Fitch Downgrades National Reserve Bank to 'B-'; Maintains RWN
October 1, 2012 Fitch Ratings
Fitch Ratings-London/Moscow-28 September 2012: Fitch Ratings has downgraded National Reserve Bank's (NRB) Long-term Issuer Default Ratings (IDRs) to 'B-' from 'B' and maintained the ratings on Rating Watch Negative (RWN). A summary of the rating actions is at the end of this commentary.
RATING ACTION RATIONALE AND DRIVERS
The downgrade reflects the recent deterioration of NRB's liquidity position due to funding base erosion, a significant reduction in unpledged securities since Fitch placed the bank's ratings on RWN (see "Fitch Places National Reserve Bank on Rating Watch Negative", dated 30 March 2012) and negative pre-impairment profitability. NRB's ratings also consider the bank's high balance sheet concentrations and the weak quality of some loan exposures. However, the ratings are supported by NRB's still reasonable solvency and the stability to date of related-party funding.
Fitch has maintained the ratings on RWN in light of further expected and potential funding outflows and the bank's high dependence on timely loan redemption by borrowers and asset sales to finance repayments to creditors. The RWN also reflects the risk that pressure on NRB's shareholder from some Russian authorities may continue to increase.
NRB's third-party customer deposits fell by about RUB1.4bn between end-Q112 and 21 September 2012. In addition to these outflows, liquidity has been negatively affected by a pre-impairment loss of RUB0.4bn in H112. Furthermore, asset encumbrance has grown as NRB has pledged its entire on-balance sheet equities book (mainly shares of OAO Gazprom ('BBB'/Stable) and OJSC Aeroflot ('BB+'/Stable)) to raise funding.
As a result, NRB estimates its currently available liquid assets (cash on accounts and short-term bank deposits) at about RUB2.6bn, which is less than a RUB2.9bn payment of principal and accrued interest on a subordinated loan from Gazprom, due on 31 December 2012. Third-party deposits are currently about RUB5.7bn, and NRB also has about RUB5.2bn of third-party repo funding, secured by Gazprom and Aeroflot shares. Repo funding secured by the Aeroflot stock (RUB2.7bn) is short-term, but both Gazprom and Aeroflot shares can be refinanced with the Central Bank (CBR), reducing liquidity risks associated with maturities of current repo funding.
NRB aims to strengthen its liquidity through scheduled loan repayments (RUB2bn) and mortgage loan sales (RUB1.8bn of the current RUB2.3bn non-impaired mortgage portfolio) in Q412. Fitch notes that NRB has already demonstrated an ability to sell mortgage loans in 2011. However, in the agency's view, the bank's strategy to strengthen its liquidity involves significant execution risks.
Non-performing loans comprised a reported 5.6% of the corporate portfolio at end-August 2012. Fitch has concerns about the quality of some loans not currently classified as non-performing. However, the agency believes that current provisioning levels in statutory accounts are at least adequate relative to loan impairment levels.
More positively, liquidity has benefited from the stability to date of related-party funding, which stood at RUB4.5bn at 21 September 2012. In addition, NRB's regulatory capital ratio, of 20.1% at end-August 2012, was well above the minimum required level of 10%, and the equity/assets ratio stood at 38%, notwithstanding an additional RUB1.8bn loan impairment charge booked in July 2012 further to a Central Bank ruling.
The Long-term IDRs could be downgraded further if NRB is unable to strengthen its liquidity position prior to the scheduled subordinated debt repayment in December 2012, or if other funding outflows result in a further tightening of the liquidity position. A strengthening of the liquidity position and successful implementation of management's plans to sell assets and repay creditors could result in the ratings stabilising at their current level.
The rating actions are as follows:
Long-Term foreign currency IDR: downgraded to 'B-' from 'B'; maintained on RWN
Short-Term foreign currency IDR: rated at 'B'; maintained on RWN
Local Currency Long-Term IDR: downgraded to 'B-' from 'B'; maintained on RWN
National Long-Term Rating: downgraded to 'BB-(rus)' from 'BBB(rus)'; maintained on RWN
Viability Rating: downgraded to 'b-' from 'b'; maintained on RWN
Support Rating: affirmed at '5'
Support Rating Floor: affirmed at 'No Floor'
Company — National Reserve Bank
Full nameJoint-stock commercial bank "National Reserve Bank" joint-stock company