Fitch Downgrades Krayinvestbank to 'B'
June 11, 2014 Fitch Ratings
Fitch Ratings has downgraded Krayinvestbank's (KIB) Long-term Issuer Default Rating (IDR) to 'B' from 'B+' with a Stable Outlook. At the same time, the agency has affirmed the bank's Viability Rating (VR) at 'b-' and removed it from Rating Watch Negative (RWN). A full list of rating actions is at available at the end of this comment.
KEY RATING DRIVERS: IDRs, SUPPORT RATING, NATIONAL RATING AND SENIOR DEBT RATING
The downgrade reflects Fitch's view of a reduced probability of support, in case of need, for KIB from its owner, the Krasnodar Region of Russia (KR; BB/Negative), following the recent downgrade of KR (see "Fitch Downgrades Russia's Krasnodar Region to 'BB'; Outlook Negative" dated 6 June 2014 on fitchratings.com).
KIB's '4' Support Rating continues to reflect the limited probability of support from KR, 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 in the form of both liquidity support and (albeit not since 2012) the provision of capital.
Fitch views the probability of support from KR's administration as only limited given KIB's moderate importance for the region's banking system and significant risks related to the bank's sizeable exposure to development loans and other non-core assets (roughly 2.5x Fitch core capital (FCC) at end-2013). In the agency's opinion, the recovery of these loans is questionable. These loans may largely be related to officials within the current regional administration and/or the bank's management, thereby suggesting weaknesses in corporate governance and potentially making support more costly and less politically acceptable.
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. The IDRs could also be downgraded in case of a multi-notch downgrade of KR's ratings; however, a one-notch downgrade of KR is unlikely to result in a further downgrade of KIB's ratings, as reflected in the Stable Outlook on KIB. Upside potential for KIB's ratings is currently limited.
KEY RATING DRIVERS: VR
The 'b-' VR reflects KIB's lumpy loan book, high exposure to construction and development sectors, moderate capitalisation and vulnerable liquidity. However, it also considers the bank's comfortable funding profile based on granular retail deposits.
The removal of the RWN on KIB's VR reflects reduced uncertainty and risks associated with KIB's exposure to non-core real estate assets, which is now structured through affiliated parties' promissory notes of RUB7.2bn (1.4x end-2013 FCC). Fitch has received information on the majority of this portfolio, which represents a combination of fairly liquid, reasonably valued properties and less liquid investments. As a result of further restructuring, Fitch expects the collateralisation of this exposure to strengthen. Overall, Fitch views this portfolio as high-risk and a significant drag on KIB's stand-alone profile; however, this risk is compatible with the bank's low 'b-' VR.
For more details on the drivers of KIB's VR, see "Fitch Affirms Fitch Affirms Krayinvestbank at 'B+'; Outlook Stable; Maintains Viability Rating on RWN" dated 12 March 2014 at www.fitchratings.com.
RATING SENSITIVITIES: VR
KIB's VR could be downgraded if the bank's non-core assets increase further in volume or deteriorate in quality, or if arrears increase markedly in the bank's loan book. Upside potential is limited.
The rating actions are as follows:
Long-term foreign and local currency IDRs: downgraded to 'B' from 'B+'; Outlook Stable
Short-term foreign currency IDR: affirmed at 'B'
National Long-term Rating: downgraded to 'BBB-(rus)' from 'A-(rus)'; Outlook Stable
Viability Rating: affirmed at 'b-', off RWN
Support Rating: affirmed at '4'
Senior unsecured debt: downgraded to 'B'/'BBB-(rus)' from 'B+'/'A-(rus)'; Recovery Rating 'RR4'
Company — Krayinvestbank