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Fitch Affirms PJSC MTS Bank at 'B+'; Outlook Stable

March 10, 2017 | Cbonds

Fitch Ratings has affirmed PJSC MTS Bank's (MTSB) Long-Term Issuer Default Rating (IDR) at 'B+'. The Outlook is Stable. A full list of rating actions is at the end of this rating action commentary.

The affirmation of MTSB's IDRs, and National Long-Term and Support Ratings reflects Fitch's view that the bank would likely be supported, in case of need, by its majority shareholder, Sistema Joint Stock Financial Corp. (Sistema; BB-/Stable) and/or its subsidiaries. This view is mainly based on the (i) the track record of capital support, including RUB15 billion of equity, provided in 2016; (ii) MTSB's role as a treasury for the group; and (iii) the brand association with OJSC Mobile TeleSystems (MTS, BB+/Stable), a major operating subsidiary of the group.

At the same time, the one-notch difference between the ratings of Sistema and MTSB reflects the bank's weak performance to date, and its limited franchise and therefore strategic importance for the group.

MTSB's 'b-' Viability Rating (VR) reflects weaknesses in the bank's credit profile, in particular asset quality and financial performance. At the same time the VR is supported by improved core capital buffer following RUB15 billion equity injection in 2016 and by adequate liquidity.

Non-performing loans (NPLs, including all loans over 90 days) fell to 39% of loans at end-2016 from 42% at end-2015, due to RUB14 billion write-offs. NPLs were moderately reserved by 88% with the unreserved portion equal to 22% of Fitch Core Capital (FCC) at end-2016. Positively, restructured exposures were a low 3% of total loans (8% at end-2015) and lending in foreign currency (FC) was also moderate at 16%.

In 2016 the bank revised its underwriting policies and reduced its risk appetite (eg. it ceased providing large long-term corporate investment loans, and in retail it is focusing on cross-selling to its existing lower-risk clients and on lending in MTS retail chain) resulting in markedly reduced NPL origination (calculated as net increase in NPLs plus write-offs divided by average performing loans) to a low 1.5% (2.9% in retail) in 2016, from double digits in 2015.

MTSB's capitalisation improved with the FCC ratio increasing to 17% at end-2016 from 8% at end-2015, mostly due to fresh equity injection in 2016. However, Tier 1 capital under local GAAP was moderate at 9.5% at end-1M17 (minimum is 7.25% including capital conservation buffer) with the difference compared with FCC being mostly due to (i) consolidation of MTSB's subsidiary East-West United Bank (EWUB) under IFRS and (ii) deduction of deferred tax asset and investment into EWUB from Tier 1 capital under local GAAP. Fitch estimates that the bank's regulatory capital cushion was sufficient to potentially increase loan impairment reserves up to 42% from the current 38% without breaching minimum capital requirements. Additional moderate loss absorption capacity is also available through pre-impairment profit, which was equal to 2% of average loans in 2016.

MTSB's liquidity position is strong, supported by significant and stable related-party funding (43% of total liabilities at end-2016). Funding concentration, apart from related-party funds, is moderate (the 20-largest not related clients accounted for a moderate 11% of end-2016 total accounts). Liquidity risk is also mitigated by MTSB's significant liquidity cushion, which covered more than 50% of total customer accounts (or a still reasonable 15% after repaying all parental funding) at end-2016.

An upgrade/downgrade of Sistema would likely result in a similar rating action on MTSB's support-driven ratings. Failure of the parent to provide timely support, if needed, could result in a downgrade of the support-driven ratings.

MTSB's VR could be downgraded if asset quality further deteriorates significantly and erodes capital. The VR could be upgraded on improvements in asset quality resulting in stronger financial performance.

The rating actions are as follows:

Long-Term IDR affirmed at 'B+', Stable Outlook
Short-Term IDR affirmed at 'B'
Viability Rating affirmed at 'b-'
Support Rating affirmed at '4'

Company: MTS Bank

Full company namePublic Joint-Stock Company "MTS Bank"
Country of riskRussia
Country of registrationRussia


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