April 24, 2014 |
|Fitch Ratings has assigned Russian bank JSC CB Kedr (Kedr) Long-term Issuer Default Ratings (IDRs) of 'B'. The Outlook is Negative. A full list of rating actions is at the end of this rating action commentary.|
KEY RATING DRIVERS - IDRs, VIABILITY RATING (VR) AND NATIONAL RATING
Kedr's IDRs are based on its VR of 'b', which reflects the bank's small franchise, weaknesses in asset quality, moderate capitalisation and poor profitability. The ratings also take into account the bank's highly granular customer deposit base and limited wholesale debt.
The Negative Outlook reflects potential risks related to Kedr's former exposure to a bank, whose license was withdrawn by the Central Bank of Russia in March 2014. Kedr had a total exposure of 0.4x end-9M13 Fitch core capital (FCC) to the bank, which it was able to recover shortly before the license withdrawal. In Fitch's view, there is a risk that the transactions which led to the recovery of Kedr's exposure could be challenged by the State Depositary Insurance Agency (DIA), which is overseeing the resolution of the mentioned bank, potentially leading to their reversal and thus moderate recovery prospects through bankruptcy. This in turn may undermine Kedr's capitalisation unless it is promptly rectified by the shareholders. However, the management is confident that the transactions were legitimate and the DIA so far has not appealed them.
Kedr has sizable exposures to the real estate and construction sectors. At end-9M13, Kedr's investments in non-core assets amounted to a high 0.6x FCC, mostly represented by a large plot of land in the Moscow region, albeit reasonably valued and attractively located. In addition, Kedr's reported loan exposure to the construction and real estate sectors amounted to a significant 0.9x FCC at end-9M13.
Positively, Kedr's reported non-performing loans (NPLs; loans 90 days overdue) were a moderate 4.1% of end-9M13 total loans, 108% covered by reserves, while its corporate loan book concentration was reasonable (the 20 largest exposures comprised 47% of corporate book, or 1.2x FCC at end-9M13). Most of the largest exposures are either short-term working capital facilities, provided to large Krasnoyarsk companies from different industries, or longer-term real estate and construction exposures. However, they are reasonably secured with typically low loan-to-value ratios. Retail loan book (42% of end-9M13 total loans) is represented mostly by unsecured consumer loans, albeit of moderate risk, as they are lent predominantly under salary schemes.
Kedr's FCC ratio was a reasonable 13% at end-9M13, although this should be considered together with its asset quality weaknesses. The total regulatory capital ratio was a low 11% at end-2013, meaning that the bank had capacity to withstand additional credit losses equal to only 1.5% of gross loans. Fitch considers Kedr's capital position as tight in light of weak internal capital generation (ROAE of 5.7% in 9M13) and the significant exposure to high risk non-core assets and development loans.
Liquidity is supported by highly granular retail funding (73% of total liabilities at end-9M13) and the comfortable buffer of liquid assets, sufficient to withstand a 19% outflow of customer accounts at end-2013. The 1Q14 regulatory accounts also show that customer funding has been stable so far, which is positive in light of overall outflow of customer funds from the Russian banking sector.
RATING SENSITIVITIES - IDRs, VR AND NATIONAL RATING
The ratings will be downgraded if transactions with the defaulted bank become reversed, potentially requiring recapitalisation of Kedr and if the shareholders are hesitant to provide new equity. Significant deterioration of the liquidity position or asset quality could also put downward pressure on the ratings.
The Outlook could be revised to Stable if contingent risks related to the bank subside and no significant deterioration of the credit risk profile occurs. Disposal of non-core assets, a strengthening of capitalisation and a significant improvement of performance would also be credit positive.
KEY RATING DRIVERS AND RATING SENSITIVITIES - SUPPORT RATINGS (SRs) and SUPPORT RATING FLOORS (SRFs)
Kedr's SRF of 'No Floor' and '5' Support Rating reflect its limited systemic importance, as a result of which extraordinary support from the Russian authorities cannot be relied upon, in Fitch's view. The potential for support from private shareholders is also not factored into the ratings, as it cannot be reliably assessed. Fitch does not expect any revision of the bank's SRF or Support Rating in the foreseeable future.
The rating actions are as follows:
Long-term foreign and local currency IDRs: assigned at 'B', Outlook Negative
Short-term foreign currency IDR: assigned at 'B'
Long-term National rating: assigned at 'BBB-(rus)'; Outlook Negative
Viability Rating: assigned at 'b'
Support Rating: assigned at '5'
Support Rating Floor: assigned at No Floor
Company: Kedr Commercial Bank
|Full company name||KEDR Public Joint-Stock Company Commercial Bank|
|Country of risk||Russia|
|Country of registration||Russia|