OREANDA-NEWS. Fitch Ratings has affirmed Belarusbank's (BBK), Belinvestbank's (BIB) and Development Bank of the Republic of Belarus's (DBRB) Long-Term Issuer Default Ratings (IDRs) 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 RATING AND SUPPORT RATING FLOOR

The Long-Term IDRs, Support Ratings and Support Rating Floors are underpinned by potential state support, in case of need, and are dependent on the level of the sovereign rating (B-/Stable). Support considerations take into account the banks' state ownership (either through The State Property Committee for BBK and BIB or the Council of Ministers in the case of DBRB) and government control (representatives of the government sit on the banks' supervisory boards).

We also consider the banks' systemic importance (greater at BBK with a market share of 40% by assets and 46% of retail deposits), the policy roles of BBK and DBRB as the country's largest providers of government programme lending backed by dedicated government funding, the track-record of support to date and the government subsidiary liability on DBRB's bond obligations, which, however is as yet untested.

At the same time, the ratings remain vulnerable to the sovereign's credit profile. External liquidity remains a key credit weakness for Belarus, as reflected in the country's low international reserves (USD4.3bn at 1 July 2016), sizeable sovereign debt servicing obligations in foreign currency (USD3.3bn for 2016), a large current account deficit (USD1.5bn at end-1Q16) and continued, albeit moderated recently, depreciation of the Belarusian rouble (BYR) against USD (by 8% in 1H16 and by 56% in 2015).

The macroeconomic outlook remains weak - we estimate real GDP to have contracted 3.9% in 2015 and expect it to fall a further 1% in 2016, constrained by weakness in the main trading partners, mainly Russia (which accounted for around 40% of Belarusian goods exports in 1Q16 and in 2015). Access to multilateral financing is key to macroeconomic stability and we assume that Belarus will continue to benefit from financial support from Russia and the Eurasian Fund for Stabilisation and Development (the latter has agreed to provide a USD2bn stabilisation loan to Belarus to be drawn over 2016-2018).

The banks' ratings reflect the authorities' limited financial flexibility to provide extraordinary support at all times, in particular in foreign currency. This view considers the three banks' sizeable external funding (a combined USD2.5bn at end-2015, including USD1.5bn short-term debt maturing during 2016) and high dollarisation of domestic liabilities (USD7.4bn), largely from customers (except for DBRB). These FX-liabilities are large relative to the country's international reserves, while FX-liquidity is tight at all three banks and to a large degree (from 41% to 80% at the three banks) comprises short-term domestic FX bonds issued by the government or central bank. We expect the authorities to make this FX liquidity available to banks, in case of need, to avoid defaults on external borrowings, although nearly half of these comprise facilities from Russian creditors and so are more likely to be rolled over, in our view. Liquidity shortages in local currency, if any, are likely to be covered by the central bank (BBK, BIB) or the authorities more generally (DBRB).

Capital injections were sizeable for both BBK and DBRB in 2015 (estimated at around 40% of end-2014 equity at BBK and 17% at DBRB), supporting both banks' growth plans. BIB's capital position benefitted from subordinated debt (USD55m) provided by the authorities in 4Q15, while the bank has been set by the authorities for privatisation. BBK has also been set by the authorities for partial privatisation (a 25% ownership stake has been earmarked recently). However, we expect privatisations in the Belarus banking sector to likely be a long-term project and believe the authorities' support propensity will remain unchanged for both BBK and BIB for the foreseeable future.

VRs - BBK, BIB

The banks' stand-alone credit profiles are strongly linked to that of the sovereign due to the large direct exposure of the banks to the authorities and, more generally, the public sector, and the dependence of bank credit quality on the ability of the authorities to support macroeconomic stability and public sector companies. At end-2015, direct exposure (includes claims on government and the central bank) relative to Fitch Core Capital (FCC) was 2.4x at BBK, and 2.5x at BIB. Loans issued to public sector corporates (including those issued under government programmes) contributed a further 4.7x FCC at BBK and 3x at BIB.

Credit risks have increased in the recessionary environment, while borrower performance is also affected by external pressures, generally significant leverage in the corporate segment and loan dollarisation (BBK: 61%; BIB: 68%), and the share of hedged borrowers is limited.

Credit metrics have deteriorated at both BBK and BIB since 2014 and we expect this trend to continue through 2016 as operating conditions remain challenging. At end-1Q16, reported non-performing loans (NPLs, more than 90 days overdue) were moderate at 3.5% of loans at BBK (end-2014: 1.5%), reflecting the high share of borrowers benefitting from government support (in the form of subsidies on interest payments or loan repayments under state guarantee). Reported NPLs were a high 11.1% at BIB at end-2015 (end-2014: 4.5%). These ratios are after partial balance sheet clean-ups arranged by the authorities in 2015 through exchange of selected NPLs for long-term FX-denominated MinFin bonds. Transferred volumes were equal to 4.8% of end-2014 loans at BBK and 5.3% at BIB. Reported restructured exposures were moderate at 2% of end-2015 loans (BBK) and 3.4% (BIB).

Regulatory capital ratios (CARs; end-1Q16: BBK: 17.9%; BIB: 14.1%) are seen as only moderate in light of the potential asset quality deterioration. Reserve coverage of existing NPLs was 145% at BBK at end-1Q16 but a moderate 61% at BIB at end-2015. Pre-impairment profitability (on a cash basis) was 3.7% of average gross loans (BBK) in 2015, although underpinned by a one-off gain from derivatives (equal to 2.2% of average gross loans), and a moderate 1.8% (BIB) in 2015. Bottom line results were affected by sharply higher loan impairment charges, which accounted for between 74% (BBK) and 103% (BIB) of pre-impairment profits in 2015. Further solvency support may be in prospect if asset quality deteriorates sharply.

Customer funding remains the main form of funding at both banks (over 70% of liabilities). Deposit trends have been stable recently in both local currency and FX, limiting immediate liquidity pressure. Liquidity management remains highly dependent on the confidence of depositors, refinancing of external liabilities and support from the authorities.

Fitch has not assigned a VR to DBRB due to the bank's special status as a development institution and its close association with the authorities.

RATING SENSITIVITIES

IDRS, SUPPORT RATING AND SUPPORT RATING FLOOR

Changes to the banks' IDRs are likely to be linked to changes in the sovereign credit profile. The Stable Outlooks reflect already low rating levels and Fitch's expectation of likely continued Russian support for Belarus's external finances. A weakening of the sovereign's credit profile could indicate a reduced ability to support the public sector and state banks as well as a greater risk of capital controls being introduced.

VRs - BBK, BIB

The VRs could be downgraded in case of capital erosion due to a marked deterioration in asset quality or a significant tightening of banks' FX liquidity.

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.

The rating actions are as follows:

BBK and BIB

Long-Term Foreign Currency IDR affirmed at 'B-'; Outlook Stable

Short-Term Foreign Currency IDR affirmed at 'B'

Viability Rating affirmed at 'b-'

Support Rating affirmed at '5'

Support Rating Floor affirmed at 'B-'

DBRB

Long-Term Foreign Currency IDR affirmed at 'B-'; Outlook Stable

Short-Term Foreign Currency IDR affirmed at 'B'

Long-Term Local Currency IDR affirmed at 'B-'; Outlook Stable

Support Rating affirmed at '5'

Support Rating Floor affirmed at 'B-'