OREANDA-NEWS. Fitch Ratings has assigned Novosibirsk Social Commercial Bank Levoberezhny, OJSC (Levoberezhny) a Long-Term Issuer Default Ratings (IDR) at 'B+' with a Stable Outlook.

Levoberezhny's Long-term IDRs are driven by its 'b+' VR, reflecting the bank's healthy performance, adequate asset quality and sound liquidity position. The ratings also reflect the bank's moderate capitalisation and narrow franchise, concentrated in the Novosibirsk Region of Siberia. Levoberezhny's sister bank, Primsotsbank (B+/Stable) is currently neutral for Levoberezhny's ratings, given the two banks' comparable standalone profiles.

Levoberezhny reported a 31% annualised return on average equity in 9M13, which was underpinned by the currently well-performing retail portfolio (56% of gross loans at end-9M13) and sound non-interest income, mainly comprising fees and commissions for client settlement operations. The latter contributed 31% of the bank's revenues in 9M13. Levoberezhny outperforms its closest peers in terms of profitability.

The bank's asset quality is adequate, with non-performing loans (NPLs, more than 90 days overdue) accounting for 7.1% of gross loans, and fully covered by impairment reserves (LIR), at end-9M13. Restructured exposures made up a further 2.3%. Corporate and SME loans (44% of the total book) are moderately concentrated, with the largest 25 borrowers comprising 52% of this portfolio, or 1.6x Fitch core capital (FCC). Fitch views most of these as moderate risk, as exposures are typically short-term and amortising, and well covered by hard collateral.

The SME portfolio (25% of gross loans) is a rating constraint, as the current margin of safety (calculated as the net interest margin less allocated operating expenses) is only 6.7%, while most Russian banks reported above 10% losses on SME books in the 2008-2009 crisis.

Levoberezhny adopts a reasonably conservative approach to retail lending. Loans to salaried clients represent about half of the total retail book, and another 25% of borrowers have a positive previous credit history with the bank. Fitch calculates the margin of safety in the unsecured retail as 14%, while losses in this segment have been significantly lower than this to date, running at 8.3% (annualised) in 9M13.

The bank is predominantly deposit-funded, with customer balances accounting for 97% of liabilities at end-1M14, of which 70% were from retail clients. About 80% of retail deposits fall under the deposit insurance system, contributing to funding stability. The bank maintains a significant liquidity cushion, with liquid assets (comprising cash and equivalents, net short-term interbank placements and securities eligible for repo with the Central Bank) net of small wholesale repayments equal to 23% of customer accounts at end-1M14.

At end-1M14 the bank's regulatory capital adequacy ratio (CAR) stood at 12.7%. This allowed the bank to increase its LIR by only 4% to a maximum 12% before the regulatory CAR would have fallen to the statutory 10% minimum. However, Levoberezhny's capitalisation is underpinned by its internal capital generation. The bank's annualised pre-impairment operating profit was equal to 7.4% of average loans in 9M13. Capital could also be supported by the bank's ability to deleverage, with average monthly proceeds from loan repayments equal to 9% of gross loans.

The Support Rating of '5' and Support Rating Floor of 'No Floor' reflect Fitch's view that support from the bank's shareholders or the Russian state cannot be relied upon, in the latter case due to Levoberezhny's low systemic importance.

Upside potential for the ratings is currently limited. Downward pressure could stem from a marked deterioration in asset quality, a sharp drop in profitability, significantly tighter capital ratios or a weakening of Primsotsbank's credit profile. The Support Rating could be upgraded in case of acquisition by a stronger shareholder.

Bank Levoberezhny is a small privately-owned regional bank, ranked 129 by assets and 140 by equity in Russia at end-2013. The bank is controlled by Dmitry Yarovoy, who is also the majority shareholder of Primsotsbank, a bank of similar size operating primarily in Primorskiy Kray.