OREANDA-NEWS. Fitch Ratings has affirmed International Investment Bank's (IIB) Issuer Default Rating (IDR) at 'BBB-' and removed it from Rating Watch Evolving (RWE). The issue ratings on IIB's senior unsecured bonds have also been affirmed at 'BBB-' and the Short-term IDR at 'F3' and removed from RWE. The Outlook on the Long-term IDR is Stable.

KEY RATING DRIVERS
The affirmation of IIB's 'BBB-' IDR and resolution of the RWE reflect the following factors:

IIB's intrinsic features strengthened throughout 2014. The bank is progressively building a track record under its revised risk management framework and business plan aimed at reshaping the bank after more than 20 years of stagnation. Throughout 2014, management consistently implemented the business plan designed in 2013, expanding operations while strengthening credit and market risk management, issuing its first medium- and long-term debt, recruiting staff to reorganise its operations, and streamlining the bank's governance framework. In Fitch's view, the intrinsic features are commensurate with an investment grade rating independent of shareholder support, and are the principal driver of the rating.

Although it is based in Moscow and has assets in Russia (38% of gross loans and 54.2% of treasury assets were exposed to Russia at end-2014), the bank has been partly insulated from the recent Russian turmoil. Its functional currency is the euro and its supranational status has exempted it from EU sanctions against Russian banks.

Additionally, with an equity/adjusted assets ratio of 74.2% at June 2014, capitalisation remains strong compared with some higher-rated peers. Although the IIB received less capital from shareholders in 2014 than it initially planned, Fitch expects that the capital plans will be fulfilled over the next year. Fitch expects capitalisation to remain comfortable over the next two to three years, supported by the payment of the residual capital instalments and a minimum Basel II capital adequacy ratio of 25% (June 2014: 95.3%), despite the bank's dynamic lending targets (it targets total assets of around EUR1bn in 2017, compared with EUR500m at June 2014). Leverage, at 33.3% at June 2014, will also remain moderate and capped by a 250% conservative ceiling.

Credit risk on the loan portfolio will remain the bank's main intrinsic weakness. IIB has entirely cleaned up its legacy loan portfolio, drastically reducing NPLs to 5.3% of gross loans at September 2014. However, loan quality remains weak, with 89.3% of gross loans exposed to borrowers rated in the 'B'/'C' rating category or unrated. Focus on wholesale lending to banks for on-lending to SMEs could reduce the overall risk of the loan portfolio, but given the challenging business environment in some member countries, the fast lending pace and still limited track record, Fitch expects NPLs to rise over the next two to three years.

Liquidity is comfortable, with treasury assets accounting for 47.1% of total assets at June 2014. Fitch expects liquidity to structurally decline as the loan book expands but to remain comfortable. However, treasury assets are of weaker quality and longer maturity than its peers. Less than 1% was invested in 'AAA'/'AA' instruments at September 2014. The bank has recorded part of its Russian bond portfolio as held-to-maturity, with risks of losses should the bank sell them to finance its lending needs.

Shareholders' ability to support the bank has declined in parallel with the strengthening of the intrinsic features. Although propensity to support could improve with the expected adoption of revised statutory documents in 2015, which will align voting rights with shares in paid-in capital, the ability to support has deteriorated following the downgrade of Russia, the largest shareholder with 59% of callable capital at September 2014 (55% of paid-in capital), to 'BBB-'/Negative.

RATING SENSITIVITIES
The Stable Outlook reflects Fitch's view that upside and downside risks to the rating are evenly balanced. The main risk factors that, individually or collectively, could trigger negative rating action are:
- Material losses in either the loan portfolio or the treasury asset portfolio, e.g.: related to the Russian exposure.
- A substantial revision of the bank's current business plan resulting in deteriorating financial strength metrics compared with our current projections.
- A loosening of the bank's prudential framework and/or the lack of implementation of further risk management measures currently anticipated by the management.

Conversely, the following factors, individually or collectively, could result in a positive rating action:
-Over the medium term, the progressive building of a track record of prudent growth and effective credit risk management in the loan and treasury portfolios associated with compliance with the self-imposed prudential framework would be beneficial to the rating.