OREANDA-NEWS. Fitch Ratings has upgraded Expobank's LLC's (EB) Long-term Issuer Default Rating (IDR) to 'B+' from 'B' with Stable Outlook and downgraded Spurt-Bank's (Spurt) Long-term IDR to 'B-' from 'B' with Negative Outlook. The agency has also affirmed the Long-term IDRs of Russian Universal Bank (Rusuniversal) at 'B' with Stable Outlook and Uraltransbank (UTB) at 'B-'with Negative Outlook. A full list of rating actions is at the end of this commentary.

KEY RATING DRIVERS
ALL BANKS' IDRS, NATIONAL LONG-TERM RATINGS AND VIABILITY RATINGS
The upgrade of EB mainly reflects longer track record of successfully managed and capital accretive acquisitions of banking assets, while maintaining reasonable asset quality and capitalisation, improved core banking profitability and adequate liquidity.

The downgrade of Spurt reflects the bank's weak asset quality with significant additionally identified risky related party/relationship lending, weak capitalisation and weak pre-impairment profitability.

The affirmation of Rusuniversal reflects limited changes in the credit profile since our last review, including the bank's narrow franchise and highly concentrated mostly relationship-based business at both sides of the balance sheet. At the same time, the bank's ratings take into account good asset quality, very high capital ratios and robust liquidity.

The affirmation of UTB reflects narrow franchise, weak asset quality and core operating profitability and only moderate capitalisation.

The Negative Outlooks on Spurt's and UTB's ratings reflect the potential for further deterioration of their credit profiles over the next 12-18 months, as asset quality remains under pressure, while core pre-impairment profitability will be insufficient to cover even a moderate increase of credit losses, which could thus eat into the banks' capital. The Stable Outlooks on EB's and Rusuniversal's ratings reflect less vulnerable asset quality, good pre-impairment profitability, large capital buffer (Rusiniversal) and therefore less likelihood of capital pressure.

EB's IDRs, NATIONAL RATING, VIABILITY RATING AND SENIOR UNSECURED DEBT RATING
EB has demonstrated a successful track record of managing acquisitions of banking assets having bought four banks, one leasing company and significant loan portfolios over the past five years. The banks were purchased with considerable discounts to book values resulting in total RUB2.5bn of gains for EB (31% of end-1H15 equity). At the same time, EB's traditional banking franchise remains limited, which coupled with appetite for further acquisitions and contingent risks related to shareholder's other assets is likely to constrain EB's ratings to the 'B' category.

EB's recently announced acquisition of Royal Bank of Scotland Russia (RBSR, assets of RUB28bn at end-11M15) is unlikely to impact its rating, because RBSR's balance sheet will be de-risked prior to the acquisition in 1Q16. Most of the remaining assets will be cash and equivalents, while the equity will be acquired with a discount to book value.

EB's asset quality is good with non-performing loans (NPLs, 90 days overdue) being negligible 1.1% of total loans at end-1H15, fully covered by impairment reserves. The loan book is highly concentrated - the 25 largest made up 50% of total loan book (60% net off held to maturity corporate eurobonds accounted as loans). In Fitch's view, most of the top 25 loans are of acceptable quality being reasonably well secured, issued to companies with reasonable performance.

Core profitability is decent further boosted by gains from acquisitions. The gain on purchase of MAK-Bank in 1H15 pulled annualised ROAE to 33%. Net of this gain EB's ROAE would have been still solid 20% helped by healthy net interest of 6.5% (almost unchanged from 2014) and low impairment charges.

The Fitch Core Capital (FCC) ratio was adequate 16.7% at end-1H15. The regulatory Tier 1 ratio was lower 11.1%, because 1H15 profit was not yet audited and therefore accounted as Tier 2 capital. Fitch estimates that the bank's regulatory capital buffer was sufficient to increase impairment reserves up to 15% of total loans (compared to 3.5% at end-1H15) before breaching regulatory minima. Loss absorption capacity is also underpinned by solid pre-impairment operating profit net of one-off M&A gains (annualised 6.5% of average loans in 1H15.

A cushion of liquid assets (cash and equivalents, bonds eligible for refinancing with Central Bank and short-term interbank) covered 70% of customer accounts.

EB's senior unsecured debt is rated in line with the banks' Long-term IDRs, reflecting Fitch's view of average recovery prospects (corresponding to a Recovery Rating of '4'), in case of default.

SPURT's IDRs, VR AND NATIONAL LONG-TERM RATING
Spurt's reported NPLs (mostly retail) were a moderate 4.5% of loans at end-1H15, 1.6x covered by reserves. However, a further 5% of loans (mostly corporate) were restructured and weakly provisioned/collateralised. Additional asset quality risks stem from significant exposure (20% of loans or 1.7x FCC) to companies, which Fitch views as related to the bank. Most of this exposure has been recently identified by Fitch and comprises small, quite granular loans.

Of total related party exposure Fitch views as somewhat lower risk loans amounting to 0.8x FCC issued to a related petrochemical plant and a large construction company dealing with state contracts. The remaining exposure (0.9x FCC) is of higher risk being loans to companies with limited operations.

Profitability is weak due to margin compression and FX losses. Annualised pre-impairment operating result net of unreceived interest accruals was only 0.5% of average loans at end-1H15. Net income was significantly pressured by impairment charges, with the latter comprising 84% of pre-impairment profit at end-1H15.

Capitalisation (regulatory Tier 1 ratio was 9% at end-9M15) is considered tight given the risks from the related party lending, restructured loans and the retail portfolio.

Liquidity and refinancing risks should be manageable, providing deposits remain relatively stable, with the bank's liquid assets net of near-term wholesale repayments 22% of customer accounts at end-9M15. Bulky repayments maturing until-end-2015 have been already repaid, and refinancing needs after 2015 are limited.

UTB's IDRs, VR AND NATIONAL LONG-TERM RATING
UTB's credit losses, defined as NPLs originated in the period to average performing loan book, were 10% in 1H15 (annualised) compared with 5.8% in 2014, while the share of NPLs in the loan portfolio was a significant 17.7%. A further 8% of problem loans were transferred to bad debt collection companies with the bank retaining credit risk. Both on balance sheet NPLs and transferred problem loans were fully covered by loan impairment reserves. However, restructured loans, which otherwise would be NPLs, accounted for another 5% of loans and were weakly provisioned.

The FCC ratio was a reasonable 17.5% at end-1H15, but the regulatory Tier 1 ratio was much tighter 8% at end-10M15, mainly because of lower property revaluation reserves and larger operational risks component under regulatory rules. Regulatory capitalisation was sufficient to increase impairment reserves by only 2.9% (up to maximum 21%) before breaching the minimum required levels, which is a small safety buffer.

UTB reported a moderate annualised ROAE of 9% in 1H15. However, this was solely due to gain on earlier redemption of subordinated debt from EBRD with a discount. Without that gain, ROAE would have been negative 13.8%. Pre-impairment profitability is weak (equal to 0.1% of assets, annualised, in 1H15, net of the redemption gain).

Liquidity is comfortable with liquid assets covering 40% of customer accounts at end-1H15 (44% at end-10M15 under local GAAP).

RUSUNIVERSAL's IDRs, VR AND NATIONAL LONG-TERM RATING
Rusuniversal focuses mainly on defence sector companies with whom the bank's management and shareholders have long-term relations. Both loans and deposits are extremely concentrated. The top 10 loans made up 90% of gross loans and the top 10 deposits 86% of customer accounts. Fitch believes there is regulatory risk as there is an overlap between some depositors and borrowers, and the state may also tighten the legislation and force defence industry companies to transfer financial flows to state-owned banks, potentially challenging Rusuniversal's business.

Franchise and concentration issues aside, the bank's metric are strong. Zero NPLs, high regulatory capitalisation (64% at end-10M15) sufficient to reserve almost the entire loan book, good profitability (annualised ROAE of 8.2% in 1H15) considering a high capital base and solid liquidity covering all customer funding.

ALL BANKS' SUPPORT RATINGS AND SUPPORT RATING FLOORS
The '5' Support Ratings and 'No Floor' Support Rating Floors of the banks reflect their small size, limited market shares and retail deposit franchises, making government support uncertain. In Fitch's view, support from the banks' private shareholders can also not be relied upon.

RATING SENSITIVITIES
EB's IDRs, NATIONAL RATING, VIABILITY RATING AND SENIOR UNSECURED DEBT RATING
Upside potential for EB's ratings is currently limited. Downward pressure may arise if capitalisation and/or liquidity deteriorates as a result of mismanaged M&As, or asset quality weakening causing high impairment losses and pressure on capital. Any changes to EB's VR would likely impact senior unsecured debt rating.

RUSUNIVERSAL's IDRs, NATIONAL RATING AND VIABILITY RATING
Given the franchise limitations, upside potential for the ratings is limited. The bank's ratings could be downgraded if regulatory pressures significantly impact its business and/or if the bank's capitalisation deteriorates as a result of either shareholders decision to withdraw a significant amount of capital or major asset quality deterioration.

SPURT's AND UTB's IDRs, NATIONAL RATING AND VIABILITY RATING
Deterioration in asset quality and continued weak pre-impairment performance leading to capital erosion may result in negative rating action. Spurt's rating could also be downgraded in case of further significant increase in related party lending and/or weakening of the bank's relations with the authorities. Should the banks demonstrate moderation of credit losses and improvement in operating profits this could lead to stabilisation of the ratings.

ALL BANKS' SUPPORT RATINGS AND SUPPORT RATING FLOORS
Positive rating action is unlikely in the foreseeable future, although acquisition by a stronger owner could lead to an upgrade of the Support Rating.

The rating actions are as follows:

Expobank LLC:
Long-term foreign and local currency IDRs upgraded to 'B+' from 'B'; Outlooks Stable
Short-term foreign currency IDR affirmed at 'B'
Support Rating affirmed at '5'
Viability Rating upgraded to 'b+' from 'b'
Support Rating Floor affirmed at 'No Floor'
National Long-Term Rating upgraded to 'A-(rus)' from 'BBB(rus)'; Outlook Stable
Senior unsecured debt upgraded to 'B+'/Recovery Rating 'RR4'
Senior unsecured debt National Long-term Rating upgraded to 'A-(rus)' from 'BBB(rus)'

Spurt Bank:
Long-term foreign currency IDR downgraded to 'B-' from 'B'; Outlook Negative
Short-term foreign currency IDR affirmed at 'B'
Viability Rating downgraded to 'b-' from 'b'
Support Rating affirmed at '5'
Support Rating Floor affirmed at 'No Floor'
National Long-term Rating downgraded to 'BB(rus) from 'BBB-(rus)'; Outlook Negative

Russian Universal Bank:
Long-term foreign currency IDR affirmed at 'B', Outlook Stable
Local Currency long-term IDR affirmed at 'B', Outlook Stable
National Long-term Rating affirmed at 'BBB-(rus)', Outlook Stable
Short-term foreign currency IDR affirmed at 'B'
Viability Rating affirmed at 'b'
Support Rating affirmed at '5'
Support Rating Floor affirmed at 'No Floor'

UralTransBank:
Long-term foreign currency IDR affirmed at 'B-'; Outlook Negative
National Long-term rating affirmed at 'BB-(rus)', Outlook Negative
Short-term foreign currency IDR affirmed at 'B'
Viability Rating affirmed at 'b-'
Support Rating affirmed at '5'
Rating Floor affirmed at 'No Floor'