Fitch Ratings has upgraded Absolut Bank's Long-term Issuer Default Rating (IDR) to 'B+' from 'B', the rating agency informed.
The upgrade of Absolut's IDR to 'B+' from 'B' mainly reflects its longer track record of sustainable performance after it was acquired in May 2013 by Non-State Pension Fund Blagosostoyanie (the Fund), controlled by JSC Russian Railways (RR, BBB/Negative), and reduced concerns about its recent merger with sister bank, OJSC KIT Finance Investment Bank (KIT), partly because the Fund had acquired some impaired assets from KIT's balance sheet prior to merger.
The upgrade also considers the Fund's now stronger commitment in assisting the bank in its development, also reflected in considerable amount of funding provided to it by the Fund's related parties to replace that of the former owner KBC Bank (A-/Stable), and broader involvement of the bank in servicing companies related to the Fund, the statement points out.
At the same time Absolut's Long-term IDRs do not factor in explicit extraordinary support from the Fund and reflect the bank's intrinsic creditworthiness (as shown by its Viability Rating). This is because there is limited visibility around the Fund's financial ability to provide support, as well potential constraints given the bank's complex ownership structure and evolving legislation of pension funds in Russia.
Absolut's non-performing loans (NPLs, overdue by more than 90 days) were a low 3% of gross loans at end-2013 reflecting the bank's focus on moderate-risk corporate borrowers and low-risk residential mortgages. The impact of KIT's consolidation on loan quality should be broadly neutral for Absolut given the Fund's prior acquisition of impaired assets with a net value of RUB6.9bn from KIT's balance sheet for a consideration of RUB5bn (RUB1.9bn impairment loss was recognised by KIT). However, Absolut still inherited one big RUB8.1bn (33% of combined pro-forma equity) non-core real estate asset (a land plot in St. Petersburg for residential construction), which may require additional provisioning, as the disposal at this valuation is likely to be problematic.
The bank's liquidity position is adequate, albeit there is an increased reliance on funding from the Fund and other related entities, which accounted for a quarter of customer accounts at end-2013. Refinancing risk is substantial with about RUB31bn (18% of liabilities) of wholesale funding maturing in 2014, including RUB12bn of bonds with put options. Mitigating this, the bank's liquid assets are sufficient to cover all 2014 repayments subject to stability of deposits.
Capitalisation was moderate at end-2013 (Fitch Core Capital (FCC) of 15.5%) and should slightly decline (by about 100bp) as a result of the merger, as KIT's capitalisation was weaker. Thus, at end-4M14 the post-merger regulatory capital ratio was 12.5% compared to 13.8% at end-2013. Fitch has been informed that the Fund may provide up to RUB3bn of new equity to support capitalisation and growth, if required, as the bank's internal capital generation is quite modest (ROAE of only 2% in 2013).
An upgrade of Absolut's ratings would require a considerable franchise development without compromising asset quality, substantial profitability improvement, diversification of funding and reduction of non-core assets. Greater visibility of the Fund's financial profile confirming its ability to provide support coupled with a more explicit commitment to do so could also result in the upgrade of support-driven ratings and potentially IDRs.
CB Absolut Bank (OAO) (tax number: 7736046991) established in 1993, is a universal bank. Its shareholder is OJSC United Credit Systems (an entity affiliated with non-state pension fund Blagosostoyanie). The bank is operating in 15 regions of Russia