S&P: Gazprombank And Its Core Swiss And Luxembourgish Subsidiaries Affirmed At 'BB+/B'; Outlook Still Negative
At the same time, we affirmed the 'ruAA+' Russia national scale rating on Gazprombank.
The affirmation balances the stabilization of the Russian government's capacity to provide timely and sufficient extraordinary support to government-related entities (GREs), including Gazprombank (see "Russian Federation Outlook Revised To Stable From Negative On Abating External Risks; Ratings Affirmed," published Sept. 16, 2016), with concerns regarding the bank's stand-alone capacity to keep sufficient loss-absorption capacity after weak earnings and deteriorated asset quality.
In our view, Gazprombank's capital and earnings position is weak in a context of increased economic risks in Russia and lessened earnings capacity. The bank's risk-adjusted capital (RAC) ratio at year-end 2015 stood at 3.4% before adjustments for diversification, and we expect the ratio will remain within 3.0%-3.5% over the next 12-18 months. Furthermore, in our view, retained earnings fail to support capitalization sufficiently.
Nonperforming loans (loans overdue by 90 days or more) moderately deteriorated in 2015 and the first half of 2016 to 2.5% of gross loans from 1.1% at year-end 2014. As of the same date, the bank had a robust provision coverage ratio of 3.3x, which is better than the figures reported by peer banks, especially those that also have strong retail lending operations. However, since we believe that distressed restructuring could make up an additional 8%-10% of Gazprombank's loans, such provisioning coverage is not excessive, in our view.
At the same time, we recognize the Russian government's strong demonstration of support toward the bank, and we expect the government will directly or indirectly support capital-building at Gazprombank to ensure that it is on an adequate competitive footing in the market.
Although the government does not own Gazprombank--and therefore does not control the bank directly--we consider Gazprombank to be a GRE with a high likelihood of timely and sufficient extraordinary government support. We base this view on our criteria for GREs and on our assessment of Gazprombank's very important role for and strong link with the Russian government.
According to our criteria, the ratings on Gazprombank are based on our opinion of the bank's status as a GRE. We therefore incorporate two notches of uplift into our long-term rating on Gazprombank to reflect the high likelihood of government support.
Because we classify Gazprombank (Switzerland) Ltd. and Bank GPB International S. A. as core subsidiaries of Gazprombank, we equalize the ratings on these entities with those on the parent. The core status reflects the subsidiaries' close integration with the parent, including full ownership, and the parent's commitment to providing ongoing and extraordinary support if needed.
The negative outlook on Gazprombank reflects the continuing pressure on Gazprombank's risk position and capital due to asset quality deterioration that will potentially increase. We would consider lowering the ratings if we observed that the bank's portfolio quality had worsened more than we expect for the banking sector as a whole, resulting in our RAC ratio falling below 3%.
We could revise the outlook to stable if we saw a significant strengthening of the bank's capital, along with lower credit losses and higher retained earnings than currently expected.
The negative outlook on Gazprombank's core subsidiaries, Gazprombank (Switzerland) Ltd. and Bank GPB International S. A. mirrors the outlook on Gazprombank and will likely move in line with our outlook on Gazprombank.