Fitch Downgrades Uralsib Bank to 'B-'; Places on Rating Watch Negative
KEY RATING DRIVERS - UB'S IDRS, VR
The downgrade of UB's Long-term IDRs reflects both the downgrade of its VR to 'b-' from 'b' and the downward revision of its Support Rating Floor (SRF) to 'No Floor' from 'B'. The downgrade of the VR is driven by a further weakening of the bank's capital position, asset quality and profitability metrics. In Fitch's view, it has become much more difficult for UB to achieve an improvement in performance and capitalisation and a meaningful clean-up of its balance sheet from significant non-core/related-party exposures due to a weaker operating environment.
The RWN on the ratings reflects Fitch's view of a significant near-term risk of some form of resolution being imposed on the bank, with the possibility that this could involve losses for some senior creditors. This in turn reflects uncertainty concerning the ongoing review of the bank by the regulatory authorities.
UB's financial position and performance continued to weaken in 1H15 due to the more difficult operating environment. The bank's net interest margin contracted to 2% of average earning assets in 1H15 from 6% in 2014, as funding costs rose to 8% from 5%. This resulted in the pre-impairment loss widening to an annualised 4% of average gross loans in 1H15 from 1% in 2014. Loan impairment charges increased to an annualised 6% of gross loans in 1H15 from 2% in 2014 as non-performing loans (overdue by more than 90 days) rose to 15% of total loans from 11% during the same period partly due to portfolio contraction.
The resultant net loss consumed around a third of the bank's Fitch Core Capital (FCC), which fell to 5% of risk-weighted assets at end-1H15 from 8% at end-2014. UB's capital is further undermined by its large non-core exposures, which are significantly overvalued, in Fitch's view. These include: (i) an indirectly-owned equity interest in an insurance company SG Uralsib (SGU, 1.1x FCC at end-1H15); (ii) an indirectly owned real-estate investment property (mostly land) (1x FCC); and (iii) related-party exposures (0.5x FCC).
The shareholder made equity injections (mostly in the form of interests in land owning companies) in July and August 2015, totaling 1x end-1H15 FCC. However, the benefits are mitigated by the high valuation of the contributed assets and by the boost they have given to UB's already sizeable stock of non-core assets.
UB's regulatory core Tier I and Tier I ratios of, respectively, 6.3% and 6.8% at end-3Q15 could reduce by around 2pp in January 2016 as a result of (i) an annual 20% deduction of investment in SGU from UB's core Tier I capital; and (ii) an expected reclassification of perpetual debt to Tier 2 capital from Tier 1. In addition, potential extra provisions, as in 3Q15, may be required on UB's standalone exposure to ULG (equal to 12% of Tier 1 capital at end-3Q15; exposure in the form of convertible bonds). As a result, the bank faces the risk of breaching the minimum ratios, in particular the 6% Tier I capital ratio, absent of new capital contributions.
The bank's liquidity position is adequate with highly liquid assets (cash, interbank placements and securities repo-able with CBR), net of planned wholesale debt repayments until end-2015, amounting to 20% of customer deposits at end-August 2015. However, customer confidence is at risk from ongoing deterioration of the bank's solvency, ULG's default and increased regulatory scrutiny.
KEY RATING DRIVERS - UB'S SUPPORT RATING AND SUPPORT RATING FLOOR
The revision of the bank's Support Rating Floor to 'No Floor' from 'B' and the downgrade of its Support Rating to '5' from '4' reflect Fitch's view that state support, which would be sufficient to avert losses for senior creditors, has become more uncertain and cannot be relied upon. This reflects the absence of any capital support for the bank to date, including under state programmes which other privately-owned banks have been able to access, and the increased regulatory scrutiny of the bank.
KEY RATING DRIVERS AND RATING SENSITIVITIES - ULG
The downgrade of ULG's Long-term IDR to 'RD' from 'B', and its Support Rating to '5' from '4', follows the company's default on USD60m of bank loans from a single counterparty and ULG's ongoing negotiations on the restructuring of these obligations.
The downgrade of ULG's Long-term local-currency IDR to 'CCC' from 'B' reflects the company's weak standalone credit profile, and that support from UB can no longer be relied upon, given the default on the bank loans.
ULG has negative equity of RUB7bn, which already includes RUB6bn of convertible local bonds held by UB as the internal capital generation has been negative since 2010. Near-term profitability prospects are further constrained by a narrow net interest margin and an eroded franchise.
Although ULG had performing RUB5.5bn operating leases at end-3Q15, its RUB4bn finance leases were of weak quality as reflected by its NPLs and restructured exposures amounting to 41% of total finance leasing portfolio at end-1H15.
At end-3Q15, ULG's rouble obligations amounted to RUB20bn, of which only RUB0.5bn were reportedly owed to non-related parties. As of the middle of October 2015 the company had no foreign currency obligations to third parties aside of the defaulted bank loans.
IDRS, NATIONAL RATINGS AND SENIOR DEBT
UB's VR and IDRs could be downgraded, potentially by more than one notch, should asset quality, capitalisation and core performance deteriorate further, or if other significant risks arise as a result of the regulatory review. The bank's Support Rating, and hence IDRs, could be upgraded in case of UB's acquisition by a stronger institutional shareholder.
ULG's Long-term local-currency IDR could be downgraded to 'RD' if ULG fails to meet its obligations under its outstanding RUB bond. The Long-term foreign currency IDR could be upgraded upon completion of the debt restructuring, once information is available on ULG's post-restructuring financial profile; however, the rating would likely be low unless there are considerable improvements in the company's solvency.
The rating actions are as follows:
Uralsib Bank's ratings:
Long term foreign currency IDR: downgraded to 'B-' from 'B'; placed on Rating Watch Negative
Short term foreign currency IDR: 'B'; placed on Rating Watch Negative
Viability Rating: downgraded to 'b-' from 'b'; placed on Rating Watch Negative
Support Rating: downgraded to '5' from '4'
Support Rating Floor: revised to 'No Floor' from 'B'
Uralsib Leasing Group's ratings:
Long term foreign currency IDR: downgraded to 'RD' from 'B'
Short term foreign currency IDR: downgraded to 'RD' from 'B'
Long term local currency IDR: downgraded to 'CCC' from 'B'
Support Rating: downgraded to '5' from '4'.