-1H15 and restructured loans to 10% from 4%. Although Fitch believes most of UB's large high-risk loans are captured in these impaired categories, reserves are yet to stabilise as coverage has weakened to 55% of total impaired loans from 75%.
Fitch also expects the merger with BFA to result in some additional asset-quality risks given BFA's light reserve coverage of its own problem loans. However, in light of BFA's small relative size (13% of combined gross loans), Fitch estimates that net impaired loans following the merger could increase only moderately to 0.6x Fitch Core Capital (FCC) from 0.4x at end-1H16.
Fitch's view of UB's weak asset quality also takes into account sizeable related-party exposures and investment property risks. Related parties comprised 0.4x FCC at end-1H16 (of which 0.2x FCC was to the previous shareholder's companies) and real estate assets made up a further 0.3x FCC. As a result of the merger, related-party exposures would likely fall to 0.2x FCC, due to the removal of intragroup loans, while investment properties, which Fitch considers overvalued, are unlikely to change relative to core capital.
UB's FCC ratio improved to 16% at end-3Q16 from 14% at end-2015, due to deleveraging and equity gains, which were partly driven by the sale of SGU to a related party during the period. UB provided an additional RUB3bn of new equity to SGU in 2Q16 (equal to 5% of UB's FCC) and plans to provide additional capital support that may be significantly larger in volume.
UB remains in breach of the minimum capital ratios as well as some other regulatory norms, since it entered into a financial rehabilitation regime imposed by the Deposit Insurance Agency (DIA) in 2015. UB's regulatory Tier 1 and Total ratios of 5.3% and 7.8%, respectively, at end-3Q16 are significantly lower than Basel and FCC ratios because local accounts do not recognise the large equity gains booked under IFRS on the low-cost funding from the DIA.
Fitch does not expect UB to improve the ratios to the regulatory minimum levels (in 2017: Tier 1 7.6%, total 9.6%) in the near term, although internal capital generation should be stronger in local accounts (under IFRS, the fair value gains on the DIA funding will be gradually accrued back through the income statement as interest expense). Under the terms of the financial rehabilitation regime, UB does not need to meet minimum regulatory capital requirements.
Fitch does not expect capital ratios to change significantly as a result of the merger with BFA. However, the bank's ambitious expansion plans, if implemented, could put pressure on capital ratios, notwithstanding improved internal capital generation.
A reduction in deposit costs, together with elimination of some interest expenses as a result of subordinated debt write-downs in 2015, improved UB's net interest margin to 4% in 9M16 from 3% in 2015. This, combined with a reduction in operating expenses, helped the bank to turn around its previously loss-making core performance as pre-impairment profit strengthened to 6% of average loans in 9M16. Adjusting for interest accrued but not received in cash and fair-value gains, pre-impairment profit was a still reasonable 2% of loans.
Nevertheless, Fitch expects high impairment charges to continue to put pressure on UB's net income as the bank gradually provides for its problem exposures. Loan impairment charges comprised a high 69% of pre-impairment profit in 9M16, resulting in a modest ROAE of 6%.
Fitch's assessment of UB's liquidity and funding profile takes into account the bank's large unencumbered liquid assets, equal to 42% of liabilities at end-3Q16, a highly granular deposit base which the bank has been able to largely restore after some outflows in 2015, and the agency's expectations that UB will maintain only moderate repo funding in the long term.
KEY RATING DRIVERS - SUPPORT RATING (SR) AND SUPPORT RATINGS FLOOR (SRF)
UB's SR of '5' and SRF of 'No Floor' reflect Fitch's view that extraordinary support from state authorities cannot be fully relied upon in the future. Fitch recognises that financial assistance the bank received in 2015 helped avert losses for its senior unsecured creditors. However, the agency does not believe that such support can be relied upon again, if needed, given the large amount of support already provided, UB's small market shares, and the exhaustion of possibilities to bail in junior obligations to restore the bank's solvency.
UB's Long-Term IDR and its VR could be downgraded if asset quality sharply weakens, capitalisation deteriorates or if the merger with BFA results in considerably greater deterioration in UB's financial profile than currently expected by Fitch.
Improved reserve coverage of problem exposures, continued solid performance and FCC/Basel capital ratios and a strengthening of regulatory capitalisation could put upward pressure on the ratings.
The rating actions are as follows:
Long term Issuer Default Rating (IDR): affirmed at 'B'; Outlook revised to Stable from Negative
Short term IDR: affirmed at 'B'
Viability Rating: affirmed at 'b'
Support Rating: affirmed at '5'
Support Rating Floor: affirmed at 'No Floor'
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