S&P affirms ratings of Subsidiary Organization JSC VTB Bank (Kazakhstan); outlook Stable
11.08.14 17:53
/Standard & Poor's, Moscow, August 8, 14, heading by KASE/ – On Aug. 8, 2014,
Standard & Poor's Ratings Services affirmed its 'BBB-' long-term and 'A-3'
short-term counterparty credit ratings on Russia's VTB Bank JSC. The outlook is
negative. We also affirmed our 'ruAAA' Russia national scale rating on VTB
Bank.
At the same time, we affirmed our ratings and maintained our outlooks on VTB
Bank's core subsidiaries:
- Bank of Moscow OJSC (BBB-/Negative/A-3; ruAAA);
- VTB Capital PLC (BBB-/Negative/A-3);
- VTB-Leasing (BBB-/Negative/A-3; ruAAA);
- VTB-Leasing Finance (BBB-/Negative/A-3; ruAAA); and
- VTB Insurance Ltd. (BBB-/Negative/--).
In addition, we affirmed our ratings and maintained our outlooks on VTB Bank's
subsidiaries in other jurisdictions:
- VTB Bank (Austria) AG (BB+/Negative/B);
- VTB Bank (France) SA (BB+/Negative/B);
- VTB Bank (Kazakhstan) (BB+/Negative/B; kzAA-); and
- VTB Bank (Georgia) (BB-/Stable/B).
Rationale
The affirmation follows a review of the sanctions announced during the week of
July 28, 2014, by the European Union and the U.S. government and our view of
those sanctions' impact on VTB Bank's financial profile. The announced sanctions
limit the access to EU and U.S. capital markets for Russian state-owned
financial institutions, including VTB Bank. We believe these sanctions will
gradually weaken VTB Bank's financial profile, especially if they prove long
lasting. However, we consider that VTB Bank's franchise strength is strong
enough to manage these risks and find alternative sources of funding, via
increased collection of customer deposits or access to non-U.S. or non-EU
investors. We also expect VTB Bank to benefit from privileged central bank
funding support, if necessary, as it is a government-related entity (GRE).
We understand that the sanctions include a prohibition on EU and U.S. entities
purchasing either new equity or fixed-income securities with a maturity
exceeding 90 days issued by VTB Bank. Services related to the issuing of such
securities and instruments, such as brokering, are also prohibited. The U.S.
sanctions additionally prohibit U.S. persons from transacting in, providing
financing for, or otherwise dealing in new debt issued by VTB Bank with
maturities exceeding 90 days or in new equity for VTB Bank. The prohibition
extends to any entity or body that VTB Bank owns more than 50% of and to any
legal person, entity, or body acting at the VTB-owned entities' direction or on
their behalf. However, we understand that other financial services, including
settlements, placing of deposits, granting of loans, and operations with
ecurities with maturities shorter than 90 days are not restricted. In our
understanding, the sanctions do not currently prevent Russian banks from
accessing liquidity held at foreign banks. We also understand that EU sanctions
do not extend to VTB Bank's EU-based subsidiaries VTB Capital PLC, VTB Bank
(Austria), VTB Bank (France), VTB Bank (Germany) (not rated), or Russian
Commercial Bank (not rated).
We understand that the scope of the U.S. and EU measures differ and some
forms of external borrowing by Russian state-owned banks are still possible.
However, in our view, the sanctions, combined with the risk of any potential
further measures being introduced in the future, will significantly constrain
VTB Bank's access to foreign funding. We also believe that the current
deteriorating operating environment caused by mounting geopolitical risks may
have hit the bank's profitability metrics, owing to likely increases in credit
and funding costs. We consider that limitations on access to EU and U.S.
capital markets may also negatively affect the execution of VTB Bank's
international business strategy in the longer term.
We do not expect any marked deterioration of VTB Bank's liquidity position in
the next 12 months, assuming no further escalation of sanctions. In our opinion,
VTB Bank has sufficient liquidity to meet its 2014 and 2015 wholesale debt
service obligations. We view the bank as having diversified funding sources,
with domestic customer deposits being the largest source of funding, and
having a limited reliance on the U.S. and EU capital markets. As of Aug. 1,
2014, VTB Bank had the equivalent of about US$17.4 billion of external wholesale
funding (or about 7% of the bank's total liabilities) including a call option of
US$2.3 billion on Tier 1 perpetual bonds due in 2022. These include US$4.4
billion maturing in 2015 (mostly euro medium-term note funding), and US$2.9
billion in 2016, which we view as manageable without material stress for the
bank's liquidity position. An additional 3%-4% of VTB Bank's liabilities
represent external customer accounts, presumably sourced primarily from its
foreign subsidiaries and short-term interbank facilities. We also understand
that, in July 2014, VTB Bank fully repaid a matured syndication loan of US$3.1
billion and that it has no material foreign liabilities maturing in
the second half of 2014, which we view positively.
We understand that VTB Bank maintains a liquidity cushion amounting to about
20% of total assets in the form of cash, interbank placements, and money
market instruments, and has priority access to funds from the government and
the Russian central bank. In Russia's very concentrated banking system, VTB
Bank steadily enjoys market shares of 15% in corporate deposits and 10% in
retail deposits. VTB Bank sources about one-third of its total liabilities from
the government and GREs, which we think reduces the bank's sensitivity to
customer confidence. In our opinion, VTB Bank's strong customer franchise
supports stability of deposits over the cycle. Of course, we note that, if these
sanctions were to last into the second half of 2015 as well, we consider their
impact would be more difficult to offset. At the same time, Standard & Poor's
emphasizes that the impact on our ratings on VTB Bank of any potential
additional U.S., EU, or other parties' sanctions, or any potential clearance or
changes in treatment of the current sanctions will be assessed at that time.
As a predominantly domestic bank, we believe VTB Bank is exposed to the
weakening economic environment in Russia, despite being the second-largest
and one of the strongest banks in the system.
VTB Bank, and the sector as a whole, may face tougher operating conditions in
2014 and 2015 than we previously anticipated, including a slowing economy
that will likely cut borrowers' payment capacity, decelerating loan growth, and
more difficult funding conditions. Access to international capital markets could
become more challenging, and costly, for VTB Bank and peers, while volatility in
the domestic foreign exchange market is adding to operating uncertainty for
banks. As a result, we expect VTB Bank to face deterioration of its asset
quality, higher funding costs, and falling margins, which could lead to lower
profitability and increase pressure on its capital base. The bank's capacity to
improve its earnings after a weak first-quarter 2014 and to preserve a
risk-adjusted capital ratio above 5% is crucial for the long-term rating.
VTB Bank is a GRE and its creditworthiness is highly influenced by that of its
main 60.9% owner, the Russian government. The government's majority
ownership is a crucial factor underpinning our assessment that there is a "very
high" likelihood of support for VTB Bank. We understand that the Russian
government, as the majority owner, is ready to provide timely and sufficient
extraordinary support to VTB Bank in case of need in order to fulfill the bank's
refinancing or liquidity needs. At the same time, if such support becomes
structural and indicates durably weakened funding diversity, we might review
VTB Bank's stand-alone credit profile (SACP), which we currently assess at
'bb'.
The long-term rating on VTB Bank incorporates a two-notch uplift above its
SACP.
Because we classify Bank of Moscow, VTB Insurance, VTB Capital, VTB-Leasing, and
VTB-Leasing Finance as core subsidiaries of VTB Bank, and we consider VTB Bank
(France) to be a core subsidiary of VTB Bank (Austria); we equalize the ratings
on these entities with those on their respective parents. The core status
reflects the subsidiaries' close integration with the parents, and the
parents' commitment to providing ongoing and extraordinary support if needed.
We consider VTB Bank (Kazakhstan) and VTB Bank (Austria) to be highly strategic
subsidiaries of VTB Bank; we cap our ratings on them at one notch below those on
VTB Bank, and the negative outlook on VTB Bank (Kazakhstan) mirrors that on
VTB Bank.
We consider VTB Bank (Georgia) to be strategically important subsidiary of VTB
Bank, and we incorporate three notches of uplift to the SACP to account for
parental support.
For expected parental support, we incorporate four notches from the SACP into
our long-term rating on Bank of Moscow, one into our ratings on VTB Insurance,
and four into our rating on VTB Bank (Kazakhstan).
VTB-Leasing Finance is a special-purpose vehicle of its owner VTB-Leasing
and we equalize the ratings and outlooks on the two entities. VTB-Leasing
established VTB-Leasing Finance solely for the purpose of issuing domestic
bonds through VTB-Leasing Finance, which are fully guaranteed by VTB-
Leasing.
Outlook
The outlook on VTB Bank and all but one of its subsidiaries that we rate remains
negative and mirrors that on the sovereign. It also reflects increasing risks of
deterioration of the financial profile, particularly liquidity and capital.
We consider that sovereign-related risks will continue to weigh on the banks'
creditworthiness. If we lower our local or foreign currency ratings on Russia,
it could affect Russia's financial capacity to support state banks and it could
lead us to downgrade VTB Bank. In addition, increased market volatility, weak
growth prospects, and rising credit losses should put growing pressure on both
financial performance and capital position, which could lead us to take negative
rating actions in the next 12 months.
We would consider revising the outlook on VTB Bank and its subsidiaries to
stable if we revised the outlook on Russia to stable and if we had evidence that
VTB Bank's financial profile had not been substantially weakened by this period
of turbulence.
Ratings List
Ratings Affirmed
VTB Bank (Kazakhstan)
Counterparty Credit Rating BB+/Negative/B
Kazakhstan National Scale kzAA-/--/--
Senior Unsecured kzAA-
Senior Unsecured BB+
VTB Capital PLC
Counterparty Credit Rating BBB-/Negative/A-3
Primary Credit Analyst:
Sergey Voronenko, Moscow (7) 495-783-4003;
sergey.voronenko@standardandpoors.com
Secondary Contacts:
Irina Velieva, Moscow (7) 495-783-4071;
irina.velieva@standardandpoors.com
Pierre Gautier, Paris (33) 1-4420-6711;
pierre.gautier@standardandpoors.com
[2014-08-11]