(The following statement was released by the rating agency)
LONDON, July 12 (Fitch) Fitch Ratings has affirmed Russia-based OJSC Alfa-Bank's
(Alfa) Long-term Issuer Default Rating (IDR) at 'BBB-'. Fitch has also affirmed
Alfa's Cyprus-based parent entity, ABH Financial Limited's (ABHFL) Long-term IDR
at 'BB+'. Both ratings have Stable Outlooks. A full list of rating actions is at
the end of this commentary.
KEY RATING DRIVERS - ALFA'S RATINGS
The affirmation of Alfa's ratings reflects little change in the credit profile
since the last review. At the same time the completion of the sale by Alfa's
shareholders of their stake in TNK-BP to Rosneft for USD14bn in Q113 has
considerably strengthened the financial position of the shareholders, improving
their ability to support the bank, in case of need, and reducing contingent
risks for the bank from other group assets.
More broadly, the ratings reflect the bank's solid franchise, its good
management and track record of navigating through successive crises in the
Russian market and its currently strong balance sheet and performance metrics.
At the same time, Alfa's ratings also consider its still moderate market shares
in a sector dominated by state-owned banks, and the likelihood of continued
significant cyclicality in the performance of the Russian economy and the bank.
Performance is sound, and earnings have been boosted in recent years by
cyclically low impairment charges or reversals. Alfa's return on equity (ROE)
was a high 22% in 2012, but given the decelerating economy and margin
compression Fitch expects this to moderate slightly in 2013. Profitability is
supported by the considerable share of low cost or interest-free current
accounts (25% of end-2012 liabilities), which gives Alfa a significant cost
advantage and the ability to lend to better quality credits.
Alfa's corporate loan book is relatively concentrated compared to most
international investment grade peers, with the largest 25 exposures comprising
30% of gross loans. Importantly, Alfa's primary focus in underwriting is on
companies' cash flows and or some form of state support/backing, although for
some riskier exposures (eg construction) collateral is also strong. However,
among the largest exposures there is a significant share of unseasoned loans
with bullet repayments, so asset quality may be volatile, especially in times of
stress, although robust problem loan workouts in the last crisis give some
Non-performing loans (NPLs; more than 90 days overdue) were a low 1.1% of gross
loans at end-2012. A further 2.7% of loans were restructured but performing,
according to management. The overall impairment reserve level of 4.0% provides a
significant buffer, comparable to cumulative loan write-offs for 2009-2012.
In retail lending (15% of the total portfolio) Alfa is mostly expanding in cash
loans, credit cards and consumer finance. There was a moderate uplift in retail
NPL origination (the ratio of net increase in NPLs plus write-offs divided by
average performing loans) to 3.8% in 2012 from 3.1% in 2011, which is moderate
relative to other large players, although for consumer loans (30% of retail
loans) this ratio was a higher 7.1% in 2012, which is more in line with the
market. The bank plans to continue with retail expansion, which may translate
into higher impairment charges, although there is a considerable safety margin
due to high lending rates of up to 35%.
Investment banking is opportunistic and therefore potentially volatile. On the
positive side, Alfa has a good track record of being able to find deals and earn
money even in the down cycle.
Liquidity is adequate, with liquid assets net of potential near-term wholesale
funding repayments sufficient to repay about one-third of customer accounts.
TNK-BP's were insignificant at end-2012 (1% of liabilities) and on market terms,
so the risk of them being withdrawn is negligible. Medium-term refinancing
requirements are low, in total comprising about USD400m in H213-2014, equal to
only 1% of end-2012 liabilities.
Basel capitalisation reduced slightly with Tier 1 and total capital ratios (CAR)
of 10.2% and 15.6%, respectively, at end-2012 (11.9% and 16.7% at end-2011) due
to 37% loan growth and USD182m of dividends paid by ABHFL in 2012. As dividends
were declared by the holdco and not Alfa, the latter's regulatory capitalisation
actually slightly improved (N1 ratio of 12.4% at end-5M13; 11.5% at end-2011).
Fitch also estimates that Alfa would not need new equity to comply with Basel
III regulations, which will be introduced by 1 January 2014, as today confirmed
by the new Head of the Central Bank Elvira Nabiullina, because the requirements
were significantly relaxed compared to those initially indicated by the
regulator. The agency had previously estimated that due to the significant (45%)
Tier 2 component of regulatory capital, Alfa would need about USD0.5bn of new
equity to comply, although even this was not a significant concern given the
bank's capacity to release reserves in statutory accounts and the owners'
apparent ability to provide new capital.
Fitch considers Alfa's management to be strong, and in general views positively
the close shareholder oversight of management, which helps to keep the latter
focused and reduces the risk of unexpected losses. The risk of Alfa becoming
highly exposed to non-banking assets within the broader Alfa Group is moderate,
in Fitch's view, due to the policy of managing these companies independently and
their generally quite strong credit profiles and cash generation. Related party
lending has been at a reasonable level (about 30% of equity at end-2012;
reportedly materially reduced in Q113) and usually of solid quality.
Fitch also believes there is some degree of political risk related to Alfa
Group's investments and operations, as is true for other large financial
industrial conglomerates in Russia. However, the agency notes Alfa Group's long
track record of maintaining acceptable relationships with the authorities, and
therefore the base case expectation is for the status quo to remain. Also, given
Alfa's franchise and importance to the Russian banking system, there is some
probability of support from the Russian authorities. For instance, Alfa was one
of the few private banks to receive subordinated debt from state
Vnesheconombank, as a part of the government's programme to support larger
banks' capitalisation in the last crisis.
RATING SENSITIVITIES - ALFA'S RATINGS
A further upgrade of Alfa is unlikely in the near term given the current level
of Russia's sovereign ratings (BBB/Stable); the expected cyclicality in the
performance of the Russian economy, and hence also of the bank; and Alfa's still
moderate market shares.
A deep and prolonged recession in Russia could put downward pressure on Alfa's
ratings. However, in light of the bank's track record of managing through
previous crises, Fitch would probably only downgrade the bank to sub-investment
grade level in case of considerable impairment to the bank's financial position.
Alfa could also be downgraded if the broader Alfa Group increases leverage to
the extent that this represents, in the agency's view, a major contingent risk
for the bank (unlikely given the current strong cash position), or in case of a
marked deterioration in relations of the bank or its shareholders with the
KEY RATING DRIVERS - ABHFL's RATINGS
The affirmation of ABHFL's ratings above the Cyprus Country Ceiling of 'B'
reflects Fitch's view that the capital controls do not hamper ABHFL's ability to
service its obligations (for more information see 'Fitch Affirms ABH Financial
Limited at 'BB+'', dated 11 April 2013).
More generally, the 'BB+' Long-term IDR assigned to ABHFL reflects Fitch's view
that default risk at the bank and the holding company are likely to be highly
correlated in view of the high degree of fungibility of capital and liquidity
within the group, which is managed as a single entity. The currently limited
volume of holding company debt to non-related parties also supports the close
alignment of its ratings with Alfa.
The one-notch difference between the bank and holding company ratings reflects
the absence of any regulation of the consolidated group, the fact that the
holding company is incorporated in a different jurisdiction and the high level
of double leverage at the holding company. The latter, defined by Fitch as
equity investments in subsidiaries divided by holdco equity, stood at a reported
192% at end-2012, although this primarily reflects related party liabilities at
the ABHFL level.
RATING SENSITIVITIES - ABHFL'S RATINGS
An upgrade or downgrade of Alfa would be likely to result in a similar rating
action on ABHFL. In addition, ABHFL could be downgraded if its planned future
debt issuance results in a further marked increase in double leverage or gives
rise to significantly increased liquidity risks at the holdco level.
The rating actions are as follows:
Long-term IDR: affirmed at 'BBB-'; Stable Outlook
Short-term IDR: affirmed at 'F3'
Viability Rating: affirmed at 'bbb-'
Support Rating: affirmed at '4'
Support Rating Floor: affirmed at 'B'
National Long-term rating: affirmed at 'AA+(rus)'; Stable Outlook
Senior unsecured debt: affirmed at 'BBB-'
Senior unsecured debt (on the National scale): affirmed at 'AA+(rus)'
Subordinated debt: affirmed at 'BB+'
Long-term IDR: affirmed at 'BB+'; Stable Outlook
Short-term IDR: affirmed at 'B'
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Applicable criteria, 'Global Financial Institutions Rating Criteria', dated
August 2012, 'National Ratings Criteria' dated January 2011, 'Rating FI
Subsidiaries and Holding Companies' dated August 2012, 'Rating Financial
Institutions Above the Sovereign' dated December 2012, are available at
Applicable Criteria and Related Research:
Global Financial Institutions Rating Criteria
National Ratings Criteria
Rating FI Subsidiaries and Holding Companies
Rating Financial Institutions Above the Sovereign
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