Fitch cuts outlook on 20 mid-sized Russian banks to negative

Credit ratings agency Fitch has revised the Outlooks on 20 mid-sized and small Russian banks to Negative from Stable. The action reflects Fitch's expectation that the sharp deterioration in the Russian operating environment will negatively impact the banks' credit profiles in 2015. The banks are Credit Bank of Moscow (CBOM, BB), Bank Saint Petersburg OJSC (BSPB, BB-), Bank Zenit (Zenit, BB-), Chelindbank (Chelind, BB-), Rosevrobank (REB ,BB-), Locko-bank (Locko, B+), Primsotsbank ( B+), Novosibirsk Social Commercial Bank Levoberezhny, OJSC (Levoberezhny ,B+), Sovcombank (SCB, B+), Tinkoff Credit Systems (Tinkoff, B+), JSC SDMBank (SDM, B+), JSC Asian-Pacific Bank (APB, B+), Absolut Bank (Absolut, B+), Evrofinance Mosnarbank (EMB, B+), JSC Bystrobank (Bystro, B), SKB-Bank (SKB, B), Expobank LLC (Expobank, B), JSC Spurt Bank ( Spurt, B), Pervobank (PB, B), Uraltransbank (UTB, B-).

At the same time, the agency has affirmed the Long-term Issuer Default Ratings of two Russian banks - Novikombank and Russian Universal Bank - at 'B' with Stable Outlooks, and withdrawn without affirmation the ratings of Promsvyazbank (PSB). Most rated Russian banks not covered in this commentary are already on Negative Outlook, either because their ratings are linked to those of the Russian sovereign (BBB/Negative) or because of bank-specific negative trends in their stand-alone credit profiles. The revision of the banks' Outlooks to Negative reflects Fitch's expectation that economic recession, significantly increased funding costs, sharp rouble depreciation, closed wholesale funding markets, a challenging liquidity situation and rising inflation will weigh on the banks' credit profiles. At the same time, the affirmation of the banks' ratings reflects (i) their moderate resilience to the weaker operating environment, as financial metrics are for the most part currently reasonable; and (ii) sovereign support for the sector, in the form of regulatory forbearance, liquidity provision and potential capital injections, which should reduce near-term pressures.

Asset quality is a key driver for all banks on Negative Outlook. Most of them had non-performing loan (NPL) ratios in single digits at end-1H14 (APB, Tinkoff, Bystro, SKB and UTB had higher ratios, reflecting their retail/small business focus), notwithstanding moderate growth in NPL ratios by 1-6 pct in 1H14, and these were well covered (at least by 80%) by reserves. However, economic recession (we forecast GDP to contract by 2.8% in 2015, and the downturn may be even more severe in the case of tightened sanctions, accelerated capital flight or a further fall in oil prices), higher interest rates and the weaker rouble are likely to lead to a more marked deterioration in corporate asset quality. Already large credit losses in retailfocused banks (Tinkoff, SCB, SKB, Bystro and APB) are also likely to further widen due to a reduction in real household incomes resulting from high inflation and rouble devaluation.

Banks' generally moderate capitalisation (although more solid at Tinkoff, Chelind and EMB) will be hit by sizable mark-to-market losses on bond portfolios, an upward revaluation of foreign currency risk-weighted assets and, over the long-term, by increased impairment charges, although regulatory forbearance will to varying degrees prevent these effects from being recognised in statutory accounts.