OREANDA-NEWS. Fitch Ratings has affirmed the Long-term IDRs of Credit Bank of Moscow (CBM) at 'BB', and of Bank Zenit and Bank Saint Petersburg (BSPB) at 'BB-'. The Outlook on BSPB is revised to Stable from Negative. The Outlooks on CBM and Zenit are Negative. A full list of rating actions is available at the end of this commentary.

KEY RATING DRIVERS - ALL BANKS' IDRs, VRs AND NATIONAL RATINGS
The three banks' IDRs and National ratings are driven by their standalone financial strength, as reflected in their Viability Ratings (VR). The ratings reflect, in the context of Russia, the banks' significant and mostly long-standing franchises, only moderate asset quality deterioration to date, reasonable capital levels and generally comfortable liquidity, with adequate cushions of liquid assets coupled with limited refinancing needs. None of the three banks are using the Central Bank's regulatory forbearance in respect to exchange rates to support their regulatory capital ratios.

CBM's higher ratings, relative to BSPB and Zenit, reflect the bank's track record of somewhat better asset quality and profitability and its broader franchise.

The revision of BSPB's Outlook to Stable reflects the bank's somewhat less vulnerable asset quality than previously and its significant pre-impairment profitability. The Negative Outlooks on CBM and Zenit reflect primarily the risk that the difficult operating environment will result in higher loan impairment and weaker performance. The Negative Outlook on CBM also reflects that on Russia (BBB-/Negative) as Fitch would likely maintain at least a two-notch differential between the sovereign and the bank.

CBM's IDRS, VR AND NATIONAL RATING
CBM's NPLs (non-performing loans, 90 days overdue) were a moderate 4.9% of end-1H15 gross loans (2014: 2.3%) and were 97% covered by reserves. The quality of CBM's largest exposures is generally reasonable for the rating category, in Fitch's view, due to either only moderate deterioration of the borrowers' financial performance to date or reasonable collateral coverage. The deterioration in the bank's unsecured retail lending (21% of end-1H15 gross loans or 1.2x Fitch Core Capital, FCC) has been manageable to date, as expressed by fairly moderate NPL origination, equal to 5.4% (annualised) of average performing retail loans in 1H15.

However, among the largest loans Fitch identified RUB39bn (51% of end-1H15 FCC) of higher-risk loans that are exposed to financially weak and/or insufficiently collateralised borrowers, including two companies which may be exposed to bankruptcy proceedings. In addition, around RUB26bn (34% of FCC) relate to loans to car dealers which Fitch views as moderately high-risk exposures, given a 40% drop in car sales in Russia. Further asset quality risks stem from RUB19bn (25% of FCC) of reverse repo transactions with high-risk counterparties and/or secured with bonds (although of reasonable credit quality) with weak liquidity at fairly low discounts. Fitch believes that CBM will have to absorb additional credit losses related to at least some of the above-mentioned exposures.

CBM's loss absorption capacity is significant, in Fitch's view. Pre-impairment profit (Fitch forecasts at least 20bn for 2015 and RUB25bn for 2016) should be sufficient to create provisions equal to about 5% of average gross loans in each year before recording bottom-line losses. The bank's capital buffer is also adequate, as expressed by a reasonable 11.8% FCC ratio at end-1H15. Regulatory capitalisation was strengthened by a RUB20bn tier 2 contribution from the Deposit Insurance Fund (DIA) under the government's support programme, bringing the total regulatory capital ratio to 16.4% at end-8M15 (end-2014: 14.3%).

Near-term refinancing needs are moderate. Fitch estimates that CBM's liquidity buffer at end-8M15, net of potential wholesale funding repayments over the next 12 months, was sufficient to withstand a high 22% reduction in customer funding.

BSPB's IDRS, VR AND NATIONAL RATING
BSPB's NPLs accounted for 3.2% of total gross loans at end-1H15 (down from 4.2% at end-2014 due to write-offs), while newly recognised NPLs were a negligible 1% of the portfolio. Restructured exposures made up a further 7%, resulting in total problem loans of 10% of the book. Total problem loans were reasonably (84%) covered by impairment reserves, while the unreserved portion was adequately collateralised, mainly by completed real estate items.

Although the net interest margin narrowed to 3.7% in 1H15 (4.9% in 2014) the bank reported strong pre-impairment performance (annualised, equal to 28% of equity), in part due to higher trading gains. The latter will likely fall in 2H15, but margin recovery - as for other banks, driven by reductions in the policy rate and funding costs - should support pre-provision results.

The FCC ratio improved to 11.8% at end-1H15 (end-2014: 10.9%) as a result of moderate loan book contraction and positive net income. The regulatory tier 1 ratio was a lower 8.6% (minimum: 6%), mainly due to deductions of investments in subsidiaries, and the total regulatory ratio was 12.1% (10% minimum). BSPB received a RUB14.6bn subordinated loan from DIA, which should improve the total capital ratio to around 15%.

Cushion of liquid assets net of next 12 month market repayments reasonably covers customer accounts by 29%.

ZENIT's IDRS, VR AND NATIONAL RATING
Zenit's NPLs accounted for 4.9% of gross loans at end-1H15, up from 3.5% at end-2014, but these were fully covered by impairment reserves. In Fitch's view, lending to companies operating in the real estate sector (19% of end-1H15 gross loans, 1.6x of FCC) are a source of significant asset quality risk for the bank, as most of the loans represent financing of long-term construction of mainly residential properties, and loan repayment is contingent upon sales. However, revenues of some of these projects increased in 1H15, mitigating risks in the near term.

Net interest margin was a narrow 2.3% in 1H15, and Zenit's performance was also undermined by a RUB1.8bn revaluation loss on assets accounted as fair value through profit and loss (mainly FX swaps), resulting in bank being marginally loss-making on a pre-impairment basis in 1H15. Due to elevated impairment charges, Zenit reported a 24% negative annualised ROAE.

The FCC ratio was 9.8% at end-1H15, up from 9.5% end-2014, as the net loss was offset by AFS securities gains and moderate deleveraging. The tier 1 regulatory capital ratio was significantly tighter, at 7.4% (total capital ratio: 13%), primarily due to deductions of investments in subsidiaries. This offers only moderate loss absorption capacity, given weak internal capital generation and the high-risk real estate exposures. Zenit received a RUB9.9bn subordinated loan from the DIA in September and expects to convert shareholder Tatneft's (BBB-/Negative) RUB5bn subordinated debt into a perpetual instrument in November. The latter should improve the tier 1 regulatory ratio to 8.5%, and Zenit is also negotiating with shareholders on a possible equity injection in 1H16.

Zenit is 24.56% owned by oil company Tatneft, which has supported the bank's funding, capital and revenues (through sales of fee-based services). However, Fitch does not believe that support from Tatneft can be relied upon in all circumstances due to its only minority stake in Zenit and the non-strategic nature of this investment.

KEY RATING DRIVERS - SUPPORT RATINGS AND SUPPORT RATING FLOORS
The '5' Support Ratings of CBM, BSPB and Zenit reflect Fitch's view that support from the banks' private shareholders cannot be relied upon. The Support Ratings and Support Rating Floors of 'No Floor' also reflect that support from the Russian authorities, although possible given the banks' significant deposit franchises, cannot be relied upon due to their still small size and lack of overall systemic importance.

KEY RATING DRIVERS - DEBT RATINGS
The banks' senior unsecured debt is rated in line with their Long-term IDRs and National Ratings (for domestic debt issues). The subordinated debt ratings of CBM and BSPB are notched off their VRs by one level, in line with Fitch's criteria for rating these instruments.

RATING SENSITIVITIES
The three banks could be downgraded if asset quality and performance further weaken significantly. Fitch views such a scenario as less likely for BSPB, as reflected in the Stable Outlook on its ratings. A downgrade of Russia's sovereign rating would also likely result in a downgrade of CBM, and could also increase downward pressure on the ratings of Zenit and BSPB if accompanied by a notable deterioration of the operating environment.

The Outlook of CBM and Zenit, as with BSPB, could be revised to Stable if downside risks for the banks' asset quality reduce significantly, or if capital contributions materially improve their loss absorption capacity beyond that currently projected by Fitch. Upside potential for the three banks' ratings is limited given the weaker economic outlook.

The rating actions are as follows:

Credit Bank of Moscow
Long-term foreign and local currency IDRs: affirmed at 'BB', Outlooks Negative
Short-term foreign currency IDR: affirmed at 'B'
Viability Rating: affirmed at 'bb'
Support Rating: affirmed at '5'
Support Rating Floor: affirmed at 'No Floor'
National Long-term Rating: affirmed at 'AA-(rus)'; Outlook Negative
Senior unsecured debt (including that issued by CBOM Finance PLC (Ireland)): affirmed at 'BB' and 'BB(EXP)'
Senior unsecured debt National Rating: affirmed at 'AA-(rus)' and 'AA-(rus)(EXP)'
Subordinated debt (issued by CBOM Finance PLC (Ireland)): affirmed at 'BB-'

Bank Saint Petersburg OJSC
Long-term foreign and local currency IDRs: affirmed at 'BB-'; Outlooks revised to Stable from Negative
Short-term foreign currency IDR: affirmed at 'B'
Viability Rating: affirmed at 'bb-'
Support Rating: affirmed at '5'
Support Rating Floor: affirmed at 'No Floor'
National Long-term Rating: affirmed at 'A+(rus)'; Outlook revised to Stable from Negative
Senior unsecured debt: affirmed at 'BB-'
Senior unsecured debt National Rating: affirmed at 'A+(rus)'
Subordinated debt (issued by BSPB Finance plc): affirmed at 'B+'

Bank Zenit
Long-term foreign and local currency IDRs: affirmed at 'BB-', Outlooks Negative
Short-term foreign currency IDR: affirmed at 'B'
Viability Rating: affirmed at 'bb-'
Support Rating: affirmed at '5'
Support Rating Floor: affirmed at 'No Floor'
National Long-term Rating: affirmed at 'A+(rus)', Outlook Negative
Senior unsecured debt: affirmed at 'BB-'
Senior unsecured debt National Rating: affirmed at 'A+(rus)'