16:13 - 29.06.2018

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Fitch Ratings-Moscow-27 June 2018: Fitch Ratings has affirmed the Long-Term Issuer Default Ratings (IDRs) of BPS-Sberbank (BPS), Belgazprombank (BGPB) and BelVEB OJSC (BVEB) at 'B'. The Outlooks on the IDRs are Stable.

Fitch has also upgraded BGPB's Viability Rating (VR) to 'b' from 'b-' and affirmed the VRs of BPS and BVEB at 'b-'. A full list of rating actions is at the end of this rating action commentary.

The affirmation of the IDRs reflects limited changes in Fitch's view of institutional support to these banks from their respective parents, which are some of Russia's largest state-owned financial institutions. BPS is 98.4%-owned by Sberbank of Russia (SBR; BBB-/Positive), BVEB is 97.5%-owned by Vnesheconombank, (BBB-/Positive), and BGPB is jointly owned by PJSC Gazprom (BBB-/Positive) and JSC Gazprombank (GPB; BB+/Positive), each with a 49.66% stake.

KEY RATING DRIVERS

LONG-TERM IDRS, SUPPORT RATINGS (SR)

The 'B' Long-Term IDRs of BPS, BGPB and BVEB are aligned with Belarus's 'B' Country Ceiling. The latter captures the high transfer and convertibility risks in Belarus and limits the extent to which support from the banks' higher-rated Russian parents can be factored into the subsidiaries' ratings.

At the same time, Fitch believes the banks' respective parents would likely have a high propensity to support their subsidiaries, if needed, due to the strategic importance of the Belarusian market and the tight political and economic ties between the two countries. Majority ownership, significant parent-subsidiary integration (including board representation and operational links), a track record of support provided to date (including assistance with business origination), the small cost of potential support, and high reputational risks from a subsidiary default also positively impact our assessment of parental support.

BGPB expects a new equity contribution in the near term. There are no plans for such injections for the other two banks, but Fitch believes parental capital support will be available for all three banks, if needed. BPS, BGPB and BVEB from time to time have received equity and subordinated debt from their parents. Transfers of credit risk on some bulky loans from BPS to SBR provided further capital relief in 2013-2016.

Although the subsidiary banks have reduced their reliance on parent funding in recent years, Fitch also expects funding support to be provided, if required, and believes that this would not be constrained by national regulators. Non-subordinated borrowings from parent banks contributed 5% of total liabilities at BGPB and 12% at BVEB at end-2017 (9% and 22%, respectively, at end-2016). BGPB additionally had a significant 29% share of deposits from Gazprom-related companies. Borrowings from SBR were a negligible 2% of BPS's total liabilities at end-2017 (3% at end-2016).

VRS

The upgrade of BGPB's VR reflects Fitch's reassessment of the bank's credit profile in line with a reassessment of the operating environment, which, in turn, reflects the recent upgrade of the sovereign rating and improved near-term economic prospects. The upgrade also reflects BGPB's track record of more stable asset quality performance and profitability compared with Belarusian peers. The affirmation of the VRs of BPS and BVEB reflects these banks' weaker asset quality and less stable performance.

More generally, all three banks' VRs continue to capture Belarus's challenging operating environment, with a state-controlled economy and potential macroeconomic volatility. The banks' direct exposure to the sovereign through government debt holdings at end-2017 stood at 20% of total assets at BPS (end-2016: 25%), 14% at BGPB (20%) and 13% at BVEB (21%). Other public sector exposures were relatively limited at BPS and BGPB, but were a further 35% of total assets at BVEB (end-2016: 32%).

Fitch's view of BGPB's stronger loan quality is driven by the bank's consistently low non-performing loans (NPLs; overdue by more than 90 days) and limited restructured loans. In addition, impairment charges and write-offs have been low, as is the reported post-devaluation debt leverage of most of the bank's largest borrowers.

BPS's and BVEB's weaker loan quality is reflected in these banks' higher NPLs and restructured exposures, although Fitch recognises that the differences in these metrics are partly due to the differences in their reporting frameworks, recognition policies and workout strategies.

At end-2017, BGPB's NPLs were equal to a small 1.2% of gross loans (1.6% at end-2016) and restructured loans stood at 3.6% (4.8% at end-2016). BPS's NPL ratio was a higher 16% at end-2017 (18% at end-2016) and restructured loans added a further 5% (7% at end-2016). BVEB's impaired loans were mostly captured by the bank's restructured loans at 14% at end-2017 (19.7% at end-2016) as reported NPLs were immaterial.

Although new loan impairment origination has reduced from peak levels, impairment risks remain high, in particular due to loans in foreign currencies (FCs) to potentially unhedged borrowers. FC loans made up a high 76% of gross loans at BVEB, 69% at BGPB and 48% at BPS at end-2017 (84%, 75% and 61%, respectively, at end-2016) with only a small part of these loans reported as problematic exposures at end-2017.

Loan impairment allowances (LIAs), at 17% at BPS and 10% at BVEB at end-2017, viewed in conjunction with the ongoing gradual recovery of the Belarusian economy from a recent recession, partly mitigated higher loan-quality risks at these banks. The 4% LIAs at BGPB covered substantially all of the bank's NPLs and restructured loans, but left limited space for potential loss absorption should loan quality deteriorate.

Fitch views capitalisation as slightly stronger at BGPB, primarily reflecting the bank's lower unreserved problem loans relative to core capital. Shareholders' plans to further improve BGPB's core capitalisation, by converting subordinated debt into equity, are also viewed as credit-positive.

At end-2017, Fitch Core Capital (FCC) stood at 17% of Basel I risk-weighted assets (RWAs) at BPS, 11% at BGPB and 10% at BVEB (15%, 13% and 10%, respectively, at end-2016). At the same time, the combined amount of NPLs and restructured loans less loan impairment reserves equaled 0.04x FCC at BGPB, 0.3x FCC at BPS and 0.3x FCC at BVEB.

BGPB's stronger profitability is captured by the bank's higher and more stable operating results through the recent credit cycle. The bank's operating profit equaled 2.5% of RWAs in 2017 after 3.3% in 2016. The ratio improved to 2% in 2017 at BPS (0.8% in 2016) due to reduced loan impairment charges (LICs), and weakened to 0.7% at BVEB (1.4% in 2016) due to growth in operating costs in 2017.

Fitch continues to view all three banks' standalone funding and liquidity profiles as vulnerable, given their limited FC placements with highly-rated counterparties and high funding dollarisation. However, potential access to parents' FC resources and all three banks' currently solid domestically-held liquidity buffers are mitigating factors.

FC cash and foreign bank placements were a small 3% of FC-denominated third-party liabilities at BGPB, 6% at BPS and 4% at BVEB at end-1Q18. Total liquid assets equaled a stronger 41%, 35% and 40% of total third-party liabilities, respectively, although these mainly comprised sovereign bonds, which may cease to be repo-able in a systemic stress scenario.

RATING SENSITIVITIES

IDRs AND SRs

The IDRs and SRs could be upgraded or downgraded if a change in Belarus's sovereign ratings results in a change in the Country Ceiling, although this is currently unlikely given the Stable Outlook on the sovereign rating. A downgrade is also possible upon a sharp weakening of the ability or propensity of any of the three parent banks to provide support but this is not Fitch's base case.

VRs

Downgrades of VRs could result from capital erosion due to a further marked deterioration in asset quality without sufficient and timely support being made available by parents. Upgrades of VRs above the sovereign rating are very unlikely given the high sovereign exposures and many borrowers' high vulnerability to adverse changes in the Belarusian state-controlled economy.

The rating actions are as follows:

Belgazprombank

Long-Term IDRs affirmed at 'B'; Outlook Stable

Short-Term IDRs affirmed at 'B'

Support Rating affirmed at '4'

Viability Rating: upgraded to 'b' from 'b-'

BPS-Sberbank and BelVEB OJSC

Long-Term IDRs affirmed at 'B'; Outlook Stable

Short-Term IDRs affirmed at 'B'

Support Ratings affirmed at '4'

Viability Ratings: affirmed at 'b-'