OREANDA-NEWS. Fitch Ratings has affirmed Russian Agricultural Bank's (RusAg) Long-term Issuer Default Ratings (IDRs) at 'BBB-'. The Outlooks are Negative.

The affirmation reflects Fitch's assessment of potential support from the Russian authorities for the bank, in case of need. In Fitch's view, the propensity to support the bank would likely be high, given the bank's full ownership by the State and its policy role of supporting the agriculture sector, which may become even more important in light of Russia's recently introduced ban on food imports from major western countries. There is no indication so far of a weakened propensity to support foreign creditors of state-owned banks, although tail risks could emerge in case of further escalation of geopolitical tensions and further sanctions. The government's ability to provide assistance is currently sound, in particular considering the moderate size of RusAg's balance sheet relative to the sovereign's available financial resources.

RusAg's Long-term IDRs, Support Rating Floor and senior debt ratings are notched down once from the sovereign's ratings due to the only moderate capital injections provided to the bank so far relative to the scale of its asset quality problems, and the absence at present of a confirmed and sufficiently robust recapitalisation plan. Earlier this year, the government included RusAg's future recapitalisation into the state programme of agribusiness development (part of the federal budget) for the next six years, but it has not yet decided on the size and the schedule of capital injections. The bank's management expects the total amount of this recapitalisation to be around RUB100bn.

The Negative Outlook on the bank's Long-term IDRs mirrors that on the sovereign and reflects potential deterioration of the government's ability to provide support, given the weakening economy and risks from sanctions. The affirmation of RusAg's debt ratings applies to all debt issued prior to 1 August 2014.

The affirmation of RusAg's Viability Rating (VR) at 'b-' primarily reflects the bank's still weak asset quality and moderate capitalisation. The rating also considers RusAg's modest profitability and significant reliance on wholesale funding.

RusAg's asset quality remains weak, with non-performing loans (NPLs, including all loans over 90 days, whether classified as impaired or watch list exposures in the IFRS accounts) comprising a high 15% of the end-2013 loan book. In addition, there were around 8% of rolled-over and/or restructured loans designated as watch list, resulting in total recognised problem/high risk exposures of 23% of the loan book. Reserve coverage of these exposures was a moderate 36%, with the unreserved part amounting to RUB206bn or 94% of Fitch Core Capital (FCC). There is also a risk of further problems being recognised upon seasoning of the predominantly long-term loan book, in particular as exposures are often structured with bullet repayments and subsidised interest rates.

The bank has received RUB70bn of equity injections in the last two years, and at end-2013 the FCC ratio stood at 13.2%. Capital is sufficient to fully reserve NPLs without the FCC falling below 8%, but would not be enough to increase reserving of restructured loans or any new potential problems, or support future growth. Internal capital generation is weak with pre-impairment profit (net of accrued but not received interest income) amounting to only RUB9bn (equal to 0.6% of average risk-weighted assets) in 2013.

The recent government decision allowing RusAg to convert its RUB25bn subordinated loan from Vnesheconombank into preferred shares would moderately support its regulatory Tier 1 ratio, although the instrument would have weak loss absorption capacity (due to its low 2% conversion trigger) and so would not improve core Tier 1 capital.

RusAg's high loans/deposits ratio (190% at end-2013) and the fairly long-term nature of its loan book make the bank's liquidity position somewhat vulnerable to a sustained reduction in access to wholesale funding. However, near-term maturities are moderate and liquidity is comfortable at present, so recently introduced sanctions are unlikely to result in a sharp increase in refinancing risks. At end-1H14, RusAg had USD10bn of foreign liabilities (22% of total non-equity funding) with negligible maturities in 2H14 and USD0.7bn due for repayment in 2015, while the bank held USD4.3bn of liquid assets (including USD0.9bn of foreign correspondent accounts and short-term bank placements).

The rating of RusAg's subordinated debt continues to be notched off the bank's Long-term IDRs, reflecting Fitch's methodology for rating 'old style' subordinated debt in Russia. Accordingly, an upgrade or downgrade of the subordinated debt rating would follow similar actions on the bank's Long-term IDRs.