Fitch Affirms Russia's Promsvyazbank at 'BB-'; Outlook Stable
November 13, 2012 Fitch Ratings
Fitch Ratings-London/Moscow-12 November 2012: Fitch Ratings has affirmed Russia's Promsvyazbank's (PSB) Long-term foreign currency Issuer Default Rating (IDR) at 'BB-' with a Stable Outlook. The agency has also assigned PSB Finance S.A.'s USD400m subordinated loan participation notes (LPN) a Long-term rating of 'B+'. A full list of rating actions is provided at the end of this commentary.
RATING ACTION RATIONALE AND DRIVERS - IDRs, VR AND SENIOR DEBT RATING
The ratings affirmation reflects limited recent changes in PSB's credit profile and prospects. The rating level reflects the bank's weak capitalisation, some higher-risk exposures in the loan book and uncertainties arising from the rapid growth strategy in more risky market segments. However, the ratings also take account of the reasonably diversified funding franchise and the track record of comfortable liquidity management.
PSB's corporate loan quality remains average for its rating category. Corporate non-performing loans (NPLs) were a moderate 4% at end H112 after sizable loan sales and write-offs in 2010-H112, while restructured exposures were, however, more significant. Accrued interest which has not been received in cash was a sizable RUB12bn, or 23% of equity, in the bank's end-9M12 statutory accounts. Accrued interest is generally larger under IFRS, although IFRS accruals have been declining in recent periods.
In Fitch's view, PSB's rather concentrated loan portfolio, combined with the presence of some restructured and poorly performing exposures among the top 20 loans, creates a risk of lumpy losses and potential capital erosion. Fitch believes that some more risky exposures are weakly provisioned, however, reported corporate NPLs were 129% covered by loan impairment reserves at end-H112.
Reported related-party exposures have been stable relative to the capital base in recent periods (2009-H112: around 20% of Fitch core capital (FCC)). Related parties' solid positions in their respective markets (IT, real estate, and media), and their association with PSB, have broadened financing options for them and somewhat alleviated pressure on the bank's capital. However, in Fitch's view, the funding reliance on the bank of some related parties (in particular in IT and real estate) may grow in future considering their significant leverage and moderate net cash flows.
PSB's real estate exposure, including loans and other on-balance sheet investments, markedly declined in 2011 but was still a material 2x Fitch Core Capital (FCC) at end-H112. Among the key non-core assets was part of an office building in the Moscow City business district where construction was only 70% complete (this asset is valued at 19% of FCC). There is little certainty about the completion timeline, although the agency believes the building's current balance-sheet valuation is reasonable given the premium location.
PSB aims to expand its retail and SME lending in the coming years to improve its overall performance. Retail lending at end-H112 comprised a moderate 9% of total loans. In Fitch's view, this strategy could be threatened by a lack of expertise in retail lending, the bank's weak previous track record in the segment, growing competition in the market and rising household leverage. PSB's retail business performance continued to improve but remained loss-generating in H112 due to a lack of scale.
PSB's liquidity position is comfortable, with a reasonable cushion being held against the rather concentrated corporate funding base. Liquid assets were maintained in the range of 15%-20% of total assets over the past two years, and stood at 16% at end-9M12. Some of the largest corporate clients, however, are state-owned companies, whose balances could be less stable at privately owned banks, especially in a stress scenario. Wholesale debt is material (end-H112: 24% of liabilities), but maturities are not concentrated.
Fitch views capital as weak given moderate reported ratios, weak provisioning of some loan exposures, significant accrued interest, some uncertainty in respect to how recent equity injections/share purchases have been financed, and the moderate ability of the bank's majority shareholders to inject new capital, if needed. The Basel I Tier I and total capital adequacy ratios (CARs) were 9.9% and 13.2%, respectively, at end-H112, and the regulatory CAR was 10.6% at end-9M12, only marginally above the minimum 10% level. Fitch estimates the recent USD400m subordinated debt issue should result in the latter increasing to a still tight 11.1%.
Following the recently postponed IPO, PSB will continue to examine the possibility of placing equity privately. However, in Fitch's view, internal capital generation is the most likely source of equity. Profitability was modest in 2009-2011 (5% average return on average equity), but increased in H112 (14%), mainly as a result of lower impairment charges. Brothers Alexey and Dmitriy Ananiev own an 88.25% stake and the EBRD 11.75%.
RATING SENSITIVITIES - IDRs, VR AND SENIOR DEBT RATING
The Long-term IDRs and Viability Rating (VR) could be downgraded if weaker asset quality and/or rapid growth increase pressure on capital. An upgrade would require a strengthening of the bank's capitalisation. Successful implementation of the bank's growth strategy without significant credit impairment would also be positive for PSB's profile.
RATING ACTION RATIONALE, DRIVERS AND SENSITIVITIES - SUBORDINATED DEBT RATINGS
PSB's subordinated debt securities issued under the USD3bn loan participation notes (LPN) programme via Luxemburg-domiciled special-purpose vehicle PSB Finance S.A. are notched down once from the Long-term IDR due to weaker recovery prospects. The rating would likely change in tandem with the Long-term IDR.
The USD400m series 7 subordinated LPNs mature in November 2019 and pay a 10.2% semi-annual coupon. There are no call or put options. PSB Finance S.A. will use the proceeds for the purpose of financing a subordinated loan PSB. Subsequently, the SPV will receive and transfer to noteholders the principal and interest accrued on the loan.
RATING ACTION RATIONALE, DRIVERS AND SENSITIVITIES - SUPPORT RATING AND SUPPORT RATING FLOOR
The Support Rating Floor and Support Rating have been affirmed at 'B' and '4', respectively, reflecting PSB's notable role in the Russian banking system as the third-largest privately owned commercial bank with a significant deposit franchise. Acquisition of the bank by a financially stronger institution could lead to a positive rating action on Support Rating.
The rating actions are as follows:
Long -term foreign currency IDR: affirmed at 'BB-'; Outlook Stable
Short-term foreign currency IDR: affirmed at 'B'
Long -term local currency IDR: assigned at 'BB-'; Outlook Stable
Short-term local currency IDR: assigned at 'B'
VR: affirmed at 'bb-'
Support Rating: affirmed at '4'
Support Rating Floor: affirmed at 'B'
Senior debt rating: affirmed at 'BB-'
Subordinated debt rating: affirmed at 'B+'
Company — Promsvyazinvest
Full nameOOO Promsvyazinvest