OREANDA-NEWS. Fitch Ratings has affirmed CB Moskommertsbank's (MKB) Long-term Issuer Default Rating (IDR) at 'CCC'. A full list of rating actions is below.

MKB is Kazkommertsbank's (KKB; B/Stable) Russian subsidiary.

KEY RATING DRIVERS
The affirmation of MKB's Long-term IDR at 'CCC' and Viability Rating (VR) at 'ccc' reflects its deep-seated asset quality problems, further aggravated by the recent rouble devaluation and economic downturn, and tight Tier 1 capitalisation.

Fitch does not factor potential support from KKB, MKB's sole shareholder, into the ratings. This reflects the absence of equity support from KKB in recent years, as well as the lack of any concrete plans to inject equity in the foreseeable future, notwithstanding MKB's high unreserved problem loans and tight core capital.

MKB's problem loans (NPLs and restructured) increased to around 60% of the book at end-2014 from 53% at end-2013. The main source of asset quality problems is the retail mortgage portfolio, which is predominantly foreign currency denominated and thus devaluation-sensitive (see 'Subsidies Key to Russian Mortgage Growth; FX Risk Limited' dated 26 March 2015 at www.fitchratings.com). Statutory reserves covered a moderate 21% of the loan book, and unreserved problem loans were equal to 4.3x regulatory core Tier 1 capital. Foreclosed collateral was equal to a further 0.5x Tier 1 capital.

MKB's regulatory Tier 1 capital ratio fell to 6.0% at end-2014 from 8.1% at end-1H14, just in line with the minimum permitted level, before recovering moderately to 6.4% at end-February 2015. The reduction was driven by revaluation of the foreign currency mortgage portfolio (inflating risk-weighted assets) and operating losses.

The bank's bottom line is highly volatile and largely depends on non-recurring income from sales of foreclosed collateral. Liquidity is currently satisfactory, with liquid assets net of near term third party repayments covering 29% of deposits at end-2014.

Although KKB has not provided equity to MKB, other forms of support have been made available. In July 2014, KKB prolonged its two US dollar-denominated subordinated loans to MKB (USD60m in total) by 10 years and converted them into 'new style' facilities. Combined with rouble devaluation, this significantly increased the bank's Tier 2 capital, and raised its regulatory total capital ratio to 21.4% at end-2M15 from 13.2% at end-1H14. Nevertheless, net problem loans were still equal to 1.3x total regulatory capital, suggesting that bail in of subordinated debt might not by itself be sufficient to address MKB's solvency problems.

Funding from KKB group entities (including both subordinated and senior facilities) comprised a high 49% of total non-equity funding at end-2014 and has supported MKB's liquidity. Other forms of support include occasional transfers of MKB's larger NPLs to KKB's balance sheet and outsourcing of a number of functions/processes to KKB.

KKB's equity funding of MKB should not exceed 10% of the parent's regulatory capital according to Kazakh regulation. However, this is currently not a support constraint due to the very small size of MKB relative to KKB (1.6% of group assets at end-2014). MKB does not qualify as a 'material subsidiary' under the terms of the cross-default clause in KKB's Eurobonds, and so its default would not trigger acceleration of KKB's debt.

RATING SENSITIVITIES
A breach of minimum regulatory capital requirements could lead to a downgrade of MKB's VR and IDRs. A further weakening of asset quality would also be credit negative. A strengthening of MKB's core capital could lead to an upgrade.

The ratings actions are as follows:

Long-term foreign currency IDR: affirmed at 'CCC'
Short-term foreign currency IDR: affirmed at 'C'
National Long-term rating: affirmed at 'B(rus)'
Viability Rating: affirmed at 'ccc'
Support Rating: affirmed at '5'.