June 21, 2013 |
|Fitch Ratings has affirmed Russian Universal Bank's (Rusuniversal) Long-term Issuer Default Rating (IDR) at 'B' with a Stable Outlook. A full list of rating actions is at the end of this comment. |
KEY RATING DRIVERS: IDR, NATIONAL RATING AND VIABILITY RATING
Rusuniversal's ratings reflect the bank's narrow franchise and highly-concentrated balance sheet with a high level of relationship-based business on both sides of the balance sheet. At the same time, the bank's ratings take into account good reported asset quality, strong capitalisation, and comfortable liquidity.
Historically, the bank has primarily focused on companies operating in the defence industry, and mainly financed companies with which its management and/or shareholders had long-term relations. Although exposure to the defence sector decreased to 39% in 2012 (from 60% at end-2011), this is still viewed by Fitch as a high single industry concentration. At the same time, concentration risk is balanced at the current rating level by management's expertise in the core defence sector, a conservative risk appetite outside this sector, strong capitalisation and good asset quality.
The loan book is highly concentrated, with the 10 largest borrowers representing 82% of total loan book. However, this risk is mitigated by comfortable loss absorption capacity (the bank could create reserves equal to 83% of the end-2012 total portfolio) due to the sizable capital buffer, with a high total regulatory capital adequacy ratio of 47% at end-May 2013. The bank also reported zero overdue loans at same date.
Rusuniversal did not have any wholesale funds at end-May 2013 and its liquidity position remains solid, with a cushion of highly liquid assets (cash and equivalents, net interbank placement up to one month and bonds eligible for repo with Central Bank of Russia) at end-May 2013 covering 75% of customer accounts. Potential large withdrawals may stress liquidity and will threaten profitability, as 72% of end-May 2013 customer accounts were demand deposits. Should the bank need to replace them with market funding, it would erode the so far healthy margin.
Rusuniversal's core business is exposed to risk if state-controlled defence industry companies are forced to direct financial flows to state-owned banks, and further regulatory risk stems from historically high, albeit decreasing, back-to-back lending (this represented about 46% of loans at end-2012).
RATING SENSITIVITIES: IDR AND VIABILITY RATING
Upside potential for the ratings is limited. Rusuniversal's ratings may be downgraded if the bank is forced out of its niche in the defence industry by regulatory or competitive pressure. The shareholders' decision to withdraw a significant amount of capital would also be rating negative, as would leveraging up the business by expanding outside areas of the bank's core expertise.
The rating actions are as follows:
Long-term foreign and local currency IDRs: affirmed at 'B', Outlook Stable
Short-term IDR: affirmed at 'B'
National Long-term rating: affirmed at 'BBB-(rus)', Outlook Stable
Viability rating: affirmed at 'b'
Support Rating: affirmed at '5'
Support Rating Floor: affirmed at 'NF'
Company: Russian Universal Bank
|Full company name||Russian Universal Bank|
|Country of risk||Russia|
|Country of registration||Russia|