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Fitch Downgrades National Bank TRUST to ‘CCC’, Affirms 3 Other Moscow-Based Banks at ‘B-‘

July 14, 2010 | Fitch Ratings

Fitch Ratings-London/Moscow-13 July 2010: Fitch Ratings has downgraded Moscow-based National Bank Trust’s (NBT) Long-term Issuer Default Rating to 'CCC' from 'B-'. At the same time, Fitch has affirmed Moscow-based banks: Probusinessbank (PRBB), CentroCredit Bank (CCB) and Central Commercial Bank Limited (CCBL) at Long-term IDR ‘B-’.

The rating actions resolve the Negative Watch placed on NBT’s ratings on 23 November 2009, and Positive or Evolving Watches placed on the ratings of the other three banks on 5 March 2010. The affirmations of the three banks' Long-term IDRs account for the strengthening of certain aspects of Russia's banking system infrastructure during the global financial crisis, most notably in respect of banks’ ability to access liquidity. However, these ratings still remain constrained to varying degrees by limited franchises, worsened asset quality and uncertainty as to whether most of the banks’ shareholders would be able to provide support, in case of need. A full rating breakdown is provided at the end of this comment.

The downgrade of NBT reflects considerable weaknesses in the bank’s asset quality and capitalisation, as well as depressed profitability and concerns about the sustainability of the bank’s current business model and operations. NPLs (loans overdue by more than 90 days) were reported as a moderate 8% of gross loans at end-Q110, and rolled-over loans at just 2%. However, in Fitch’s view, there is significant uncertainty in respect to borrowers’ ability to repay a majority of the bank’s largest corporate loans, and the agency estimates that corporate loans comprising at least 14% of the total portfolio could be classified as restructured based on the nature of the transactions. In addition, the agency is concerned about limited transparency in respect to some of the bank’s assets, and cannot rule out the possibility that related-party exposures may be much higher than the reported 1% of end-2009 loans. Fast lending growth (25% in May 2010), high exposure to the real estate/construction sectors (31% of loans or 133% of regulatory capital at end-Q110) and high concentrations (exposure to the top 20 borrowers represented 54% of loans or 360% of equity at end-April 2010) are also sources of high credit risk, in the agency’s view.

In this context, Fitch believes that loan impairment reserves equal to 6% of gross loans and a regulatory capital of 11.6% at end-May 2010 look inadequate. Internal capital generation is also weak, pressured by high credit and funding costs. Securities investments were sizeable (at 4x equity), although mainly in instruments eligible for refinancing with the Central Bank of Russia (CBR). On the positive side, the bank has been able to replace unsecured lending from the CBR due to rapid growth of retail deposits and repo transactions with local banks, and the bank currently has no outstanding large ticket wholesale funding. However, liquidity cushion is limited, and the funding of quite long-term corporate loans with generally shorter-term and potentially volatile retail deposits represents an underlying source of liquidity risk, in Fitch’s view.

CCB’s ratings are supported by its currently adequate capital and liquidity positions and the manageable level of impaired assets; however, the ratings are constrained by the limited franchise and high levels of market risk. CCB’s core business continues to be in securities operations. Investments increased almost twofold in Q409-H110 and comprised 57% of total assets at end-H110, with the portfolio dominated by exposure to government securities (83% percent of the total book at end-H110). The repo market is also a major source of the bank’s assets and liabilities; the potential volatility of this market is mitigated by the potential to refinance the securities book with the CBR. The loan book comprised just 10% of assets at end-H110; although loan impairment is significant, this is adequately covered by reserves. The regulatory capital ratio was a comfortable 21% at end-April 2010.

CCBL’s ratings are constrained by the bank’s narrow franchise, sizeable amounts of restructured loans, potentially significant related-party transactions, which may negatively affect the quality of capital, the concentrated funding base and potentially vulnerable liquidity. However, the ratings are supported by the stability of deposit funding to date and the currently manageable liquidity position. Reported NPLs were a low 2.8% at end-May 2010; however, rolled-over loans were a high 50% at the same date, and loan impairment reserves were 22% of the total book. The loan book is dominated by borrowers with significant leverage and weak profitability, while exposures are largely collateralised by guarantees, in some cases from related parties of the bank, Fitch understands. At end-May 2010, CCBL’s regulatory capital ratio was 37.6%, but the loss absorption cushion could still prove insufficient given the potentially high level of related-party business. Customer accounts are concentrated, with a majority of these sourced from one company; CCBL places the balance on this current account in liquid instruments, but Fitch believes that the liquidity position is potentially vulnerable.
PRBB’s ratings reflect weak asset quality, tight capital and operational risks relating to the management of subsidiary regional banks. However, the ratings also consider the stable deposit base, limited wholesale funding and some signs that asset quality has started to stabilise. NPLs reached 19.6% of gross loans at end-Q110 (end-2009: 18.6%), while another 9% were restructured and around 6.5% were sold during 2009 to companies, some of which could be related to the bank.

NPL coverage by reserves dropped to 89% at end-2009, while the current capital cushion is limited, with the regulatory ratios of both PRBB and its largest subsidiaries close to the minimum 10% level. The group’s capital position is not expected to be improved materially in medium term, as internal capital generation is weak and substantial new share issuance seems unlikely given the reluctance of senior management, which controls 58% of the bank, to relinquish control. Fitch has some concerns in relation to the level of related-party business.

Today's rating actions represent the latest part of a broader Fitch review of privately-owned Russian banks' ratings which were placed on rating watch in March 2010 (with the exception for NBT).

The rating actions are as follows:

National Bank TRUST
Long-term IDR: downgraded to ‘CCC’ from ‘B-’; removed from Rating Watch Negative
Short-term IDR: downgraded to ‘C’ from ‘B’
Individual Rating: downgraded to ‘E’ from ‘D/E’; removed from Rating Watch Negative
Support Rating affirmed at ‘5’
Support Rating Floor affirmed at ‘No Floor’

CentroCredit Bank
Long-term IDR: affirmed at 'B-'; removed from Rating Watch Positive; assigned Stable Outlook
Short-term IDR: affirmed at 'B'
Individual Rating: affirmed at 'D/E'; removed from Rating Watch Positive
Support Rating: affirmed at '5'
Support Rating Floor: affirmed at 'No Floor'
National Long-term Rating: upgraded to 'BB (rus)' from 'BB- (rus)'; removed from Rating Watch Positive; assigned Stable Outlook

Probusinessbank
Long-term foreign currency IDR: affirmed at 'B-'; removed from Rating Watch Evolving; assigned Stable Outlook
Long-term local currency IDR: affirmed at 'B-'; removed from Rating Watch Evolving; assigned Stable Outlook
Short-term IDR: affirmed at 'B'
Individual Rating: affirmed at 'D/E'; removed from Rating Watch Evolving
Support Rating: affirmed at '5'
Support Rating Floor: affirmed at 'No Floor'
National Long-term Rating: affirmed at 'BB- (rus)'; removed from Rating Watch Evolving; assigned Stable Outlook

Central Commercial Bank Limited
Long-term IDR: affirmed at 'B-'; removed from Rating Watch Evolving; assigned Stable Outlook
Short-term IDR: affirmed at 'B'
Individual Rating: affirmed at 'D/E'; removed from Rating Watch Evolving
Support Rating: affirmed at '5'
Support Rating Floor: affirmed at 'No Floor'
National Long-term Rating: affirmed at 'BB- (rus)'; removed from Rating Watch Evolving; assigned Stable Outlook

Company: Bank Trust

Full company nameBank "Trust"
Country of riskRussia
Country of registrationRussia
IndustryBanks

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