RA Fitch Affirms 3 Foreign-owned Belarus Banks at 'B-'/Stable
December 2, 2014
Fitch Ratings has affirmed the Long-term Issuer Default Ratings (IDRs) of BPS-Sberbank (BPS), Bank BelVEB and Belgazprombank (BGPB) at 'B-' with Stable Outlooks. A full list of rating actions is available at the end of this rating action commentary.
KEY RATING DRIVERS - IDRS, SUPPORT RATINGS
The affirmation of Long-term IDRs of BPS, BelVEB, and BGPB with Stable Outlooks reflect Fitch's expectation of the high propensity of their Russian owners to provide support, in case of need. BPS is 98.4%-owned by Sberbank of Russia (BBB/Negative), BelVEB 97.5%-owned by Vnesheconombank, (VEB; BBB/Negative), and BGPB is jointly owned by OAO Gazprom (BBB/Negative) and Gazprombank; (BBB-/Negative).
Our view is driven by the majority ownership, common branding (implying high reputational risks), parent-subsidiary integration links (including board representation and operational controls), continued strong commitment of the Russian shareholders to the Belarus market, low cost of any support required (each of these subsidiaries accounts for less than 2% of their respective parent banks' consolidated assets) and the track record of support to date.
However, the ratings are constrained at 'B-' by the rather high risk of transfer and convertibility restrictions being imposed in case of sovereign stress, which could limit the banks' ability to utilise support from their shareholders to service their obligations. The Belarusian subsidiaries are not affected by the Negative Outlooks on their parents, which mirror that on the Russian sovereign - due to significant rating difference.
The operating environment in Belarus remains difficult and the country's external position is a weakness in view of moderate FX reserves (USD6bn as of 1 November 2014), a persistent current account deficit (USD2.6bn in 1H14) and material upcoming debt repayments (around USD3bn in 2015). The pressure on the country's external finances has so far been alleviated by continued access to foreign funding/preferential trade terms with Russia and we expect this to remain available.
Support from the Russian parents has been forthcoming so far and Fitch believes it will be made available in the future, in case of need. However, new sizeable equity injections are not expected, as growth targets for these subsidiaries have been revised down to match, in general, the pace of inflation in 2015. Funding support, mostly in foreign currencies, remains considerable with parent loans being in the range of 22%-37% of these subsidiaries' liabilities. This is likely to increase further, because foreign funding (BPS: 10% of liabilities, BelVEB: 16%, BGPB: 17%) may need to be repaid at maturity due to sanctions (BPS, BelVEB are directly affected, while BGPB, although not sanctioned, may be subject to negative investor sentiment).
KEY RATING DRIVERS - Viability Ratings (VRs)
These banks' VRs to a large extent remain closely correlated to the sovereign credit profile given (i) the likelihood that any further deterioration of the sovereign's financial position would hurt the broader economy; (ii) the high degree of state ownership across the country and the dependence of many borrowers on government support; and (iii) the banks' high direct exposure to the sovereign through government bonds and FX swaps with the National Bank (BPS 159% of Fitch Core Capital (FCC); BelVEB: 60%; BGPB: 82%).
Non-performing loans (overdue by more than 90 days) were at end-1H14 a low 2.2% at BPS, 1.3% at BelVEB and 0.3% at BGPB. These were adequately covered by loan impairment reserves (LIR). LIR comprised 5%, 4.3%, 2.9% of gross loans, respectively for the three banks.
However, downside risks for asset quality are high given significant FX (mainly USD/EUR) lending of 70%-90% of loans for the three banks while most borrowers are effectively unhedged. In addition the banks have generally high borrower leverage, large loan concentrations (top 25 credit exposures/FCC ratios were in the range of 1.9x-3.0x for the three banks at end-1H14), and face spillover effects from weaker economic growth and potential external pressures.
In this context, loss absorption capacity is viewed as only moderate at the three banks. Fitch estimates that at end-1H14, loan impairment reserves/gross loans ratios could increase to 6% (BPS) and to 11% (BelVEB and BGPB) without breaching the regulatory capital adequacy (CAR) limit of 10%. As a moderate mitigant, annualised pre-impairment profits (adjusted for interest income accrued but not received in cash) were equal to 4.1% (BPS), 4.4% (BelVEB) and 7.3% (BGPB) of average gross loans in 1H14.
Regulatory CARs remained moderate at end-3Q14 (BPS: 11.2%; BelVEB: 13.2%; BGPB: 13.8%), with capital being pressured by growth and asset inflation fuelled by a weaker rouble. These pressures have been managed with parent support involving both capital and subordinated debt injections (BPS, BelVEB) and risk transfers (BPS). BGPB expects a USD150m subordinated loan from the parent in December 2014 to support growth targets and to remain compliant with the CAR of 12%, covenanted in the bank's funding agreements. Internal capital generation remains modest at the three banks (1H14: net ROAE of 7.2% at BPS; 7.9% at BelVEB; 1.1% at BGPB).
Changes to the banks' IDRs are likely to be linked to changes in the sovereign credit profile. A further weakening of the sovereign could indicate a greater risk of transfer and convertibility restrictions being introduced, which could result in downward pressure on each of the banks' IDRs.
Banks' VRs could be downgraded if their financial profiles deteriorate considerably as a result of marked asset quality deterioration and capital erosion, without support being made available.
The potential for positive rating actions on either the IDRs or VRs is limited in the near term, given weaknesses in the economy and external finances.
Company — Belgazprombank
Full nameBelarusian-Russian Belgazprombank Joint-Stock Company