Fitch Affirms 3 State-Owned Belarus Banks at 'B-'; Outlook Stable
KEY RATING DRIVERS
IDRS, SUPPORT RATINGS AND SUPPORT RATING FLOORS
The Long-term IDRs, Support Ratings and Support Rating Floors of BBK, BIB and DBRB reflect Fitch's expectation of support these banks may receive from the government of Belarus, in case of need. This view takes into account the banks' state ownership (either through The State Property Committee for BBK and BIB or the Council of Ministers in the case of DBRB) and government control (representatives of the government sit on the banks' supervisory boards).
We also consider the banks' high systemic importance (greater at BBK with market shares of 33% by assets and 70% by retail deposits), policy roles (mainly for BBK and DBRB as the country's largest providers of government programme lending backed by dedicated government funding) and the track record of support to date.
At the same time, the ratings remain vulnerable to deterioration of the sovereign credit profile as external financing pressures remain high, reflected in the country's low FX reserves (USD4.6bn at 1 July 2015), a large current account deficit (USD1.3bn or 7.3% of GDP in 4M15) and depreciation of the Belarusian rouble (BYR) (by 29% against USD in 1H15 and by 24% in 2014). The macroeconomic outlook is weak - real GDP contracted 3% in 5M15 and the IMF forecasts Belarus economy to stagnate in 2016, mostly due to weaker external demand.
The country's reliance on Russia remains high in terms of external debt refinancing, direct investment and preferential trade terms, and Russia remains the country's largest trading partner. Fitch's base case expectation is for Russian support to remain available to the country to help alleviate external pressures and internal imbalances.
The banks' ratings reflect the authorities' limited financial flexibility to provide extraordinary support to the banks at all times, in particular in foreign currency. This view considers the banks' large foreign currency liabilities (a combined USD9.5bn at end-2014), of which the majority is customer deposits, but a significant proportion (USD1.4bn at end-1Q15) is short-term external debt maturing within 12 months. These liabilities are significant relative to the country's FX reserves, while FX liquidity is tight at all three banks. Government funding is significant at DBRB and BBK, at 72% and 20% of liabilities, respectively at end-2014, although limited at BIB (2%). Liquidity shortages in local currency, if any, are likely to be covered by the central bank (BBK, BIB) or authorities (DBRB).
The government recently provided new equity injections into BBK (BYR10trn or 40% of end-2014 IFRS equity, through conversion of MinFin deposits at the bank) and into DBRB (BYR1.3bn or 11% of end-2014 equity, out of BYR2trn approved for 2015). No recapitalisation plans exist for BIB; however, we expect the support propensity will remain unchanged, despite the authorities' intention to privatise this bank. Privatisation is likely to be a long-term project and the authorities are likely to provide support to the bank prior to any sale, in Fitch's view.
Viability Ratings (VRs) - BBK, BIB
BBK's and BIB's VRs reflect the high correlation of these banks' stand-alone creditworthiness with the sovereign credit profile. This is due to both banks' large direct and indirect exposure to the sovereign (end-2014: BBK: 5.3x Fitch Core Capital (FCC); BIB: 3.7x) through (i) holdings of government bonds and FX swaps with the National Bank of Belarus (NBB) and (ii) policy lending under government programmes (BBK: 61% of loans; BIB: 24%) and loans issued to state-owned corporates.
Reported non-performing loans (NPLs, more than 90 days overdue) remained low at 1.5% at BBK and 4.5% at BIB at end-2014, helped by transfers of weakly performing government programme loans to DBRB (by BBK), government subsidies on interest payments, loan repayments under state guarantees, bullet repayment structures and increasing rollovers. Credit risks have increased in the recessionary environment, and are also heightened by generally high leverage in the corporate segment and significant FX lending (BBK: 57%; BIB: 60%), often to unhedged borrowers, whose debt servicing capacity would have been affected by the recent BYR devaluation.
Regulatory capital ratios (CARs; end-1H15: BBK: 17%, BIB: 12%) are seen as only moderate in light of their risk profiles, although the recent equity injection at BBK and planned additional loan transfers to DBRB or MinFin (BBK: 8% of loans; BIB: 7%) should support CARs and asset quality management in the near term. Pre-impairment profitability remains reasonable, at 3.6% and 3.0% of average gross loans (net of unpaid interest accruals), respectively, in 2014, but internal capital generation remains low (ROAE of 5.5% and 3.7%, respectively at end-2014), despite generally moderate loan impairment charges (LICs) so far. Further solvency support in the form of loan transfers or capital contributions may be in prospect if asset quality deteriorates further.
Customer funding is the main form of funding at both banks (72%-74% of liabilities) and highly dollarised. Retail deposits (BBK: 44% of liabilities; BIB: 40%) tend to show volatility in periods of market turbulence, as was the case in December 2014-January 2015, exerting pressure on the banks' liquidity and leading to higher funding costs. BBK's high loan-to-deposit ratio of 127% reflects a significant share of dedicated government funding and external liabilities (15% of the total); BIB's loans-to-deposit ratio is more moderate, close to 100% at end-2014. Liquidity buffers (net of near-term wholesale debt repayments) are generally moderate (in BYR) or tight (in FX), and liquidity management remains highly dependent on the confidence of depositors, refinancing of external liabilities and support from authorities.
Fitch has not assigned a VR to DBRB due to the bank's special status as a development institution and its close association with the authorities.
RATING SENSITIVITIES
IDRS, SUPPORT RATINGS AND SUPPORT RATING FLOORS - BBK, BIB, DBRB
Changes to the banks' IDRs are likely to be linked to changes in the sovereign credit profile. A further weakening of the sovereign could indicate a reduced ability to support the banks as well as greater risk of capital controls being introduced. A marked reduction in Belarus's ability to refinance its external debt could result in a significant weakening of the sovereign profile.
VRs - BBK, BIB
BBK's and BIB's VR's could be downgraded if the weaker operating environment translates into a marked deterioration in the banks' asset quality, performance and capital metrics, without support being made available.
The potential for positive rating actions on either the IDRs or VRs is limited in the near term, given weaknesses in the economy and external finances.
The rating actions are as follows:
BBK and BIB
Long-term IDR affirmed at 'B-'; Outlook Stable
Short-term IDR affirmed at 'B'
Viability Rating affirmed at 'b-'
Support Rating affirmed at '5'
Support Rating Floor affirmed at 'B-'
DBRB
Long-term IDR affirmed at 'B-'; Outlook Stable
Short-term IDR affirmed at 'B'
Local-Currency Long-term IDR affirmed at 'B-'; Outlook Stable
Support Rating affirmed at '5'
Support Rating Floor affirmed at 'B-'
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