OREANDA-NEWS. Fitch Ratings has downgraded Orient Express Bank's (OEB) Long-term Issuer Default Rating (IDR) to 'B-' from 'B' and its Viability Rating (VR) to 'b-' from 'b'. The ratings have been removed from Rating Watch Negative (RWN). The Outlook on the Long-term IDR is Negative. A full list of rating actions is available at the end of this rating action commentary.


The downgrade of the bank's Long-term IDR and of its VR reflects declining capitalisation, weak asset quality, negative bottom line results and exposure to the overheated Russian unsecured consumer finance market. The near-term recovery prospects of the unsecured consumer finance market are uncertain given a weak economic environment, high borrower indebtedness, a drop in real disposable incomes and rising unemployment. Positively the ratings also capture the bank's reasonable funding profile and low refinancing risks.

OEB's asset quality has been under pressure as credit losses (defined as the increase in loans 90 days overdue during the period plus write-offs, divided by average performing loans) rose to 29.3% (annualised) in 1H15, from 25.7% in 2014 and 16.3% in 2013. Despite somewhat tighter underwriting standards, Fitch expects that credit losses will remain elevated in 2016 due to the unfavorable operating environment and higher effective interest rates charged by the bank.

OEB's breakeven credit loss level (defined as pre-impairment profit divided by average performing loans) was a moderate 15% in 1H15, considerably below the actual credit losses of 29%. Higher effective interest rates charged for newly issued loans, and a gradual decrease in funding costs, should support the bank's pre-impairment profitability in the near future (the bank was around breakeven in August). However, given the magnitude of credit losses, Fitch does not expect OEB to return to sustainably profitable performance in the foreseeable future.

OEB's capitalisation is weak with the Fitch Core Capital (FCC) ratio a low 7.9% at end-1H15 (end-2014: 10.2%) and pressured by large bottom line losses, which resulted in OEB losing 39% of its FCC in 1H15. OEB's regulatory capitalisation is also under pressure from poor profitability. At end-8M15, OEB's regulatory capital adequacy ratio was 10.7%, only marginally above the regulatory minimum of 10%. The bank is expecting around RUB3bn of new equity (equal to about 1.2% of regulatory risk-weighted assets) from its key shareholder by end-2015, following a RUB2.6bn injection in June. This should temporarily improve capital ratios (providing the bank is able to avoid further significant losses for the remainder of the year), although longer-term solvency will largely depend on the quality of new lending.

OEB is mostly customer-funded (80% of end-1H15 liabilities) and its liquidity cushion was sufficient to withstand a significant 22% customer funding outflow at end-8M15.

Fitch has downgraded OEB's senior unsecured debt rating to 'CCC', one notch below the Long-term IDR. This reflects Fitch's view of 'below average' recovery prospects on the bank's senior obligations, given that these are subordinated to a large proportion of the OEB's liabilities (75% comprising retail deposits). The rating has been withdrawn as it is no longer considered to be relevant to the agency's coverage. This is because only a minimal amount of OEB's senior debt issue remains outstanding, following the exercise by most bondholders of a put option.

The '5' Support Rating of OEB reflects Fitch's view that support from the bank's private shareholders cannot be relied upon. The Support Rating and Support Rating Floor of 'No Floor' also reflect that support from the Russian authorities, although possible (particularly in the form of regulatory forbearance), also cannot be relied upon due to OEB's small size and lack of systemic importance. Accordingly, the OEB's IDR is based on its intrinsic financial strength, as reflected by its VR.


OEB's ratings could be downgraded further if weak asset quality and bottom line losses result in continued erosion of OEB's and are not offset by capital injections in a timely manner.

Upside rating potential is limited, although gradual improvement of asset quality metrics resulting in sustainably profitable performance could stabilise the ratings at their current level.

The rating actions are as follows:

Long-term foreign currency IDR: downgraded to 'B-' from 'B', removed from RWN, Outlook Negative
Short-term foreign currency IDR: affirmed at 'B', removed from RWN
Long-term local currency IDR: downgraded to 'B-' from 'B', removed from RWN, Outlook Negative
National Long-term Rating: downgraded to 'BB-(rus)' from 'BBB(rus)', removed from RWN, Outlook Negative
Support rating: affirmed at '5'
Support Rating Floor: affirmed at 'No Floor'
Viability Rating: downgraded to 'b-' from 'b', removed from RWN
Senior unsecured Long-term Rating: downgraded to 'CCC' from 'B', removed from RWN; Recovery Rating revised to 'RR5' from 'RR4', ratings withdrawn
Senior unsecured National Long-term Rating: downgraded to 'B-(rus)' from 'BBB(rus)', removed from RWN, withdrawn.