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Fitch Upgrades 21 Russian and Russian-owned Financial Institutions on Sovereign Upgrade

20.08.2019,18:28


August 20, Fineko/abc.az. Fitch Ratings has upgraded 21 Russian and Russian-owned financial institutions' Long-Term Foreign- and Local-Currency Issuer Default Ratings (IDRs) and debt ratings by one notch. The rating actions follow the upgrade of Russia's ratings (see 'Fitch Upgrades Russia to 'BBB'; Outlook Stable', dated 9 August 2019 at www.fitchratings.com).

Fitch has also placed the 'bbb-' Viability Ratings (VRs) of Sberbank of Russia (SBRU) and AO Citibank on Rating Watch Positive (RWP).

A full list of rating actions is at the end of this commentary.

 

KEY RATING DRIVERS

LONG-TERM IDRS, SUPPORT RATINGS, SUPPORT RATING FLOORS (SRFs)

 

STATE-CONTROLLED FINANCIAL INSTITUTIONS

 

The upgrades of the Long-Term IDRs of Sberbank of Russia (SBRU), VEB.RF (VEB), Russian Agricultural Bank (RusAg), Gazprombank (JSC) (GPB) and PJSC State Transport Leasing Company (STLC), and the upward revisions of their SRFs, reflect an improvement of Russia's financial flexibility, and therefore a stronger ability to provide support to these entities, as reflected by the upgrade of the Russian sovereign ratings.

 

Fitch rates SBRU and VEB at the same level as the sovereign, which reflects our view of a very high propensity of the Russian sovereign to provide support, in case of need, because of: (i) majority state ownership in SBRU (50%+1 share owned by the Central Bank of Russia) or direct state control and supervision in VEB; (ii) the exceptionally high systemic importance of SBRU (approximately 33% of system assets and 45% of retail deposits at end-5M19) and VEB's policy role as a state development corporation; (iii) the track record of capital and funding support (VEB); and (iv) the close association between the authorities and the two entities.

 

Fitch rates RusAg and GPB one notch below the sovereign's at 'BBB-'. Rusag's and GPB's ratings factor in a high propensity of the state to provide support given the banks' high systemic importance, state ownership/control, RusAg's policy role and GPB's association with PJSC Gazprom (BBB/Stable). However, as the two banks do not have the exceptional systemic importance of SBRU or the development bank status of VEB, their ratings are notched down once from the sovereign's. The notching also reflects (i) delays in provision of core equity support in light of the banks' potential additional capital needs (especially at RusAg); and (ii) non-direct state ownership and a complex legal ownership structure at GPB.

 

Fitch rates STLC two notches below the sovereign's at 'BB+', which reflects a moderate probability of support the company could receive from the sovereign in case of need due to its lower systemic importance and a smaller policy role compared with the large state banks. In assessing support, Fitch views positively: (i) 100% state ownership; (ii) the track record of past equity injections; (iii) the low cost of potential support given the company's small size; and (iv) the company's policy role (albeit somewhat limited) in the implementation of state programmes to support the transportation sector.

 

FOREIGN-OWNED BANKS

The upgrades of the Long-Term IDRs of Bank of China (Russia), China Construction Bank (Russia) Limited, AO Citibank, Danske Bank (Russia), HSBC Bank (RR) LLC, ING Bank (Eurasia) JSC, JSC Nordea Bank, AO Raiffeisenbank (RBRU), Rosbank and SEB Bank JSC reflect the upgrade of Russia's Country Ceiling to 'BBB' from 'BBB-' following the sovereign upgrade.

 

Russia's Country Ceiling captures transfer and convertibility risks and limits the extent to which support from the foreign shareholders of these banks can be factored into their Long-Term Foreign-Currency IDRs. The banks' Long-Term Local-Currency IDRs, where assigned, also take into account Russian country risks.

 

The banks are fully owned by Bank of China Limited (A/Stable), China Construction Bank Corporation (A/Stable), Citigroup Inc. (A/Stable), Danske Bank AS (A/Negative), HSBC Bank Plc (AA-/Rating Watch Negative), ING Bank N.V. (AA-/Stable), Nordea Bank Abp (AA-/Stable), Raiffeisen Bank International AG, Societe Generale S.A. (SG; A/Stable) and Skandinaviska Enskilda Banken AB (AA-/Stable), respectively. The foreign-owned banks' IDRs reflect Fitch's view that their parents will continue to have a strong propensity to support these banks given their majority ownership, the high level of operational and management integration between the banks and their parents, common branding in most cases and the limited size of the subsidiaries, making potential support manageable.

 

SUBSIDIARIES OF STATE-CONTROLLED BANKS

 

The upgrades of the Long-Term IDRs and, if applicable, National Long-Term Ratings of Sberbank Leasing (to BBB from BBB-), Kazakhstan-based Subsidiary Bank Sberbank of Russia JSC (to BBB- from BB+, to AA+(kaz) from AA-(kaz)), JSC VEB-Leasing (to BBB from BBB-) and Gazprombank (Switzerland) Ltd (to BBB- from BB+) reflect the strengthening of their parents' ability to support them, if needed.

The upgrade of Baltic Leasing JSC's Long-Term IDRs to 'BB' from 'BB-' reflects our assessment of the increased ability of the company's shareholder, state-controlled PJSC Bank Otkritie Financial Corporation, to provide support.

The ratings of state-related banks' subsidiaries reflect their relative strategic importance to, and integration with, their parents and the record of parental support.

 

DEBT RATINGS

The ratings of all senior debt instruments are aligned with the Long- and Short-Term IDRs and National Long-Term Ratings of the relevant financial institutions, reflecting average recovery prospects in case of default.

 

SBRU's subordinated debt issues (including 'new style') are notched down once from the bank's Long-Term IDR. The notching reflects below-average recovery prospects for all subordinated instruments in case of default. Fitch notches subordinated debt issues from the bank's IDR, rather than from the bank's Viability Rating (VR), because of a track record of pre-emptive capital support to Russian state banks, suggesting that the non-performance risk of subordinated debt is likely to be close to that of senior unsecured debt.

 

Kazakhstan-based Subsidiary Bank Sberbank of Russia JSC's subordinated debt is notched down once from the bank's Long-Term IDR and National Long-Term Rating, reflecting Fitch's view that support from SBRU would likely be available for subordinated debtholders to cover the related non-performance risk.

The upgrade of Russia-based AO Toyota Bank's (TBR) guaranteed domestic rouble-denominated bond issues' long-term ratings to 'A' from 'A-' reflects our approach to rating them at the lower of the rating of Toyota Motor Finance (Netherlands) B.V. (TMFNL, A+/Stable) and a level three notches above Russia's sovereign rating. This is because the bonds are backed by irrevocable and unconditional guarantee from TMFNL, TBR's sister company. Payments to bondholders, including those made by TMFNL pursuant to the guarantee, will be made through the National Settlement Depository (NSD), which exposes bondholders to a quite remote, extreme form of country risk, specifically the impossibility of the settlement being made in Russia through NSD. To capture this extreme form of country risk, the bond's rating is capped at three notches above the Russian sovereign's Long-Term IDR (BBB/Stable).

 

SHORT-TERM RATINGS

The 'F2' Short-Term IDRs of banks with 'BBB' Long-Term IDRs is the higher of the two possible options corresponding to the Long-Term IDR of 'BBB', according to Fitch's Short-Term Rating Criteria, and reflects our view that the providers of support have strong liquidity positions and would be willing to support the banks in case of need. The (wrong-way) risk of the sovereign paying its direct obligations ahead of providing support to state-controlled SBRU and VEB is limited, in our view, and there should not be impediments to the prompt flow of funds to rated banks from their foreign owners.

 

VRS

 

The RWP on SBRU's and Citibank's VRs reflects the high correlation between these banks' standalone credit profiles and sovereign risk, and Fitch's previous statements that the VRs could be upgraded in case of a sovereign upgrade. We intend to review the banks' VRs over the coming months, as a result of which the ratings could be upgraded by one notch.

 

RATING SENSITIVITIES

IDRS, SUPPORT RATINGS, SRFs, DEBT RATINGS

 

Rating actions on the IDRs and SRFs of entities covered in this commentary will likely mirror those on Russia's sovereign ratings and the Country Ceiling. The only exception is RBRU, which for an upgrade of its IDRs would require, in addition to a sovereign upgrade, an improvement of its parent's ability to support it or a two-notch upgrade of its VR.

A significant weakening of the ability and/or propensity of parent banks to provide support (not expected by Fitch at present) could result in downgrades of the subsidiaries' ratings.

Debt ratings are likely to move in line with their anchor ratings, although the notching for subordinated debt may widen if we see an increased risk of poor recovery prospects in case of default.

 

VRs

 

We expect to resolve the RWP on SBRU and Citibank's VRs during the next full rating reviews in 4Q19. The VRs will be upgraded to 'bbb' if we take the view that the banks' standalone credit profiles remain significantly strong for them to be equalised with the sovereign.

 

PUBLIC RATINGS WITH CREDIT LINKAGE TO OTHER RATINGS

The upgrades of Sberbank of Russia, VEB.RF, Russian Agricultural Bank, Gazprombank (JSC) and PJSC State Transport Leasing Company reflect a strengthening of Russia's financial flexibility. The upgrades of Bank of China (Russia), China Construction Bank (Russia) Limited, AO Citibank, Danske Bank (Russia), HSBC Bank (RR) LLC, JSC Nordea Bank, AO Raiffeisenbank (RBRU), SEB Bank JSC , ING Bank (Eurasia) JSC and Rosbank, reflect the upgrade of Russia's Country Ceiling to 'BBB' from 'BBB-' following the sovereign upgrade. The upgrades of Baltic Leasing JSC, Sberbank Leasing, Kazakhstan-based Subsidiary Bank Sberbank of Russia JSC, JSC VEB-Leasing and Gazprombank (Switzerland) Ltd reflect the strengthening of their parents' ability to support them, if needed. Ratings of Russia-based Toyota Bank AO's (TBR) guaranteed domestic rouble-denominated bond issues follow the Russian sovereign upgrade.

 

ESG CONSIDERATIONS

Unless otherwise disclosed in this section, the highest level of ESG credit relevance for issuers covered in this commentary is a score of 3. ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or to the way in which they are being managed by the entity.

 

Gazprombank and Russian Agricultural Bank have an ESG Relevance Score of 4 for governance structure, which reflects weaknesses in governance and controls leading to risks of directed lending. This has a negative impact on the credit profiles, and is relevant to the ratings in conjunction with other factors.

 

Gazprombank has an ESG Relevance Score of 4 for group structure, which reflects contingent risks from considerable debt and equity exposure to non-banking subsidiaries. This has a negative impact on the credit profile, and is relevant to the rating in conjunction with other factors.

 

PJSC State Transport Leasing Company; Long Term Issuer Default Rating; Upgrade; BB+; RO:Sta

; Short Term Issuer Default Rating; Affirmed; B

; Local Currency Long Term Issuer Default Rating; Upgrade; BB+; RO:Sta

; Support Rating; Affirmed; 3

; Support Rating Floor; Support Rating Floor Revision; BB+

----senior unsecured; Long Term Rating; Upgrade; BB+

Russian Agricultural Bank; Long Term Issuer Default Rating; Upgrade; BBB-; RO:Sta

; Short Term Issuer Default Rating; Upgrade; F3

; Local Currency Long Term Issuer Default Rating; Upgrade; BBB-; RO:Sta

; Support Rating; Upgrade; 2

; Support Rating Floor; Support Rating Floor Revision; BBB-

----senior unsecured; Long Term Rating; Upgrade; BBB-

SB Capital S.A.

----senior unsecured; Long Term Rating; Upgrade; BBB

----subordinated; Long Term Rating; Upgrade; BBB-

ING Bank (Eurasia) JSC; Long Term Issuer Default Rating; Upgrade; BBB; RO:Sta

; Short Term Issuer Default Rating; Upgrade; F2

; Local Currency Long Term Issuer Default Rating; Upgrade; BBB; RO:Sta

; Support Rating; Affirmed; 2

----senior unsecured; Long Term Rating; Upgrade; BBB

AO Raiffeisenbank; Long Term Issuer Default Rating; Upgrade; BBB; RO:Sta

; Short Term Issuer Default Rating; Upgrade; F2

; Local Currency Long Term Issuer Default Rating; Upgrade; BBB; RO:Sta

; Support Rating; Affirmed; 2

AO Toyota Bank

----guaranteed; Long Term Rating; Upgrade; A

Gazprombank (Joint-stock Company); Long Term Issuer Default Rating; Upgrade; BBB-; RO:Sta

; Short Term Issuer Default Rating; Upgrade; F3

; Local Currency Long Term Issuer Default Rating; Upgrade; BBB-; RO:Sta

; Support Rating; Upgrade; 2

; Support Rating Floor; Support Rating Floor Revision; BBB-

----senior unsecured; Long Term Rating; Upgrade; BBB-

Rosbank; Long Term Issuer Default Rating; Upgrade; BBB; RO:Sta

; Short Term Issuer Default Rating; Upgrade; F2

; Local Currency Long Term Issuer Default Rating; Upgrade; BBB; RO:Sta

; Support Rating; Affirmed; 2

----senior unsecured; Long Term Rating; Upgrade; BBB

----senior unsecured; Short Term Rating; Upgrade; F2

GTLK Europe DAC

----guaranteed; Long Term Rating; Upgrade; BB+

SEB Bank JSC; Long Term Issuer Default Rating; Upgrade; BBB; RO:Sta

; Short Term Issuer Default Rating; Upgrade; F2

; Support Rating; Affirmed; 2

Baltic Leasing LLC

----senior unsecured; Long Term Rating; Upgrade; BB

Gazprombank (Switzerland) Ltd; Long Term Issuer Default Rating; Upgrade; BBB-; RO:Sta

; Short Term Issuer Default Rating; Upgrade; F3

; Support Rating; Upgrade; 2

Subsidiary Bank Sberbank of Russia, JSC; Long Term Issuer Default Rating; Upgrade; BBB-; RO:Sta

; Short Term Issuer Default Rating; Upgrade; F3

; Local Currency Long Term Issuer Default Rating; Upgrade; BBB-; RO:Sta

; National Long Term Rating; Upgrade; AA+(kaz); RO:Sta

; Support Rating; Upgrade; 2

----senior unsecured; Long Term Rating; Upgrade; BBB-

----subordinated; Long Term Rating; Upgrade; BB+

----senior unsecured; National Long Term Rating; Upgrade; AA+(kaz)

----subordinated; National Long Term Rating; Upgrade; AA(kaz)

VEB.RF; Long Term Issuer Default Rating; Upgrade; BBB; RO:Sta

; Short Term Issuer Default Rating; Upgrade; F2

; Local Currency Long Term Issuer Default Rating; Upgrade; BBB; RO:Sta

; Support Rating; Affirmed; 2

; Support Rating Floor; Support Rating Floor Revision; BBB

----senior unsecured; Long Term Rating; Upgrade; BBB

VEB Finance PLC

----senior unsecured; Long Term Rating; Upgrade; BBB

China Construction Bank (Russia) Limited; Long Term Issuer Default Rating; Upgrade; BBB; RO:Sta

; Short Term Issuer Default Rating; Upgrade; F2

; Local Currency Long Term Issuer Default Rating; Upgrade; BBB; RO:Sta

; Support Rating; Affirmed; 2

GTLK Europe Capital DAC

----guaranteed; Long Term Rating; Upgrade; BB+

GPB Eurobond Finance PLC

----senior unsecured; Long Term Rating; Upgrade; BBB-

JSC Nordea Bank; Long Term Issuer Default Rating; Upgrade; BBB; RO:Sta

; Short Term Issuer Default Rating; Upgrade; F2

; Support Rating; Affirmed; 2

JSC VEB-Leasing; Long Term Issuer Default Rating; Upgrade; BBB; RO:Sta

; Short Term Issuer Default Rating; Upgrade; F2

; Local Currency Long Term Issuer Default Rating; Upgrade; BBB; RO:Sta

; Support Rating; Affirmed; 2

----senior unsecured; Long Term Rating; Upgrade; BBB

Sberbank Leasing; Long Term Issuer Default Rating; Upgrade; BBB; RO:Sta

; Short Term Issuer Default Rating; Upgrade; F2

; Local Currency Long Term Issuer Default Rating; Upgrade; BBB; RO:Sta

; Support Rating; Affirmed; 2

HSBC Bank (RR) LLC; Long Term Issuer Default Rating; Upgrade; BBB; RO:Sta

; Short Term Issuer Default Rating; Upgrade; F2

; Local Currency Long Term Issuer Default Rating; Upgrade; BBB; RO:Sta

; Support Rating; Affirmed; 2

AO Danske Bank; Long Term Issuer Default Rating; Upgrade; BBB; RO:Sta

; Short Term Issuer Default Rating; Upgrade; F2

; Support Rating; Affirmed; 2

AO Citibank; Long Term Issuer Default Rating; Upgrade; BBB; RO:Sta

; Short Term Issuer Default Rating; Upgrade; F2

; Local Currency Long Term Issuer Default Rating; Upgrade; BBB; RO:Sta

; Viability Rating; Rating Watch On; bbb-; RW: Pos

; Support Rating; Affirmed; 2

Sberbank of Russia; Long Term Issuer Default Rating; Upgrade; BBB; RO:Sta

; Short Term Issuer Default Rating; Upgrade; F2

; Local Currency Long Term Issuer Default Rating; Upgrade; BBB; RO:Sta

; Local Currency Short Term Issuer Default Rating; Upgrade; F2

; Viability Rating; Rating Watch On; bbb-; RW: Pos

; Support Rating; Affirmed; 2

; Support Rating Floor; Support Rating Floor Revision; BBB

Baltic Leasing JSC; Long Term Issuer Default Rating; Upgrade; BB; RO:Sta

; Short Term Issuer Default Rating; Affirmed; B

; Local Currency Long Term Issuer Default Rating; Upgrade; BB; RO:Sta

; Support Rating; Affirmed; 3

Bank of China (Russia); Long Term Issuer Default Rating; Upgrade; BBB; RO:Sta

; Short Term Issuer Default Rating; Upgrade; F2

; Local Currency Long Term Issuer Default Rating; Upgrade; BBB; RO:Sta

; Support Rating; Affirmed; 2

Keywords: Fitch Ratings