Fitch Affirms 6 Foreign-Owned Russian Banks; Revises Outlook on RBRU to Stable


27 Jan 2017 10:12 AM


Fitch Ratings-Moscow/London-27 January 2017: Fitch Ratings has affirmed the Long-Term Foreign Currency Issuer Default Ratings (IDRs) of AO Raiffeisenbank (RBRU), AO UniCredit Bank (UCB), AO Citibank (CITI), Rosbank (RB), Rusfinance Bank (RFB) and DeltaCredit Bank (DCB) at 'BBB-'. The Outlook on RBRU has been revised to Stable from Negative, and the Outlooks on the other five banks are Stable.

Fitch has affirmed the National Ratings of all six banks at 'AAA(rus)'/Stable and simultaneously withdrawn them. The National Ratings are being withdrawn because Fitch has withdrawn its Russian National-scale ratings in response to a new regulatory framework for credit rating agencies in Russia (see 'Fitch Ratings Withdraws National Scale Ratings in the Russian Federation' dated 23 December 2016 at www.fitchratings.com).

A full list of rating actions is at the end of this commentary.

KEY RATING DRIVERS
IDRS, SUPPORT RATINGS AND SENIOR DEBT
The banks' IDRs, Support Ratings and, where assigned, debt ratings are underpinned by the potential support they may receive from their foreign shareholders. RBRU is a 100%-subsidiary of Raiffeisen Bank International AG, UCB is 100%-owned by UniCredit S.p.A. (UC; BBB+/Negative/bbb+) and CITI is fully owned by Citigroup Inc. (A/Stable/a). RB and its retail subsidiaries DCB and RFB are ultimately owned by Societe Generale (SG; A/Stable/a; SG holds a 99.4% stake in RB, which in turn owns 100% of DCB and RFB).

The banks' IDRs (except for RBRU) and, where assigned, senior debt ratings, are constrained by the Russian Country Ceiling of 'BBB-'. Russia's Country Ceiling captures transfer and convertibility risks and limits the extent to which support from the foreign shareholders of these banks can be factored into their Long-Term Foreign Currency IDRs. The banks' Long-Term Local Currency IDRs, where assigned, also take into account Russian country risks.

RBRU's 'BBB-' Long-Term IDRs and senior debt ratings are driven by the bank's intrinsic strength. The revision of the Outlook reflects stabilisation in the bank's credit metrics as captured by its 'bbb-' Viability Rating (VR).

The affirmation of the banks' support-driven ratings reflects Fitch's view that their parents will continue to have a strong propensity to support given (i) the continued strategic importance of the Russian market for the parent institutions; (ii) the high level of operational and management integration between the banks and their parents; (iii) majority ownership; (iv) reputational risks in case of subsidiary defaults; and (v) the subsidiaries' generally small size relative to their parents, limiting the cost of potential support.

VRs
The affirmation of the banks' VRs considers the recent stabilisation of Russia's operating environment and decreasing pressures on the banks' asset quality and performance. The banks' 'bbb-' (RBRU, UCB, CITI) and 'bb+' (RB, RFB, DCB) VRs remain amongst the highest among Russian banks and reflect their stronger standalone creditworthiness compared with most peers. This is supported by their lower risk appetite through the cycle and exposure to better quality domestic corporates and/or lower-risk retail client niches and products, resulting in more resilient financial metrics (albeit with some performance pressures at RB and DCB, due to limited operating efficiency at the former and legacy problem loans at the latter). All banks' VRs also consider the banks' solid loss-absorption capacity, stable funding franchises and large liquidity cushions (RBRU, UCB, CITI, RB) or manageable refinancing risks (RFB, DCB).

RBRU, UCB, CITI, RB
At end-3Q16, non-performing loans (NPLs, loans more than 90 days overdue) remained below sector average levels and the peaks of previous cycles, despite increased volatility in borrowers' performance in 2014-2015 (NPL ratios: RBRU 5.9%; UCB 6.8%; CITI 0.3%; RB 10.2%). Reserve coverage of existing NPLs has been strong across the board (83%-100% range).

NPL origination (defined as the net increase in NPLs plus write-offs divided by average performing loans) decreased markedly in 9M16 (to the 0%-1.4% range from 1%-4% in 2015 for these banks), led by the core corporate segment (65%-82% of loans), where borrowers include leading domestic corporates with decent cash generation capacity and multinational clients. Risks in the unsecured retail segment (RBRU: 21% of loans; UCB: 6%; CITI: 31%; RB: 20%) remain high, but are reducing as the economy recovers and the banks tightened underwriting standards in 2014. Vintage analysis shows stable performance of retail loans issued from 2015.

We expect asset quality to stabilise over the next 12 months on the back of a gradually recovering economy and the banks' continued moderate risk appetite. At the same time, certain borrower and industry concentrations (such as sizeable, albeit falling, real estate exposure at RBRU), the high share of FX lending (although largely transacted with hedged borrowers) and large share of unsecured lending remain sources of potential credit risk.

Pre-impairment performance has been resilient in 2015-9M16 (with the exception of RB) and generally solid (estimated at 8.2% of average performing loans for RBRU, 4.6% for UCB, and 9.8% for CITI, based on annualised 9M16 results). This is underpinned by adequate funding cost controls thanks to stable client franchises, solid fee generation (RBRU, CITI), stronger FX trading gains (RBRU) and good operational efficiency. Loan impairment charges moderated in 9M16 to 18% of pre-impairment profit at RBRU and 15% at CITI but remained high at 44% at UCB, constraining operating returns. We expect these banks to remain profitable in 2017, while performance metrics will be highly sensitive to asset quality trends.

RB's 'bb+' VR captures, in particular, sluggish albeit improving performance. Fitch expects the bank to marginally exceed breakeven in 2016, mainly due to lower loan impairment in unsecured retail lending. Still limited operating efficiency and a high proportion of low-risk and low-yielding assets on the balance sheet will also remain a drag on RB's performance in the near term, in Fitch's view.

Capital levels are solid in light of the low unreserved NPLs and conservative development plans with single-digit growth targets. End-3Q16 FCC ratios were 19.7% at RBRU, 16.1% at UCB and 14.6% at RB, and CITI's regulatory capital ratio was 13.6%. Regulatory Tier 1 capital ratios are tighter (RBRU: 10.6%: UCB: 11.7%; CITI: 11.8%; RB: 9.3%) but managed with a comfortable cushion above the increasing minimum capital requirements applied to domestic systemically important banks (7.6% Tier 1 ratio including capital buffers in 2017, rising gradually to 9.5% by 2019).
Refinancing risks remain limited due to the banks' stable deposit funding (end-3Q16: RBRU 88% of liabilities; UCB 83%; CITI 94%; RB 67%), limited reliance on wholesale funding (higher at RB due to capital market borrowings by consolidated subsidiaries - RFB, DCB) and sizeable liquidity buffers. However, the latter is undermined by high deposit concentrations at UCB. Parent bank funding is low.

RFB
The NPL origination ratio decreased to 1.5% in 9M16 (annualised) from 4.4% in 2015 driven by the tighter underwriting standards and a broader stabilisation in the economic environment with a recovering Russian retail loan market. NPL origination is comfortably within the loss-absorption cushion afforded by pre-impairment profit (estimated at 5% of average performing loans based on 9M16 annualised results), while the capital buffer (end-1H16 FCC ratio of 26%) is also available to absorb credit losses. Internal capital generation remains constrained by high loan impairment charges (51% of pre-impairment profit in 9M16) and still high funding costs, which Fitch expects to gradually fall in the next few years.

RFB is largely funded by wholesale debt raised on domestic capital market (64% of end-1H16 liabilities), and the bank's access to this funding source has been stable so far. RFB's refinancing needs for 2017 are equal to RUB17bn (25% of end-3Q16 liabilities), which should also be viewed in the context of contingent liquidity support available from the parent bank.

DCB
At end-3Q16, NPLs were a moderate 4% of gross loans with adequate 43%-coverage by specific reserves. In addition, 5% of gross loans, or 0.5x of FCC were loans (originally disbursed in US dollars and converted into Russian roubles following the sharp rouble devaluation) with weak collateral coverage as loan-to-value ratios were above 100% (the average loan-to-value ratio for DCB's mortgage book is 45%). These risks are mitigated by the so far adequate performance of this portfolio with a low share of overdue exposures.

DCB's FC mortgage book accounted for a moderate 9% of the total portfolio at end-3Q16, down from 25% at end-2014, as the bank has converted US dollar mortgages into roubles and also provided some debt relief to borrowers through haircuts on loan principal and lower interest rates. As a result of this restructuring and also accounting for potential additional provisioning requirements on this portfolio, the bank recognised a loss of RUB2.5bn in 9M16 (16% of end-2015 equity). We expect DCB to return to profitability in 2017, as credit risks have subsided following the conversion, and growth expectations are moderate. The bank's profitability metrics will remain pressured by high funding costs and competition from state banks.

Loss-absorption capacity remains adequate, underpinned by the additional subordinated debt (equivalent of RUB2.3bn at end-3Q16) received from RB in early 2016: at end-3Q16, DCB had a FCC ratio of 20.8% and regulatory total capital adequacy ratio of 11.3%, the latter driven by higher risk weightings.

Wholesale debt accounted for 63% of DCB's end-3Q16 liabilities, while near-term refinancing needs were a moderate RUB10bn (7% of the total). This should be manageable, in Fitch's view, given DCB's adequate liquidity cushion (RUB19bn, or 12% of total assets at end-11M16) and contingent access to liquidity support from the parent bank.

RATING SENSITIVITIES
IDRS AND SUPPORT RATINGS
The banks' IDRs and senior debt ratings would be downgraded in case of a downgrade of Russia's sovereign ratings, and upgraded (with the exception of RBRU) in case of a sovereign upgrade.

A significant weakening of the ability and/or propensity of the parent banks to provide support (not expected by Fitch at present) could result in downgrades of subsidiaries' Support Ratings. However, this would not impact the IDRs of RBRU, UCB or CITI, which are underpinned at their current level by their VRs.

VRs
Rating upside for the VRs of RBRU, UCB and CITI is limited as they are already at the same level as the sovereign. For RB, an upgrade of the VR would require a significant improvement in performance and an extended track record of stable asset quality in unsecured retail lending. Upside potential for RFB and DCB is constrained by the banks' niche franchises as retail lenders and limited deposit collection capacity.

The VRs could be downgraded if the weaker operating environment translates into marked deterioration in the banks' asset quality and capital metrics, or if prospects for Russia's economy and macroeconomic stability deteriorate significantly. The VRs of RBRU, UCB and CITI would also likely be downgraded in the event of a sovereign downgrade.

The rating actions are as follows:

AO Raiffeisenbank
Long-Term Foreign and Local Currency IDRs: affirmed at 'BBB-'; Outlooks revised to Stable from Negative
Short-Term Foreign Currency IDR: affirmed at 'F3'
National Long-Term Rating: affirmed at 'AAA(rus)'/Stable and withdrawn
Viability Rating: affirmed at 'bbb-'
Support Rating: affirmed at '2'
Senior unsecured debt: affirmed at 'BBB-(EXP)'; affirmed at 'AAA(EXP)(rus)' and withdrawn
Senior unsecured debt: affirmed at 'BBB-'; affirmed at 'AAA(rus)' and withdrawn

AO UniCredit Bank
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)'/Stable and withdrawn
Support Rating: affirmed at '2'
Viability Rating: affirmed at 'bbb-'

AO Citibank
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)'/Stable and withdrawn
Viability Rating: affirmed at 'bbb-'
Support Rating: affirmed at '2'

Rosbank
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)'/Stable and withdrawn
Viability Rating: affirmed at 'bb+'
Support Rating: affirmed at '2'
Senior unsecured market linked securities: affirmed at 'BBB-(emr)'
Senior unsecured debt: affirmed at 'BBB-'; affirmed at 'AAA(rus)' and withdrawn
Senior unsecured debt: affirmed at 'F3'

Rusfinance Bank
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)'/Stable and withdrawn
Viability Rating: affirmed at 'bb+'
Support Rating: affirmed at '2'
Senior unsecured debt: affirmed at 'BBB-'; affirmed at 'AAA(rus)' and withdrawn

DeltaCredit Bank
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)'/Stable and withdrawn
Viability Rating: affirmed at 'bb+'
Support Rating: affirmed at '2'
Senior unsecured debt: affirmed at 'BBB-'; affirmed at 'AAA(rus)' and withdrawn

Contact:
Primary Analysts
Olga Ignatieva (RBRU, UCB, CITI)
Senior Director
+7 495 956 69 06
Fitch Ratings Moscow
Valovaya Str, 26
Moscow

Dmitri Vasiliev (RB, RFB, DCB)
Director
+7 495 956 55 76
Fitch Ratings Moscow
Valovaya Str, 26
Moscow

Secondary Analysts
Sergey Popov (CITI)
Associate Director
+7 495 956 99 81

Alyona Plakhova (RB, RFB, DCB)
Associate Director
+7 495 956 24 09

Maria Kuraeva (RBRU, UCB)
Associate Director
+7 495 956 55 75

Committee Chairperson
James Watson
Managing Director
+7 495 956 66 57

Media Relations: Elaine Bailey, London, Tel: +44 203 530 1153, Email: elaine.bailey@fitchratings.com; Julia Belskaya von Tell, Moscow, Tel: +7 495 956 9908, Email: julia.belskayavontell@fitchratings.com.

Additional information is available at www.fitchratings.com.

Applicable Criteria
Global Bank Rating Criteria (pub. 25 Nov 2016)

Additional Disclosures
Dodd-Frank Rating Information Disclosure Form
Solicitation Status
Endorsement Policy


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