OREANDA-NEWS. Fitch Ratings has today placed Russia-based Absolut Bank’s (’Absolut’) Issuer Default ’B’, Short-term ’B’, Support ’5’ and National Long-term ’BBB(rus)’ ratings on Rating watch Positive. Its Individual Rating is affirmed at ’D’. At the same time, KBC Bank’s (’KBC’) ratings of Issuer Default ’AA-’ (AA minus) with Stable Outlook, Short-term ’F1+’, Individual ’B’ and Support ’2’ are affirmed, as is its Support floor of ’BBB+’.

The rating action follows the announcement today by KBC that it has agreed to acquire a 92.5% stake in Absolut Bank, the 30th-largest Russian bank by assets at end-2006, for EUR761m (the cost for full ownership). Fitch expects that on completion of the deal, Absolut Bank’s IDR will be upgraded to A- (A minus), the current Country Ceiling for Russia, its Short-term rating to ’F2’ and Support rating to ’1’. The National Long-term rating is likely to be raised to ’AAA(rus)’. The upgrade is to reflect the extremely high potential of support from KBC in case of need.

Although the acquisition will shave roughly 50bps off KBC’s capitalisation, this is likely to be rebuilt relatively quickly through retained earnings. Capital management of the group is centralised and KBC Group - KBC Bank’s parent - has declared that it will maintain a Tier 1 of at least 8% at the KBC Bank level. KBC Bank’s Tier 1 ratio at end-2006 was 8.45%; its total capital ratio was 11.15%.

The Issuer Default, Short-term and Individual ratings of KBC reflect its strong business position, consistent strategy, quality of management, moderate risk profile and solid capital. Fitch has considered the possible impact of the Russian operation on KBC’s overall risk. Absolut’s business is growing rapidly and is substantially higher risk than KBC’s current central and eastern European operations. Any delay or weaknesses in the transfer of controls from the current management to KBC or any substantial increase in credit risk stemming from a fast growing loan book is likely to place some pressure on KBC’s ratings.

Profitability at KBC Bank was strong in 2006, extending the improvements seen in 2005. In 2006, KBC Group reported a return on equity of 24%, while bottom line results were boosted by one-offs, including capital gains on the sale of its Spanish private bank during the year, as well as solid volume growth in all areas, to reach EUR3.4bn.

The acquisition is subject to the approvals of the Central Bank of Russia and the Anti-Trust Commission, which are expected to be forthcoming by Q307.

Absolut is currently controlled by five Moscow-based businessmen. The IFC holds the remaining 7.5% share. Absolut’s operations are concentrated in Moscow although its expansion into other regions is underway. Its core business consists of corporate lending, including trade finance, but the bank is also building up retail banking, including mortgages and car loans.

KBC Group was created in 2005 by the merger of KBC Bank and Insurance Holding Company and its former parent, Almanij. KBC was created in 1998 by the merger of two banks with Flemish roots, Kredietbank and CERA. It boasts a market share of around 20% in most deposit and loan products in Belgium. Its market share is particularly strong in Flanders.