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Fitch Upgrades 5 Russian Regional Banks; Affirms 3 Others

July 12, 2010 Fitch Ratings
Fitch Ratings-London/Moscow-09 July 2010: Fitch Ratings has upgraded the Long-term Issuer Default Ratings (IDRs) of five Russian regional banks, namely Chelindbank (CB), JSC Spurt Bank (Spurt), Primsotsbank (PB) and SKB-Bank (SKB), and JSC BTA-Kazan (BTAK). At the same time, Fitch has affirmed the Long-term IDRs of Uraltransbank (UTB), Petersburg Social Commercial Bank (PSCB) and Bank Snezhinskiy PJSC (BS).

The rating actions resolve the rating watches Fitch had placed on the banks' ratings on 5 March 2010, and Stable Outlooks have been assigned to all of the banks' Long-term IDRs. A full rating breakdown is provided at the end of this comment.

The upgrades of the five banks' Long-term IDRs reflect 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. The upgrades further reflect each bank's manageable asset quality through the crisis, generally satisfactory loss absorption capacity and currently adequate liquidity positions, supported by large inflows of retail deposits. However, these ratings still remain constrained to varying degrees by limited franchises, the banks' focus on quite high-risk small business and retail lending, and uncertainty as to whether most of the banks' shareholders would be able to provide support, in case of need.

The affirmations of UTB's, BS's and PSCB's 'B-' ratings also take into account the improvements in market infrastructure mentioned above. However, UTB's ratings have been affirmed in light of the bank's currently weak asset quality, and BS's and PSCB's ratings are constrained by their particularly narrow franchises, loan concentrations (BS) and potentially significant operational and regulatory risks (PSCB).

The two-notch upgrade of CB to 'B+' reflects the deeper and apparently more sustainable regional franchise of the bank, relative to other Russian regional banks rated by Fitch; CB's conservative management and moderate risk appetite; and the absence of any notable weaknesses in the bank's financial profile. CB reported 13.6% of non-performing loans (NPLs, overdue more than 90 days) and 6.6% of rolled-over loans at end-May 2010. However, reserves provided 112% coverage of NPLs, and the bank had a solid capital cushion (regulatory capital adequacy ratio of 22.7% at end-May 2010; albeit with tier 2 capital accounting for half of the total). Balance sheet concentrations are moderate and liquidity is currently comfortable.

SKB's reported NPLs were 8.7% of the loan book at end-2M10, while the restructured/rolled-over exposures comprised only 2%. Loan concentrations were substantial (with the top 20 borrowers accounting for 1.9x the bank's equity at end-2M10) and the majority of the corporate portfolio (70%) was represented by exposures with bullet repayments, whose quality is yet to be tested. At the same time, Fitch is concerned with SKB's aggressive expansion strategy (the bank targets almost 50% loan growth at end-2010 compared to end-Q110), which may result in elevated credit and operational risks and decrease its capital adequacy ratios. Fitch views capitalisation as no more than adequate, with a regulatory ratio of 16.4% at end-Q110 and a sizable tier 2 component; however, SKB's shareholders provided RUB1.7bn of fresh capital in 2008, and an additional equity injection is being considered in 2011. Liquidity has been supported by rapid retail deposit growth and is comfortable at present.

PB's loan portfolio is split almost equally between retail and SME loans, resulting in high credit risk exposure. NPLs reached 13.6% of gross loans at end-2009, but arrears appear to have stabilised in Q110; about 5% of gross loans were reported as restructured at end-Q110. Positively, PB's capital ratios have strengthened considerably since 2008 due to robust internal capital generation and reduced risk-weighted assets. The tier I Basel I ratio rose to 18% at end-2009 from just 13% at end-2008 and 11% at end-2007, while reserve coverage remained just over 100%.

Spurt's loan portfolio is highly concentrated with exposures to the largest 20 borrowers equal to about 2.5x the bank's equity, and some of the largest loans made to industries experiencing significant pressures in the current operating environment (including construction/real estate, petrochemicals, and auto dealerships). The bank's reported NPLs stood at 5.7% of the total portfolio at end-February 2010, although largely as a result of loan restructuring (19.8% of the total portfolio). At the same time, with only moderate NPL coverage by reserves (22% at end- February 2010) and the capital ratio (19.5% at end-February 2010) supported by a substantial tier 2 component, Spurt had a smaller loan loss absorption capacity compared to peers: Fitch estimated that the bank was able to reserve only up to 12.1% of its loan book at end- February 2010. The quite supportive stance of the authorities of the Republic of Tatarstan in respect to the region's banks is, however, a positive credit factor for both Spurt and BTAK.

BTAK reported NPLs of 12% (net of exposures collateralised by deposits) at end-Q110; however, rolled-over and restructured exposures comprised a large 39%; at the same time, the regulatory capital ratio of 22.4% at end-Q110 meant that the bank had capacity to increase its reserves/loans ratio to 30% from the actual 6.7% (excluding loans collateralised by deposits). The ratings of BTAK also take into account uncertainty as to how the strategy, balance sheet and operations of BTAK may evolve following the recent change in the bank's ownership. Fitch understands that lending to related parties (entities controlled by the new majority shareholders) may be currently substantial; in addition, the agency cannot fully exclude the possibility that the bank may face some contingent risks relating to its former majority ownership by the previous shareholder, Mukhtar Ablyazov.

UTB reported NPLs at 20.8% of the gross loan book at end-Q110, while an additional 21% of the portfolio has been restructured, and the bank continues to renegotiate loan terms with troubled borrowers. At the same time, the shrinking loan portfolio (which contracted 20% in 2009 and a further 3% in Q110) is putting greater pressure on UTB's margins. These negative factors were somewhat offset by UTB's quite strong loss absorption capacity: Fitch estimates that at end-Q110 the bank was able to reserve up to 31% of its loan book before its statutory capital adequacy ratio would have breached the minimum regulatory limit. The ratings may be upgraded if UTB successfully resolves its asset quality problems and ensures recovery in its revenue streams. However, further substantial impairment of UTB's loan book could exert downward pressure on the ratings.

PSCB's ratings reflect the bank's narrow, and potentially difficult to sustain, franchise limited primarily to SMEs from the trade sector, and the bank's significant cash and settlement business, which carries potentially significant operational and regulatory risks. Concentrated funding sourced almost exclusively from customer accounts also weigh on the bank's ratings. At the same time, Fitch notes the good asset quality of the bank (2.2% of NPLs at end-May 2010), which benefited from the short-term nature of PSCB's lending; its currently liquid balance sheet (liquid assets stood at 25% of total assets at the same date) and solid capitalization (tier 1: 28.3% and total ratio: 31.2% at end-2009).

BS reported NPLs of 6.1% and rolled-over loans of 9.1% at end-May 2010. Loan impairment reserves stood at 8.2% of the gross loans at the same date. Loan concentrations remained significant, with exposures to the largest 20 borrowers equal to 2.9x the bank's equity, and exposure to the troubled construction/real estate industry was also significant with 28% of the portfolio (equal to 143% of equity) related to these sectors. Capitalisation is moderate with the regulatory capital adequacy ratio at 14.7% at end-May 2010; however, liquidity is comfortable after strong retail deposit inflow over the last year and a half.

Today's rating actions represent the fourth part of a broader Fitch review of privately-owned Russian banks' ratings which were placed on rating watch in March 2010. Fitch expects to complete the broader review in the next week.

The rating actions are as follows:

Uraltransbank
Long-term foreign 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

Petersburg Social Commercial 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

Bank Snezhinskiy PJSC
Long-term foreign 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'

JSC Spurt Bank
Long-term foreign currency IDR: upgraded to 'B' from '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: upgraded to 'BBB-(rus)' from 'BB-(rus)'; removed from Rating Watch Evolving; assigned Stable Outlook

JSC BTA-Kazan (OJSC)
Long-term foreign currency IDR: upgraded to 'B-' from 'CCC'; removed from Rating Watch Evolving; assigned Stable Outlook
Short-term IDR: upgraded to 'B' from 'C'; removed from Rating Watch Positive
Individual Rating: upgraded to 'D/E' from '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 'B(rus)'; removed from Rating Watch Evolving; assigned Stable Outlook

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

SKB-Bank
Long-term foreign currency IDR: upgraded to 'B' from 'B-'; removed from Rating Watch Evolving; assigned Stable Outlook
Short-term IDR: affirmed at 'B'
Individual Rating: upgraded to 'D' from 'D/E'; removed from Rating Watch Evolving
Support Rating: affirmed at '5'
Support Rating Floor: affirmed at 'No Floor'

Chelindbank
Long-term foreign currency IDR: upgraded to 'B+' from 'B-'; removed from Rating Watch Positive; assigned Stable Outlook
Short-term IDR: affirmed at 'B'
Individual Rating: upgraded to 'D' from '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 'A-(rus)' from 'BB(rus)'; removed from Rating Watch Positive; assigned Stable Outlook
Company — Uraltransbank
  • Full name
    Uraltransbank
  • Registration country
    Russia
  • Industry
    Banks