Fitch Ratings has downgraded JSC Bank VTB's Viability Rating (VR) to 'bb-' from 'bb' and Russian Agricultural Bank's (Rusag) VR to 'b' from 'b+', the agency's press release says on Monday.
VTB and Agricultural Bank are present in Azerbaijani banking market.
The agency has affirmed CJSC Bank VTB24's VR at 'bb'. The three state-owned banks' support-driven ratings, including their 'BBB' Long-term Issuer Default Ratings, are unaffected by the current rating actions, and will be reviewed separately.
The downgrade of VTB's VR reflects the bank's moderate capitalisation, increased concerns about market risk appetite/tolerance and volatility of earnings, and the still high level of credit risk in the bank's loan book and other asset exposures. At the same time, the rating also considers the bank's broad franchise, currently adequate liquidity and limited refinancing risk, and the solid performance of the bank's retail subsidiary, VTB24.
VTB has shown an improvement since end-2010 in management-reported non-performing loan (NPL) and restructured ratios, with the former standing at 5.5% at end-Q112. This was mainly driven by loan growth. Fitch is concerned about increased exposure to real estate sector (114% of Fitch core capital), which at the top end is very concentrated and, in agency's view, weakly reserved; significant risks and reliance on collateral in some of the other larger loan and investment exposures; and continued build-up of accrued interest, with the total accumulated figure equal to 29% of Fitch core capital at end-Q112. Positively, interest accruals slowed down in Q112, but the sustainability of this trend needs to be confirmed.
Capitalisation (Fitch core capital ratio of 8.5% at end-Q112, up from 7.8% at end-2011), provides only modest loss absorption potential. Quality of earnings is weak, with about half of 2011 pre-impairment profit coming from one-off/non-cash items, while the volatility of trading results suggests high and increased appetite/tolerance for market risk (although Fitch has been informed that a reduction in market risk exposures is ongoing). On a positive note, liquidity is currently reasonable, with Fitch calculating the available buffer at end-Q112 sufficient to cover 37% of customer accounts.
VTB's VR could be upgraded if capitalisation and performance strengthened and asset quality improved. However, the rating could be downgraded if there were further credit or market driven losses resulting in increased pressure on the bank's solvency.
The affirmation of VTB 24's (VTB's retail banking subsidiary) VR reflects the bank's continued strong financial metrics as measured by loan portfolio performance, profitability, funding and liquidity. However, the rating also considers the bank's reduced capitalisation following rapid growth and dividend payments to the parent.
VTB24's VR is closely linked to that of its parent given the relatively high degree of fungibility of capital and liquidity between the two entities. An upgrade of VTB24's VR would therefore likely require an upgrade of VTB's VR, as well as continued strong performance of VTB24's retail business and strengthening of its capitalisation. A downgrade of VTB's VR, or an increase in credit risks at VTB24 as it plans to augment its existing upper mass market franchise with greater focus on lower mass market customers, could result in a downgrade of VTB24's VR.
The downgrade of Rusag's VR reflects Fitch's concerns about ongoing and potential future deterioration in the bank's asset quality. The VR also considers the bank's weak profitability and high, although declining reliance on wholesale funding. However, the rating also reflects deposit stability and continued access to market funding, which support liquidity and provide flexibility in recognising and managing asset quality problems.
RusAg's reported ratio of loans overdue by 90 days or more increased only moderately during 2011, to 12% from 10%. However, this partly reflected significant loan growth, with the absolute increase in 90 day overdue loans during the year (RUB44bn) equal to 5.8% of the starting balance. Restructured loans were also a high 24% at end-2011, and reserve coverage (64% of 90 day overdue loans) remains moderate. Moreover, in Fitch's view, reported asset quality figures may significantly understate the amount of potential problems due to the slow seasoning of the bank's long-term loan book, where most borrowers also benefit from interest rate subsidies, in Fitch's view potentially making it harder to assess borrowers' own ability to service loans, and high underlying credit risks arising from the rapid creation of the loan portfolio in a relatively high risk sector of the economy.
The Fitch core capital ratio stood at 12.7% at end-2011, offering only limited capacity to absorb further loan impairment. Pre-impairment profit is moderate (equal to 2.7% of average gross loans in 2011), and net income has been close to zero for the last three years due to provision creation.
RusAg's VR could be downgraded further if the bank recognises marked increased impairment in its loan book, putting pressure on the bank's solvency, or if Fitch believes underlying credit quality is showing clearer signs of deterioration. The VR could stabilise at its current level if further capital injections materially strengthen the bank's loss absorption capacity.