Fitch Affirms Krayinvestbank at 'B+'; Outlook Stable; Places Viability Rating on RWN
September 18, 2013 Fitch Ratings
Fitch Ratings has affirmed Krayinvestbank's (KIB) Long-term Issuer Default Rating (IDR) at 'B+' with a Stable Outlook. At the same time, the agency has put the bank's 'b-' Viability Rating (VR) on Rating Watch Negative (RWN). A full list of rating actions is at the end of this comment.
KEY RATING DRIVERS: IDRs, SUPPORT RATING, NATIONAL RATING AND SENIOR DEBT RATING
KIB's '4' Support Rating and 'B+' Long-term IDR reflect the limited probability of support that KIB may receive if needed from the Krasnodar Region of Russia (KR; BB+/Stable), which directly owns a 98% stake in the bank. Fitch's view of the propensity to provide support is based on KR's majority ownership and a track record of assistance to date both in the form of liquidity support and the provision of capital, including RUB1.5bn contributed in June 2012 and the planned RUB1bn equity injection expected in Q413.
At the same time, Fitch views the probability of support from the KR administration as only limited given KIB's moderate importance for the region's banking system and significant concerns about the bank's sizeable exposure to development and other non-core assets (over 1.8x Fitch Core Capital (FCC) at end-H113). In the agency's opinion, these have very questionable recoverability and may be related to officials within the current regional administration and/or the bank's management, thereby suggesting weaknesses in corporate governance and potentially making potential support more costly and less politically acceptable.
KEY RATING DRIVERS: VR
The 'b-' VR reflects KIB's lumpy loan book, weak performance, high exposure to construction and development sectors and moderate capitalisation. However, it also considers its improving liquidity position and comfortable funding profile based on granular retail deposits.
The RWN on KIB's VR reflects potential risks resulting from KIB's exposure of RUB4.3bn (0.9x FCC at end-H113) to third party receivables (mostly, promissory notes) with questionable recoverability. Fitch has not so far obtained sufficient information on these investments to take a view on their quality and recoverability, and expects to resolve the RWN after receiving additional information on the exposures.
In addition, at end-H113 KIB had real estate development loans (RUB2.1bn, or 0.4x FCC) and holdings of investment property (RUB2.6bn, or 0.5x FCC). In Fitch's view, some of the investment properties are reasonably valued, but half of the exposures are higher risk residential properties at the initial stage of construction, or industrial properties with very questionable liquidity.
Though reported loans overdue by 30 days (non-performing loans; NPLs) were a moderate 4.8% at end-2012 and 136% covered with loan impairment reserves (LIR), underlying asset quality may be masked by significant rolled-over loans (10% of end-2012 loans) and long-term exposures. Fitch's review of KIB's 20 largest exposures (accounting for roughly 64% of end-H113 corporate loans) revealed that most of these are of high credit risk and are extended to borrowers that have poor financial standing.
In light of significant construction exposure and poor asset quality the liquidity of KIB's balance sheet is only modest despite the liquidity buffer covering 20% of end-H113 customer funding. As a moderate mitigant, KIB's exposure to third-party wholesale funding is limited, while its customer funding (76% of end-H113 liabilities) is relatively sticky with a high share of granular retail deposits (50% of end-H113 liabilities).
KIB's performance remains weak, and its internal capital generating capacity is insufficient to maintain the expected annual growth. In Fitch view, the anticipated capital injection of RUB1bn, which is expected to be made by end-2013, will have only a temporary effect given ambitious growth plans (KIB targets 30% loan growth in 2014). KIB's current capital buffer (with the regulatory capital adequacy ratio of 12.1% at end-H113) is sufficient to withstand additional losses equal to only 4% of loans, which is considered low by Fitch, given significant credit risks.
RATING SENSITIVITIES: IDRs, SUPPORT RATING, NATIONAL RATING AND SENIOR DEBT RATING
Downside pressure on KIB's support-driven ratings could arise from any major weakening in the relationship between KR and the bank, for example as a result of changes in key senior regional officials (not Fitch's base case expectation at the moment as KR's governor was reappointed one and a half years ago).
KIB's Long-Term IDR could be upgraded if KIB's systemic importance increases and the bank's corporate governance notably improves, but Fitch views this as unlikely in the near to medium term.
RATING SENSITIVITIES: VR
The RWN on KIB's VR could be resolved with a downgrade if Fitch is provided with insufficient information to take a view on the risks associated with the third party receivables mentioned above, or if the agency believes these risks are very high. Conversely, if the risks related to these assets are more moderate, KIB's VR may be affirmed at 'b-'.
Downward pressure on KIB's VR could also result from further deterioration of asset quality and performance, resulting in erosion of capital, or from growing exposure to development projects and other non-core assets.
The rating actions are as follows:
Long-term foreign and local currency IDRs: affirmed at 'B+'; Outlook Stable
Short-term foreign currency IDR: affirmed at 'B'
National Long-term Rating: affirmed at 'A-(rus)'; Outlook Stable
Viability Rating: 'b-', placed on RWN
Support Rating: affirmed at '4'
Senior unsecured debt: affirmed at 'B+'; Recovery Rating 'RR4'
Company — Krayinvestbank