Fitch Ratings has revised Russia-based Evrofinance Mosnarbank's (EMB) Outlook to Stable from Negative, while affirming the Long-term Issuer Default Ratings (IDRs) at 'B+'.
KEY RATING DRIVERS
The affirmation of EMB's Long-term IDRs and revision of the Outlooks reflect the so far limited negative impact from the economic downturn on the bank's credit profile and our expectation of continuing reasonable performance and credit metrics.
The ratings reflect the standalone profile of EMB, as expressed by its Viability Rating, without taking into account potential support from the Russian and Venezuelan authorities. This is due to continued delays to the ratification of an intergovernmental agreement (IA), initially signed by Russia (BBB-/Negative) and Venezuela (CCC) in 2011 to transform the bank into an international financial institution (IFI), equally owned by the two governments directly or through government agencies. Currently, EMB is owned by Gazprombank (BB+/Negative; 25% plus one share), VTB Bank (25% plus one share) and the National Development Fund of Venezuela (50% minus two shares).
EMB has a limited and concentrated franchise, moderate profitability and volatile funding (albeit less volatile in 2H15 than previously). At the same time the ratings positively consider EMB's solid capitalisation, ample liquidity and sound asset quality.
EMB's exposures are mainly the bank's securities book (52% of assets at end-3Q15), loan book (27%) and off-balance sheet contingencies (equal to 32% of assets). Most of these are Russian exposures of reasonable quality, while Venezuelan exposures (exclusively through sovereign and quasi-sovereign bonds) are a moderate 18% of Fitch Core Capital (FCC).
Loan book asset quality metrics were sound and stable in 9M15, with NPLs far below sector average at 2.6% at end-3Q15 (end-2014: 2.9%). Restructured loans, however, moderately increased to 6% at end-3Q15 from 1.6% at end-2014, while their recoveries are uncertain. Loan impairment reserves were a reasonable 4.4% at the same date, while solid capital provides a further buffer.
EMB's tier 1 and total regulatory capital ratios were a strong 22% and 25%, respectively, at end-3Q15, serving a solid buffer against market and credit risks. However, dividends to current shareholders have increased (100% of local GAAP net income since 2013 after 50% in 2012).
EMB's balance sheet has historically been volatile, driven by sporadic inflows of large short-term placements by Venezuelan entities, reflecting the bank's focus on trade finance and settlement operations. However, these have historically been prudently covered with liquid assets. At end-3Q15, EMB's total available liquidity, net of potential debt repayments within one year, was sufficient to repay a high 47% of customer accounts.
EMB's net interest margin has historically been moderate, at 3.9% on average for 2012-1H15, mostly due to a high share of low-yielding liquid assets, reflective of its balance sheet structure. This, coupled with a high capital base, translates into a low return on equity (6% in 1H15). The recent volatility of EMB's comprehensive income was caused by the performance of Venezuelan and Russian securities.
EMB's Support Rating of '5' and Support Rating Floor of 'No Floor' reflect Fitch's view that support from the bank's shareholders and/or the Russian/Venezuelan authorities, while possible, cannot be relied upon.
RATING SENSITIVITIES
Should EMB become an IFI, this would likely lead to an upgrade of its IDRs, although the level of the ratings would depend on the ratings of Russia and Venezuela, Fitch's assessment of the bank's policy role and the extent of the shareholders' capital commitments.
Capital deterioration as a result of: (i) a significant increase in leverage; (ii) a prolonged period of elevated credit losses in excess of pre-impairment profitability, or (iii) contingent risks from the shareholders would lead to a downgrade.
Upside potential for EMB's VR is currently limited given the bank's narrow franchise and moderate performance.
The rating actions are as follows:
Long-term foreign and local currency IDRs: affirmed at 'B+'; Outlooks revised to Stable from Negative
Short-term foreign currency IDR: affirmed at 'B'
National Long-term Rating: affirmed at 'A-(rus)'; Outlook revised to Stable from Negative
Viability Rating: affirmed at 'b+'
Support Rating: affirmed at '5'
Support Rating Floor: affirmed at 'No Floor'
Senior unsecured debt: affirmed at 'B+(EXP)'; Recovery Rating 'RR4(EXP)'; affirmed at 'A-(rus)(EXP)' and withdrawn
