Joint Stock Company Alfa-Bank Full Rating Report
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Banks Russia Joint Stock Company Alfa-Bank Full Rating Report Ratings Key Rating Drivers Foreign-Currency Long-Term BB+ IDR Highest-Rated Russian Private Bank: Joint Stock Company Alfa-Bank’s ratings, which are Short-Term IDR B the highest of a Russian privately owned bank, reflect its well-developed franchise, improved Long-Term Local-Currency BB+ Rating asset quality, recovering profitability and good record of managing through the cycle. The ratings also take into account risks related to the Russian operating environment, significant Viability Rating bb+ cyclicality in the banks’ performance and moderate regulatory capitalisation. Support Rating 4 Support Rating Floor B Improved Asset Quality: Asset quality improved with the ratio of non-performing loans (NPLs, Outlooks more than 90 days’ overdue) decreasing to 2.9% at end-1H17 from 7.2% at end-2015 as a Long-Term Foreign-Currency Stable result of recoveries, foreclosures and write-offs. NPLs were fully reserved while restructured IDR loans were negligible. Retail loans performance also improved, reflected in NPL origination Long-Term Local-Currency IDR Stable Sovereign Long-Term Stable (calculated as the increase in NPLs plus write-offs to average performing loans) decreasing to Foreign-Currency IDR 4% in 1H17 from 9% in 2015, well below the Fitch Ratings-calculated break-even level of 14%. Financial Data Adequate Core Capitalisation: The Fitch Core Capital (FCC) ratio, calculated based on the Joint Stock Company Alfa-Bank consolidated accounts of Alfa’s holding company ABH Financial Limited (ABHFL), was 15.7% 30 Jun 31 Dec at end-1H17, slightly down from 16.7% at end-2015. However, this and the bank’s reported 17 16 Basel I Tier 1 capital ratio (15.8%) benefit significantly from the Basel I-based risk-weighted Total assets (USDm) 41,804 38,247 Total equity (USDm) 5,299 5,033 asset calculation, which does not include charges for market and operational risk. Adjusting for Operating profit 586.0 779.0 (USDm) these, Fitch calculates that core capital ratios would have been about 13%. Published net income 436.0 527.0 (USDm) Comprehensive 502.0 670.0 Tighter Regulatory Capital: Regulatory capitalisation at the bank level is significantly tighter, income (USDm) with a core Tier 1 ratio of 7.7% (required minimum including buffers is 6.1%), Tier 1 ratio of Operating ROAA (%) 3.0 2.3 Operating ROAE (%) 22.9 16.7 9.1% (7.6%) supported by USD700 million of additional Tier 1 perpetual bonds placed in 2H16 Internal capital 16.6 10.5 and a total capital ratio of 12% (9.6%) at end-1H17. generation (%) Fitch Core Capital/ 15.7 15.9 weighted risks (%) Moderate Profitability: Profitability improved in 2016, with the ratio of total comprehensive Tier 1 regulatory ratio 15.8 16.2 (%) income to average equity increasing to 14% in 2016 (annualised 19.6% in 1H17) from zero in Total capital ratio (%) 20.5 21.8 2015 due to the net interest margin improving moderately to 4.5% from 4% and a loan impairment charges (LICs) reducing significantly to 1.4% from 3.2% of average loans. Ample Liquidity: Liquid assets (cash and equivalents, net short-term interbank placements and bonds eligible for refinancing with the Central Bank of Russia, CBR) covered customer accounts by 47% at end-9M17. Wholesale debt maturing in the next 12 months at the same date was USD2 billion (of which USD1.7 billion was bank funding), equal to a moderate 17% of Related Research the liquidity cushion, and Alfa plans to refinance most of these obligations. Russian Banks Datawatch - 9M17 (November 2017) Support Possible: Fitch believes there is a moderate probability of support from the Russian Russia – December 2017 Global Economic Outlook Forecast (December 2017) authorities given Alfa’s broad franchise, as reflected in the Support Rating of ‘4’ and Support Fitch: Russian Banking Sector Is Being Rating Floor of ‘B’. Fitch does not formally factor shareholder support into the ratings due to Reshaped by Clean-up (September 2017) limited visibility of the shareholders’ financial position and Alfa’s significant size. However, we Russian Banking Sector in 2017 (September 2017) believe they would have strong propensity to support the bank if required. Rating Sensitivities Analysts Sovereign, Asset Quality: Alfa’s ratings could be upgraded if there is a further improvement in Anton Lopatin +7 495 956 70 96 the Russian operating environment and consistently robust bank financial metrics in terms of [email protected] asset quality, performance and capitalisation. An upgrade of the sovereign rating (BBB- Dmitri Vasiliev /Positive) would be a pre-requisite for an upgrade of Alfa, as Fitch is likely to maintain at least a +7 495 956 55 76 [email protected] notch difference between the ratings of the sovereign and the bank. www.fitchratings.com 18 December 2017 Banks Operating Environment Russia’s Key Indicators Positive Outlook on Sovereign Ratings Ratings The Outlook on Russia's Long-Term IDR of ‘BBB-’ was revised to Positive in September 2017 Sovereign IDR/Outlook BBB-/Positive a on the back of more flexible exchange rate, strong commitment to inflation targeting and a MPI 1 BSIb bb prudent fiscal strategy. In Fitch’s view, Russia’s strengthening policy framework may result in improved macro stability and, together with robust external and fiscal balance sheets, increase 2017F 2016 Macroeconomic the economy’s resilience to shocks. indicators Real GDP growth (%) 2.0 -0.2 Economic growth is reviving, but will remain weak relative to peers. Fitch expects growth to rise Unemployment (%) 5.0 5.5 CPI (eop) (%) 4.4 7.1 to 2% in 2017 after contracting in 2016 and average 2.1% in 2018-2019 (1pp above the median General government -2.8 -3.7 for ‘BBB’ category), due to reduced uncertainty, monetary policy easing supporting credit balance (% of GDP) recovery, rouble stability and a benign oil price outlook. Continued current account surpluses, General government 16.7 16.0 debt (% of GDP) moderate capital outflows and higher-than-budgeted oil prices will push reserves above USD500 billion in 2018, returning to end-2013 levels. The sovereign net foreign assets position Banking sector (%) 1H17 2016 is a solid 28% of GDP. System assets 74.1 73.5 (RUBtrn) Stable Sector Outlook; Banking Clean-Up Continues System assets/GDP 89.7 87.9 Number of banks 589 623 Pressure on Russian banks’ profits reduced in 2016-2017 as the economy has bottomed out. Share of five largest 56.9 57.1 Credit risks are likely to remain elevated, but in most cases banks’ pre-impairment profit should banks be sufficient to cover problem loans without hitting capital. Liquidity is comfortable and the Share of state-owned 59.5 59.8 Share of foreign-owned 6.2 6.0 sector has sufficient access to foreign currency to repay external debt. Retail loans/total loans 23.9 23.6 FC loans/total loans 24.5 23.8 Fitch believes that Sberbank (30% of sector assets), foreign-owned banks (6%) and some of Retail loan growthc 3.8 0.8 Corporate loans 0.8 -7.1 the private banks (5%-10% in total, including Alfa) have reasonably strong credit profiles, while growthc weaker state-owned banks (28%) are pre-emptively supported by the Russian authorities. Foreign funding 8.2 9.0 FC customer fundingd 31.0 32.9 These make the core of system, which is not directly affected by the CBR clean-up, which Impaired loans ratioe 9.8 9.8 instead focuses on the remaining 20%-25%. Therefore the recent failures of B&N Bank and Equity/assets 11.7 10.7 Otkritie are not indicative of a systemic crisis. The banks’ combined market share was only 5% a The Macro Prudential Indicator b The Banking System Indicator and potential contagion risk has largely been mitigated by the CBR rescuing them without any c Nominal, not annualised for 1H17 losses for senior creditors. d Customer accounts include Eurobonds issued through SPVs e Category 4 (problem) and 5 (loss) loans As the CBR plans to continue with the clean-up for the next three to four years, further weak according to CBR Source: CBR, Fitch banks may be revealed, with the CBR then deciding their fate. This uncertainty will cause gradual flight to quality to continue, benefiting larger banks. Reasonable Asset Quality and Performance; Weak Loan Growth The operating environment for Russian banks is gradually improving due to stabilised asset quality, recovered margin and a structural liquidity surplus. The latter, however, is skewed towards Sberbank and some stronger foreign and private banks (including Alfa). Capital adequacy is only moderate in most cases (sector average common equity Tier 1 ratio was 8.9% at end-9M7), although in light of limited growth and moderate profit retention, banks are likely to gradually build up their capital bases along with Basel III buffers being phased in by 2019. Fitch forecasts low single-digit corporate loan growth in 2017 (3% in 9M17, adjusted for foreign- exchange moves) mostly due to weak demand. Retail lending growth may reach 10-12% in 2017 as unsecured retail lending has recovered after overheating, although in the longer term it should probably fall to 5%, in Fitch’s view. Sector NPLs (we use doubtful and loss categories as a proxy) accounted for 10.2% of the sector portfolio in 9M17, but were 88% covered by reserves. We estimate restructured loans at 10%-15% on average, and these are weakly provisioned. Banks are likely to gradually recognise some of these as NPLs, reserving them out of pre-impairment profits. Joint Stock Company Alfa-Bank 2 December 2017 Banks The sector core (net of RUB0.5 billion impairment loss in Otkritie and B&N bank following their rescue by the CBR) ROAE improved to 15% in 9M17 (annualised) from 11% in 2016 thanks to 20bp net interest margin improvement and stabilisation of loan impairment charges at 2% of gross loans.