Fitch Downgrades Kedr to 'B-'; Outlook Negative
October 15, 2014 Fitch Ratings
14 October 2014: Fitch Ratings has downgraded Russian bank JSC CB Kedr's (Kedr) Long-term Issuer Default Ratings (IDRs) to 'B-' from 'B'. The Outlook is Negative. A full list of rating actions is at the end of this rating action commentary.
KEY RATING DRIVERS: IDRs, VIABILITY RATING (VR) AND NATIONAL RATING
The downgrade reflects the significant deterioration in Kedr's credit profile since our last review in April 2014. Worsened profitability and asset quality caused capital to erode by 13% in 1H14. Fitch estimates that if the bank continues to generate losses at the same pace as in 1H14 and shareholders have not provided it with new equity, it would use up its capital buffer in about half a year. Liquidity is less of a risk and the ratings continue to benefit from a granular customer deposit base and limited wholesale debt.
The Negative Outlook reflects the weak performance, with the bank relying on external support in order not to run through its capital, as well as contingent risks of potential claims from the Depositary Insurance Agency (DIA) with respect to certain assets recovered from a failed bank immediately before its failure in March 2014.
Kedr lost 13% of its equity in 1H14, as it became loss making on a pre-impairment basis and impairment charges also increased due to weaker asset quality. As a result, Kedr's Fitch Core Capital (FCC) ratio dropped to a modest 9.1% at end-1H14 from 11.3% at end-2013. Kedr's regulatory core Tier 1 capital ratio also decreased to a low 6.8% at end-9M14 from 7.7% at end-2013 (with the required minimum of 5%), allowing the bank to withstand additional losses of a modest 2.7% of gross loans. Kedr's regulatory total and Tier 1 capital ratios did not change significantly for 9M14 due to RUB250m perpetual subordinated debt raised in 1Q14.
If the bank's performance does not improve and the shareholders do not provide new equity or merge it with another bank (they also own several banks, of which the largest is OJSC Bank ROST), Kedr may soon exhaust its capital buffer. According to management, shareholders have no short-term plans to recapitalise Kedr, although the bank's management aims to improve the capital position via the disposal of non-core investment property and further deleveraging of the balance sheet.
In May 2014, KEDR's ownership structure changed for the third time in three years, when the bank was acquired by a group of entities closely related to Bank ROST and their ultimate beneficiary, Mr. Oleg Karchev, who is also a co-owner of one of the largest Russian IT distributors. ROST banking group (combined assets at about RUB127bn) consists of seven Russian banks, four of which are expected to be merged by end-2014, while Kedr, according to management, will likely be merged into it by end-2015.
Asset quality is weak. Non-performing loans (NPLs; loans 90 days overdue) were at 7.2% of total loans and 1.2x covered with reserves at end-1H14 (5.3%, 1.4x at end-2013). Larger borrowers seem of reasonable quality, albeit there are three loans (totally amounted to 38% of end-1H14 FCC), which appeared after the acquisition by ROST group, which raise concerns due to them being weakly secured and/or issued to companies with a limited track record/weak financial standing. Additional asset quality risks stem from loan exposure to the construction and real estate sectors (a significant 0.7x FCC at end-1H14) and non-core assets (a high 0.8x FCC), mostly represented by a large plot of land in the Moscow region, albeit reasonably valued and attractively located.
The contingent risks related to assets (0.6x of FCC at end-1H14) recovered from another bank shortly before its license was withdrawn. In Fitch's view, there is a risk that the transactions that led to the recovery of Kedr's exposure could be challenged by the DIA, which is overseeing the resolution of the affected bank, potentially leading to their reversal and thus moderate recovery prospects through bankruptcy. This in turn may undermine Kedr's capitalisation unless it is promptly rectified by the shareholders. However, management is confident that the transactions were legitimate and the DIA has not yet appealed them.
Liquidity is reasonable, supported by highly granular retail funding (93% of total liabilities at end-1H14) and a comfortable buffer of liquid assets, sufficient to withstand an 18% outflow of customer accounts at end-1H14. However, roughly one-third of Kedr's liquid assets are placed in Bank ROST, whose liquidity position looks tighter based on regulatory accounts.
RATING SENSITIVITIES: IDRs, VR AND NATIONAL RATING
The ratings would be downgraded in case of further asset quality deterioration and/or losses eroding capital base and if shareholders are hesitant to provide new equity and/or merge it with a better capitalised bank. A downgrade could also occur if the transactions with the defaulted bank become reversed, potentially requiring recapitalisation of Kedr.
The Outlook could be revised to Stable if performance notably improves, contingent risks related to the defaulted bank subside and there is no significant deterioration of the credit risk profile. Disposal of non-core assets, a strengthening of capitalisation and a significant improvement of performance would also be credit positive.
KEY RATING DRIVERS AND RATING SENSITIVITIES: SUPPORT RATING AND SUPPORT RATING FLOOR (SRF)
Kedr's SRF of 'No Floor' and Support Rating of '5' reflect its limited systemic importance, as a result of which extraordinary support from the Russian authorities cannot be relied upon, in Fitch's view. The potential for support from private shareholders is also not factored into the ratings, as it cannot be reliably assessed. Fitch does not expect any revision of the bank's SRF or Support Rating in the foreseeable future.
The rating actions are as follows:
Long-term foreign and local currency IDR: downgraded to 'B-' from 'B'; Outlook Negative
Short-term foreign currency IDR: affirmed at 'B'
National Long-term Rating: downgraded to 'BB-(rus)' from 'BBB-(rus)'; Outlook Negative
Viability Rating: downgraded to 'b-' from 'b'
Support Rating: affirmed at '5'
Support Rating Floor: affirmed at 'NF'
Company — Kedr Commercial Bank
Full nameKEDR Public Joint-Stock Company Commercial Bank