Fitch Ratings affirmed Hungary-based OTP Bank Plc's (OTPH) Support Rating at '3' and Open Joint Stock Company OTP Bank's (OTPR; OTPH's Russian subsidiary) Long-term Issuer Default Rating (IDR) at 'BB' with a Stable Outlook. At the same time, the agency downgraded OTPR's Viability Rating to 'b+' from 'bb-', OTP Bank informed.
The affirmation of OTPH's Support Rating reflects Fitch's opinion that the Hungarian government would likely have a high propensity to support OTPH if needed, in light of its systemic importance in the banking sector. However, Fitch believes that OTPH is unlikely to require such support in the short- to medium-term. At end-3Q13, OTPH was the largest bank in Hungary and accounted for 26% of sector assets and 27% of retail deposits.
OTPH's Support Rating could be upgraded or downgraded if there is a multiple-notch upgrade or downgrade of the Hungarian sovereign rating. However, Fitch currently views this as unlikely.
OTPR's Long- and Short-term IDRs and Support Rating are driven by potential support from OTPH, in case of need. Fitch believes that the parent would have a high propensity to support OTPR in light of its majority ownership, high level of integration, and the Russian subsidiary's still material, albeit reduced, contribution to the group's results (9% of group's 9M13 profit before tax).
The downgrade of OTRP's VR to 'b+' from 'bb-' reflects (i) a more challenging operating environment, which has translated into larger-than-expected credit losses and markedly reduced resilience to their further increase; (ii) weak performance relative to peers, and (iii) considerable decline of regulatory capitalisation. At the same time, the rating considers OTPR's still solid pre-impairment results and comfortable liquidity.
The NPL (non-performing loans, 90 days overdue) origination rate (defined as the difference in NPLs plus written off loans during the period divided by the average performing portfolio) on OTPR's retail loans increased sharply to 18.2% (annualised) in 9M13 (up from 12.5% in 2012). This represents a higher loss rate than at most peers (see "Russian Consumer Finance Sector" dated October 2013 at www.fitchratings.com for details), and leaves only a narrow safety margin for further asset quality deterioration as the estimated breakeven loss-rate was 19.4% in 9M13.
Positively, the most recently granted loans suggest some stabilisation, albeit at a still elevated level, of default rates. Early warning indicators such as first- and second-payment-default statistics show moderate asset quality improvement following the tightening of loan approval criteria. However, the sustainability of these trends in a slowing economy with a growing household debt burden is uncertain.
Fitch no longer considers OTPR's capitalisation to be a clear rating strength. Although OTPR's Fitch Core Capital (FCC) ratio was a solid 23% at end-3Q13, Fitch views the bank's capital position in the context of elevated credit risks, modest internal capital generation (annualised ROAE of 7.5% in 9M13) and tight regulatory capital. The regulatory capital adequacy ratio decreased by 300bps during 9M13 and was a moderate 13.2% at end-3Q13, largely due to higher provisioning requirements and more stringent, recently introduced risk-weights on newly-issued high-yield unsecured retail loans. A potential further increase in risk weights, combined with portfolio regeneration, may lead to further pressure on regulatory capitalisation. As moderate mitigating factors, some reduction in OTPR's risk appetite and more conservative growth rates should support the bank's capital position.
OTPR is mainly funded with locally sourced customer accounts (73% of end-3Q13 liabilities, retail funding comprised 65% of total deposits).
Liquidity risk is moderate, mitigated by the bank's large liquidity cushion, which covered 28% of customer funding at end-3Q13, and fast loan turnover (monthly loan repayments equal a further 9% of end-3Q13 deposits).
OTPR's ratings could be upgraded or downgraded based on parent support if OTPH's credit profile improves or deteriorates.
The ratings could also come under pressure from evidence of a weakening propensity by OTPH to provide support, although Fitch views this as unlikely at present.
Downward pressure on OTRP's VR could come from further asset quality deterioration and/or capital erosion. Moderation of credit risks resulting in higher profitability and capitalisation would be credit-positive.
OTPR's SENIOR UNSECURED DEBT OTPR's senior unsecured debt is rated in line with its Long-term IDR. Any changes to the bank's Long-term IDR would thus impact the ratings of these instruments.
OJSC OTP Bank (previously called Investsberbank) established 1994 is operating as a full-service retail bank. In 2006, Investsberbank's controlling block of shares was acquired by Hungary-based OTP Bank; today, OTP Bank is part of OTP Group. The bank's authorized capital is RUB 2.618 billion.
RAS net profit of OTP Bank for 2012 increased by 24% year-on-year to RUB 6.481 billion.