OREANDA-NEWS. Fitch Ratings has assigned Banca Intesa (Russia) (BIR) Long-term Issuer Default Ratings (IDRs) of 'BBB-' with a Negative Outlook. A full list of rating actions is available at the end of this rating action commentary.

KEY RATING DRIVERS - IDRs, Support Ratings, National Rating and Senior Debt Ratings
The bank's IDRs, National Rating, Support Rating and senior debt ratings reflect Fitch's view that BIR would likely be supported, in case of need, by its ultimate parent, Intesa Sanpaolo S.p.A. (IS, BBB+/Stable). This view is based on the strategic role of the Russian bank for further development of the Russian franchise of the group, the low cost of the potential support that might be required, common branding and potential reputational and contagion risks for the group in case of a subsidiary default.

BIR's Viability Rating (VR) of 'b+' reflects the bank's focus on the fairly high-risk niche of Russian small business lending and the recent weakening of its asset quality and profitability. However, the rating also considers BIR's solid capitalisation, healthy margins and therefore reasonable pre-impairment profitability, and sound liquidity position.

Non-performing loans (NPLs; overdue by more than 90 days) rose to 12.3% of the portfolio at end-1H15 (from 8.4% at end-2014), with the increase mainly due to a few large loans becoming NPLs in 2015. The NPL origination ratio (calculated as the net increase in NPLs plus write-offs during the period to average performing loans) was a high 6.1% (annualised) in 1H15. The bank demonstrates prudent provisioning: at end-1H15, NPLs were 0.9x covered by loan impairment reserves.

Due to short loan tenors and timely renegotiation of rates on existing loans, the bank was able to increase its net interest margin in 1H15 to 8.8% (2014: 7%) and therefore improve pre-impairment return on equity to 17.3% (2014: 10.7%). However, due to increased impairment charges associated with the provisioning of new NPLs, BIR reported a loss in 1H15 (-9.6% annualised ROAE).

The Fitch Core Capital ratio was a solid 17.4% at end-1H15. Regulatory capital ratios were also reasonable, with both Tier 1 and total ratios standing at 14.9% at the same date, and the bank was able to increase impairment reserves up to 18.4% (from 10.5%) without breaching regulatory minimum ratios.

The IS group provides 37% of BIR's non-equity funding. Available liquidity (cash and equivalents, bonds repo-able with the Central Bank of Russia and unused open credit lines from the parent), net of wholesale funding repayments due during the next 12 months, covered more than 80% of customer accounts at end-1H15.

RATING SENSITIVITIES-IDRs, Support Ratings, National Rating and Senior Debt Ratings
BIR's Long-term foreign currency IDR is constrained at Russia's 'BBB-' Country Ceiling, and the local currency Long-term IDR also takes into account country risks. The Negative Outlook on BIR's ratings reflects the Negative Outlook on Russia's sovereign rating, and BIR will likely be downgraded if Russia's ratings are downgraded. BIR could also be downgraded if there is a sharp reduction in IS's commitment to the subsidiary.

VR upside is currently limited due to the weak economy and recent deterioration in BIR's performance. Negative pressure could stem from further asset quality deterioration and a weakening of the capital position, if this is not compensated by fresh equity injections from the parent.

The rating actions are as follows:

Banca Intesa
Long-term foreign and local Currency IDRs: assigned at 'BBB-'; Outlook Negative
Short-term foreign and local currency IDRs: assigned at 'F3'
National Long-term Rating: assigned at 'AAA(rus)'; Outlook Stable
Support Rating: assigned at '2'
Viability Rating: assigned at 'b+'
Senior debt long term rating: assigned at 'BBB-'.