OREANDA-NEWS. This commentary replaces the version published earlier today to clarify that a cited ratio of Peresvet Bank references pre-impairment profit as a share of gross loans, and not impairment losses as a share of gross loans. The correct version is as follows:

Fitch Ratings has affirmed the Long-term Issuer Default Ratings (IDR) of Banca Intesa (BIR) at 'BBB-', Rosevrobank (REB) at 'BB-', and Peresvet Bank (Peresvet) at 'B+'. The Outlook on BIR is Negative, while those on REB and Peresvet are Stable. A full list of rating actions is available at the end of this rating action commentary.

KEY RATING DRIVERS

IDRs

The affirmation of BIR's IDRs reflects Fitch's view that BIR would likely be supported, in case of need, by its ultimate parent, Intesa Sanpaolo S. p.A. (ISP, BBB+/Stable). This view is based on the strategic role of BIR for further development of the Russian franchise of the group, the low cost of the potential support that might be required, common branding and potential reputational and contagion risks for the group in case of a subsidiary default.

BIR's Long-Term Foreign Currency IDR is constrained by Russia's 'BBB-' Country Ceiling, and the Long-Term Local Currency IDR also takes into account country risks. The Negative Outlook on BIR's ratings reflects the Negative Outlook on Russia's sovereign rating.

The IDRs and National Ratings of REB and Peresvet are driven by their intrinsic strength, as expressed by their Viability Ratings (VRs).

VRs

The affirmation of all three banks' VRs (REB at 'bb-', RIB and Peresvet at 'b+') reflects their generally stable financial metrics and only limited asset quality deterioration (more significant at BIR) amid the weak economic environment, and reasonable capital buffers. Negatively, the VRs reflect the banks' limited and fairly concentrated franchises and balance sheets. The one-notch higher VR of REB relative to the other two banks reflects its stronger and more resilient performance through the cycle.

REB

REB's asset quality remains resilient as expressed by a consistently low non-performing loans (NPLs, 90 days overdue) ratio (3.9% at end-1H16; 3.4% at end-2015) and moderate share of restructured loans (2.2%). These exposures in total were 1.5x covered by loan impairment reserves (LIRs). REB's 25-largest corporate exposures (equal to 1.3x Fitch Core Capital (FCC)) were mostly of limited risk because these are either (i) working-capital loans to cash - generative clients with long operational track records; or (ii) low-risk loans to government-related companies (about 20% of gross loans).

REB's FCC ratio was a high 16% at end-1H16, up from 14% at end-2015, due to only limited lending growth and robust profitability (annualised ROAE of 32% in 1H16). Fitch estimates that at end-1H16 the bank's capital cushion was to sufficient to increase loan impairment reserves up to 24% of the portfolio without breaching minimum capital requirements. Loss absorption capacity is also strengthened by solid pre-impairment profit, which was equal to a large 13% of average loans in 1H16 (annualised).

REB's funding is a strength due to a high share (38% of liabilities at end-1H16) of sticky and granular interest-free current accounts. The funding structure translates into REB's fairly low funding cost (4.4% in 1H16), providing the bank with a significant competitive edge for lending to better quality corporates while maintaining healthy margins.

Funding concentration is low (the 20-largest clients accounted for a moderate 23% of end-1H16 total accounts) and proved to be rather stable through the past crises. Liquidity risk is also mitigated by REB's significant liquidity cushion, which covered more than 45% of total customer accounts at end-8M16.

BIR

BIR's NPLs ratio increased to 16.3% of gross loans at end-1H16 from 13.9% at end-2015 and 8.4% at end-2014. Restructured exposures made up a further 9% of loans at end-1H16. The deterioration occurred mainly due to further credit losses in the SME portfolio and several defaults among the largest borrowers.

Provisioning is prudent, with NPLs being fully covered by reserves. The combined coverage of NPLs and restructured loans was a weaker 0.7x, but is still reasonable as most restructured exposures are performing well under renegotiated terms. Positively, the NPL origination ratio (calculated as the net increase in NPLs plus write-offs during the period, annualised) decreased to 2% in 1H16 from 7% in 2015, indicating improvement in asset quality following the strengthening of underwriting in 2H15 and the stabilisation of the Russian economy.

Profitability is weak. Although the net interest margin remained a solid 7% in 1H16, BIR was close to break-even on a pre-impairment basis due to its cost-income ratio jumping to 79% in 1H16 (62% in 2015) as it deleveraged by 15%. Loan impairment charges decreased to 3% of gross loans in 1H16 (8% in 2015), but this still led to a negative ROAE of 7%.

The FCC ratio remained reasonable, at 13.6% at end-1H16 (13.3% at end-2015), as the bottom line loss was offset by a decrease of risk-weighted assets. Regulatory capital ratios were also stable: at end-8M16 the Tier 1 ratio was 13.8% (6% required minimum) and total capital ratio was 18% (required minimum of 8%), potentially allowing the bank to reserve an extra 13% of gross loans (up to 34% totally) without breaching regulatory limits.

As it has deleveraged, the bank has repaid a significant share of its parent funding (decreased to 25% of liabilities at end-1H16 from 44% at end-2014). BIR can tap RUB26bn of unused credit lines from the group (equal to 75% of BIR's deposits), if needed, which significantly mitigates liquidity risks.

PERESVET

Peresvet's reported NPLs were a low 0.6% at end-1H16, but real asset quality is potentially weaker. This is based on Fitch's review of the top 100 exposures, which revealed that many borrowers have some signs of affiliation among themselves or with the bank's shareholders or management, although not to the extent that these could formally be considered related parties for the purposes of IFRS or regulatory reporting. In Fitch's view the origination of these exposures raises some concerns about corporate governance in Peresvet. Fitch also believes that the actual concentration and related-party lending levels are higher than reported.

As a moderate mitigating factor, according to management, most such borrowers are typically working under contracts with regional authorities or state-related companies, reducing credit risks. However, the longer-term sustainability of this business is questionable to Fitch.

Fitch estimates that around RUB12bn (0.5x of end-1H16 FCC) of these loans are particularly high-risk, as the borrowers are mostly booking entities without any real assets, while the bank is the sole creditor. Around RUB2bn of these loans were reportedly cash-covered, which somewhat reduces the risk.

Another area of risk is a RUB4bn (18% of FCC) fiduciary bank placement, which in reality represents a corporate exposure of the same nature as above.

The bank's capital ratios remained reasonable (12.9% FCC ratio and regulatory Tier 1 ratio of 9.6% at end-1H16). Fitch estimates that Peresvet had the capacity to reserve an additional 5% of gross loans at end-1H16 before breaching regulatory capital adequacy requirements. Additional impairment losses could be absorbed through pre-impairment profit, which made up 5.5% (annualised) of end-1H16 gross loans. However, capitalisation should be considered together with the concentrated and potentially high-risk loan book.

Peresvet is funded mainly by customer accounts, which are predominantly relationship-based and highly concentrated, making liquidity sensitive to the behaviour of few large depositors. Refinancing risks are moderate at present, but may increase as the bank has been actively attracting wholesale funding (at 22% of liabilities at end-1H16, up from 9% at end-2014). Peresvet's liquidity buffer was rather tight, at 13% total liabilities at end-8M16.

REB'S AND PERESVET'S SUPPORT RATINGS AND SUPPORT RATING FLOORS

The '5' Support Ratings (SRs) of REB and Peresvet reflect Fitch's view that support from the banks' private shareholders cannot be relied upon. The SRs and Support Rating Floors of 'No Floor' also reflect that support from the Russian authorities cannot be relied upon due to the banks' narrow franchises and lack of systemic importance.

BIR'S AND PEREVET'S SENIOR UNSECURED DEBT

The senior unsecured debt (RUB-denominated local bonds) of these two banks is rated in line with their respective Long-Term IDRs, in line with Fitch's criteria for rating these instruments.

RATING SENSITIVITIES

BIR

The Negative Outlook on BIR's ratings reflects the Negative Outlook on Russia's sovereign rating, and BIR will likely be downgraded if Russia's ratings are downgraded. BIR could also be downgraded if there is a sharp reduction in ISP's commitment to the subsidiary.

VR upside is currently limited due to the recent deterioration in BIR's performance and asset quality metrics. Negative pressure could stem from further asset quality deterioration and a weakening of the capital position, if this is not rectified by fresh equity injections from the parent.

REB AND PERESVET

REB's and Peresvet's ratings could be downgraded if their asset quality deteriorates significantly and erodes the banks' profitability and capital positions. Further corporate governance weaknesses or risks arising from regulatory reviews in Peresevet may also lead to a downgrade.

Upside for the banks' ratings is limited at present given their limited franchises and a weak outlook on the broader economy, but is more likely for REB should it manage to expand its franchise and demonstrate an extended track record of solid financial metrics.

REB'S AND PERESVET'S SUPPORT RATINGS AND SUPPORT RATING FLOORS

Fitch believes that any changes in the banks' SRs and SRFs are unlikely in the near term, although if any of the banks is sold to a higher-rated investor, it may result in an upgrade of its SR.

PERESVET'S AND BIR'S SENIOR UNSECURED DEBT

Senior unsecured debt ratings are sensitive to changes in the respective banks' IDRs.

The rating actions are as follows:

Banca Intesa

Long-Term Foreign and Local Currency IDRs: affirmed at 'BBB-'; Outlook Negative

Short-Term Foreign and Local Currency IDRs: affirmed at 'F3'

National Long-term Rating: affirmed at 'AAA(rus)'; Outlook Stable

Support Rating: affirmed at '2'

Viability Rating: affirmed at 'b+'

Senior debt long term rating: affirmed at 'BBB-'

REB

Long-Term Foreign and Local Currency IDRs: affirmed at 'BB-'; Outlooks Stable

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 Stable

Peresvet Bank

Long-Term Foreign and Local Currency IDRs: affirmed at 'B+'; Outlooks Stable

Short-Term Foreign Currnecy IDR: affirmed at 'B'

National Long-Term Rating: affirmed at 'A-(rus)'; Outlook Stable

Viability Rating: affirmed at 'b+'

Support Rating: affirmed at '5'

Support Rating Floor: affirmed at 'No Floor'

Senior unsecured debt: affirmed at 'B+'/'A-(rus)'; Recovery Rating 'RR4'