Fitch Places Bank Zenit's IDRs on RWP
KEY RATING DRIVERS - IDRs, NATIONAL RATINGS, SUPPORT RATING, SUPPORT RATING FLOOR
The RWP on BZ's IDRs, National Rating and Support Rating follows the increase of the ownership stake in the bank by oil company PJSC Tatneft (Tatneft, BBB-/Negative) to 49% from below 25% and the bank's management's expectation that the stake will increase to above 50% by November as a result of the buy-out of some minority shareholders. In the agency's view, should Tatneft become a majority shareholder, consolidating BZ in its financial accounts, the propensity to support the bank will increase. To date, Fitch has not factored support from Tatneft directly into the ratings, although the bank's credit profile has benefitted from significant liquidity placements and capital injections from the company.
An upgrade of BZ's IDRs will likely be limited to one notch to 'BB', two notches below Tatneft's ratings. This is mainly due to Fitch's view that BZ is a non-core asset for Tatneft despite it performing a treasury function for the company.
Tatneft's ability to support BZ is reflected in the company's 'BBB-' IDR, and is capped by the Russian sovereign rating. The company's credit profile is underpinned by low leverage with funds from operations (FFO) adjusted gross leverage of 0.1x at end-2015. The acquisition of BZ will not have an impact on Tatneft's ratings and potential support of the bank should be manageable for Tatneft as BZ's equity accounted for only 15% of FFO at end-2015.
BZ's Support Rating Floor (SRF) of 'No Floor' reflects the bank's limited market shares, as a result of which support from the Russian authorities cannot be relied on, in Fitch's view.
KEY RATING DRIVERS - DEBT RATINGS
BZ's senior unsecured debt is rated in line with the bank's Long-Term IDR and National Rating (for domestic debt issues). These ratings have also been put on RWP.
KEY RATING DRIVERS - VIABILITY RATING
The affirmation of BZ's VR reflects the bank's well-established franchise, only moderate asset quality deterioration to date, and reasonable capital levels supported by timely capital injections. Liquidity is comfortable, underpinned by adequate liquid assets against limited refinancing needs. However, asset quality is vulnerable in the currently difficult operating environment, while core profitability is weak.
BZ's non-performing loans (more 90 days overdue; NPLs) at end-2015 accounted for a moderate 5.8% of gross loans (up from 3.5% at end-2014) and were fully covered by impairment reserves. Restructured exposures made up an additional 14% of loans and their coverage was weaker at 25%. Although these loans are currently performing and in most cases are adequately collateralised, additional provisioning may be required, in Fitch's view.
Lending to companies operating in the real estate sector (18% of end-2015 gross loans, of which 9.1% were restructured) are particularly vulnerable, in Fitch's view, as most of the loans represent financing of long-term construction of mainly residential properties, and loan repayment is contingent upon sales. However, most projects are now closer to finalisation, reducing completion risks. Asset quality has also been negatively impacted by reverse repo exposure with illiquid collateral to a Russian bank with weak credit metrics to an amount equal to 29% of BZ's end-1H16 core Tier 1 regulatory capital. This exposure is technically short-term, but has been rolled over once.
BZ's net interest margin (NIM) fell to 2.2% in 2015 from 3.6% in 2014 due to higher funding costs increasing 3.1ppts, while loan rates rose only 1.8ppts. BZ's performance in 2015 was also undermined by a RUB3.1bn revaluation loss on assets accounted at fair value through profit and loss (mainly FX swaps) resulting in only marginal profitability on a pre-impairment basis (0.8% of average loans). Impairment charges more than doubled to 4.3% of average gross loans in 2015, resulting in an overall net loss consuming 32% of the bank's end-2014 equity. For 2016 we expect net losses.
As a result of losses, the Fitch Core Capital (FCC) ratio fell to a moderate 7.7% at end-2015, but is estimated to have improved to a more adequate 10%-11% at end-1H16 after a RUB8bn equity injection made mainly by Tatneft and some other minority shareholders in June. Regulatory capital ratios are under pressure from deduction of investments in subsidiaries, but the Core Tier 1 and Tier 1 ratios rose to 9.1% and 10.4% at end-1H16 (end-2015: 7% and 8%) as a result of the equity injection.
BZ is funded mainly by customer accounts, which are concentrated with the top 20 representing 44% of total funding at end-2015, although most are rather stable. About RUB12.6bn or 6.5% of customer accounts were from Tatneft and related entities. The bank further increased its liquidity cushion (cash and equivalents and bonds repo-able with the Central Bank of Russia) to 44% of customer accounts at end-1Q16 (or 20% net of 2016 market debt repayments).
Fitch expects to resolve the RWP once Tatneft's offer to minority shareholders is completed. BZ's IDR will likely be upgraded by one notch to 'BB' if Tatneft consolidates a majority stake in the bank as a result of the offer; however, at this level the rating would likely carry a Negative Outlook, in line with that of Tatneft and the Russian sovereign. If Tatneft remains a minority shareholder of BZ, the bank's ratings will likely be affirmed at their current levels.
BZ's SRF of 'No Floor' is unlikely to change as the bank has limited market share and support from Russian authorities is not reliable.
BZ's VR could be downgraded if asset quality deterioration further erodes capital without timely new capital injections. Upside is currently limited given the difficult operating environment and BZ's weak performance.
The rating actions are as follows:
Long Term Foreign and Local Currency IDRs: 'BB-' placed on Rating Watch Positive
National Long Term Rating: 'A+' placed on Rating Watch Positive
Short Term Issuer Default Rating: affirmed at 'B'
Support Rating: '5', placed on Rating Watch Positive
Support Rating Floor: affirmed at 'No Floor'
Viability Rating: affirmed at 'bb-'
Senior unsecured debt long-term rating: 'BB-' placed on Rating Watch Positive
Senior unsecured debt national long-term rating: 'A+(rus)' placed on Rating Watch Positive