Credit Opinion: Alfa-Bank
Transcription
Credit Opinion: Alfa-Bank
Credit Opinion: Alfa-Bank Global Credit Research - 25 Mar 2015 Moscow, Russia Ratings Category Outlook Bank Deposits Baseline Credit Assessment Adjusted Baseline Credit Assessment Senior Unsecured Subordinate Moody's Rating Negative Ba2/NP ba3 ba3 Ba2 B1 Amsterdam Trade Bank N.V. Outlook Bank Deposits Baseline Credit Assessment Adjusted Baseline Credit Assessment Rating(s) Under Review *Ba3/NP **ba3 **ba3 Alfa MTN Issuance Limited Outlook Bkd Sr Unsec MTN Bkd Other Short Term Negative (P)Ba2 (P)NP * Rating(s) within this class was/were placed on review on January 13, 2015 ** Placed under review for possible downgrade on March 17, 2015 Contacts Analyst Irakli Pipia/London Semyon Isakov/Moscow Yves Lemay/London Ilya Pestryakov/Moscow Phone 44.20.7772.5454 7.495.228.6060 44.20.7772.5454 7.495.228.6060 Key Indicators Alfa-Bank (Consolidated Financials)[1] Total Assets (RUB billion) Total Assets (USD billion) Tangible Common Equity (RUB billion) Tangible Common Equity (USD billion) Problem Loans / Gross Loans (%) Tangible Common Equity / Risk Weighted Assets (%) Problem Loans / (Tangible Common Equity + Loan Loss Reserve) (%) Net Interest Margin (%) PPI / Average RWA (%) [2]6-14 [2]12-13 [2]12-12 [2]12-11 [2]12-10 1,696.5 1,598.5 1,403.1 1,007.5 869.3 49.8 48.6 45.9 31.4 28.5 170.1 152.3 120.1 106.0 87.4 5.0 4.6 3.9 3.3 2.9 4.5 3.5 2.3 5.0 7.5 12.0 11.5 10.1 11.6 12.1 23.6 19.3 14.1 24.9 32.3 4.7 4.3 4.8 4.4 5.8 3.7 4.6 5.2 5.3 7.3 Avg. [3]18.2 [3]15.0 [3]18.1 [3]14.9 [4]4.6 [5]11.4 [4]22.8 [4]5.0 [5]5.0 Net Income / Tangible Assets (%) Cost / Income Ratio (%) Market Funds / Tangible Banking Assets (%) Liquid Banking Assets / Tangible Banking Assets (%) Gross Loans / Total Deposits (%) Source: Moody's 1.0 41.9 27.0 26.2 125.6 1.9 43.8 29.5 29.6 108.5 1.8 46.4 26.3 29.9 104.4 2.1 51.6 24.8 26.3 116.7 2.0 [4]1.7 44.3 [4]45.6 23.1 [4]26.1 36.2 [4]29.6 100.0 [4]111.1 [1] All figures and ratios are adjusted using Moody's standard adjustments [2] Basel I; IFRS [3] Compound Annual Growth Rate based on IFRS reporting periods [4] IFRS reporting periods have been used for average calculation [5] Basel I & IFRS reporting periods have been used for average calculation Opinion SUMMARY RATING RATIONALE Moody's assigns a standalone baseline credit assessment (BCA) of ba3 to Alfa-Bank's (Alfa). The rating is supported by: 1) the bank's strong commercial franchise in Russia and business diversification; 2) strong capitalisation and manageable, although deteriorating, level of non-performing assets. The rating is constrained by: 1) high, albeit reducing, single-name concentrations on both sides of the balance sheet; 2) a significant level of related-party exposures; 3) very challenging operating environment and volatility in the macro fundamentals affecting the Russian economy and growth opportunities for the group. Alfa's senior debt and deposit ratings at Ba2 are based on the bank's BCA of ba3 and Moody's assessment of a low probability of systemic support for the bank in case of need. This results into one notch uplift on the bank's standalone BCA. We base our systemic support assumptions on a track-record of government support (subordinated loan was granted by the government to Alfa in 2009 alongside with other large banks in Russia), and the bank's market share of around 3% in retail deposits (term and demand) with almost 10.8 million retail clients. The latter makes Alfa-Bank one of the largest deposit-takers in Russia. THE BANK'S RATING IS CONSTRAINED BY RUSSIA'S MACRO PROFILE OF WEAK+ Russian banks face a very challenging operating environment and high likelihood of a sharp economic contraction in 2015, that Moody's expect to extend into 2016, followed by a weak recovery. The country's susceptibility to shocks or event risk is high, given geopolitical tensions in the region. The country's institutional strength is low, reflecting Russia' weak levels of governance, rule of law and transparency. Funding conditions remain difficult; access to international capital markets is restricted and the domestic cost of funding has substantially increased, while recent volatility in the rouble exchange rate increases foreign-currency mismatch risk. However, the system principally relies on domestic sources of funding, with the Central Bank of Russia in particular acting as a major creditor to banks, funding more than 10% of the system's liabilities. Credit conditions in Russia are influenced by rapid growth in the past, although growth rates have moderated since mid-2013. We expect subdued loan growth in 2015 and into 2016 given the economic slow-down. Our assessment also incorporates high levels of single-name borrower concentrations and the potential for rapid formation of new nonperforming loans, as occurred during the 2008/09 crisis. In terms of industry structure, Russia's banking industry is more concentrated than most other emerging-market peers; the three largest government-owned banks together account for about 50% of total banking assets. However, the rest of the system is competitive and there is no evidence of overcapacity in the industry. Rating Drivers - Established business franchise in corporate and retail banking, supported by a large branch network across Russia - The risk profile is negatively affected by single- and related-party concentrations, albeit declining, in loans and deposits - Manageable, albeit declining, asset quality trends and solid capitalisation - Pressure on profitability balanced with good efficiency - High loan-to-deposit ratios with manageable refinancing risk Rating Outlook In February 2015 Moody's downgraded the standalone and the long-term ratings of Alfa-Bank. The action on the supported ratings follows the weakening of Russia's credit profile, as reflected by Moody's downgrade of Russia's government debt rating to Ba1 from Baa3 on 20th of February, 2015 and placing it on a negative outlook. The outlook on Alfa-Bank's supported ratings is negative in line with the outlook on the sovereign rating. What Could Change the Rating - Up Any positive developments would require one or more of the following: (i) the ongoing ability to maintain overall profitability and capital buffer commensurate with risks assumed in the current deteriorating operating environment, (ii) a marked improvement in its risk profile, reflected in decreased concentration levels in loans and related-party exposures. The bank's long-term ratings are unlikely to come under upward pressure in the near term given its current negative outlook. What Could Change the Rating - Down A larger than expected deterioration of asset quality, capitalisation and/or liquidity position (including refinancing risk) could have a negative impact on the standalone credit profile, as could a weakening market position and a material loss of market share. Alfa-Bank's senior debt/deposit ratings could be downgraded in the event of a downgrade of the bank's BCA and/or Moody's re-assessment of the current probability of systemic support. DETAILED RATING CONSIDERATIONS ESTABLISHED BUSINESS FRANCHISE IN CORPORATE AND RETAIL BANKING, SUPPORTED BY A LARGE BRANCH NETWORK ACROSS RUSSIA With total assets of $49.8 billion Alfa is Russia's largest privately owned banking group, with one of the largest branch networks in the country. The bank has a clear corporate focus in assets, but is rapidly diversifying into retail banking. In a market dominated by state banks, Alfa is the 5th largest banking group by system assets, with around 3% market share in terms of assets. The bank serves a large number of customers in the range of around 10.8 million retail and over 128 thousand corporate clients as at June 2014. The bank is controlled by Alfa Group Consortium (not rated by Moody's), one of the largest Russian conglomerates that owns Rosvodokanal Group, large stakes in X5 Retail Group, among others assets. Alfa Group Consortium appears to be cash-rich following the sale of its 25% stake in oil company TNK-BP to Rosneft for around $14 billion. The group is beneficially owned by six shareholders, including Mikhail Fridman, German Khan and Alexei Kuzmichev. The bank has diversified away from providing loans to Alfa Consortium companies over recent years, although related-party transactions remain an important business for the bank, done on market terms according to bank management and shareholders. Alfa operates primarily in Russia through a large branch network. At June 2014, it distributed products and services through a network comprising 672 offices (including branches, regional branches and outlets) (YE 2013: 617). Alfa has a clear corporate focus in lending. Corporate loans accounted for 80% of gross loans at June 2014. Based on Alfa's segment reporting under IFRS, the corporate segment (also includes investment banking) generated US$162 million in pre-tax profit for the first half of 2014 (H1 2013: US$400 million ). This significant decline compared with the previous year's result was mainly driven by an increase in higher provisioning charges compared with the previous year. Retail loans amounted to 20% of gross loans at June 2014, and were reasonably well diversified by products, dominated by personal instalment loans and credit cards, consumer finance, and followed by mortgages, which remain an underdeveloped asset class in Russia. The retail banking segment made a pre-tax profit of US$115million for the first half of 2014 (H1 2013: US$150 million). Despite higher segment revenue in 2014, the decline in the segment's overall profit was due to increase in provisioning (particularly in unsecured consumer lending), as well as a general increase in operating expenses. - THE RISK PROFILE IS NEGATIVELY AFFECTED BY SINGLE- AND RELATED-PARTY CONCENTRATIONS IN LOANS AND DEPOSITS The bank has a notable single-client concentrations on both sides of the balance sheet. Loans to the 20 largest groups of corporate clients amounted to almost 200% of Tier 1 capital at June 2014, up from 187% at year-end 2013, but still lower than 244% at year-end 2012. These concentration metrics, although still high, are mostly in line with the Russian system average. The largest credit exposures are to Alfa Group companies and Russian bluechip companies of comparable financial strength. Alfa's credit exposure to related-parties has been volatile in recent years, but remains above the level seen at similarly rated peers. Moody's traditionally considers related-party transactions as higher-risk because of the potential conflict of interest between shareholders and creditors and reputational difficulties associated with the recovery of such loans. During H1 2014, Alfa has significantly increased its' related-party exposures (including corporate and bank loans, securities and receivables) to around US$2 billion or 42% of Tier 1 capital, up from US$1.1 billion or 25% of Tier 1 capital at end-2013 (YE2012: 49%). The bank also has large foreign currency exposures with 47% of assets and 42% of liabilities were denominated in foreign currencies, mainly in US dollars, as at June 2014. Although the foreign currency exposures on the both sides of the bank's balance sheet appear to be matched, we still note that some non-export oriented borrowers could be exposed to a currency exchange risk, especially given the recent volatility in the exchange rate. MANAGEABLE, ALBEIT DECLINING, ASSET QUALITY TRENDS AND ADEQUATE CAPITAL ADEQUACY Alfa's asset quality deteriorated notably in light of the economic slowdown in 2014. Problem loans (including impaired and loans overdue by more than 90 days) increased to US$1.6 billion or 4.5% of total gross loans at June 2014 from US$1.2 billion or 3.5% at YE2013 (2012: US$0.7 billion or 2.3%). Alfa's asset quality metrics remains sound compared to Russian peers (5-10% problem loan ratios on average), which has been attributed to more efficient problem loan workout procedures. Alfa's loan loss reserves ratio for gross loans increased slightly to 5% of total gross loans at June 2014 from 4.3% at end- 2013. We note that although currently Alfa's provisioning level creates an adequate buffer against problem exposures further deterioration in this ratio would be considered as credit negative. The industry breakdown of the loan book is relatively granular, dominated by trade & commerce (10%), machinery and metal work (9%), finance and investment companies (8%), real estate (7%) of gross loans and other. The share of construction made up 4% of gross loans at end-June 2014, which we view as conservative. Despite an almost 5% increase in Tier 1 Capital since year-end, the bank's capital adequacy has deteriorated slightly, mainly due to pressure from new lending growth and a slight reduction in Tier 2 capital. Total CAR (Basel I) stood at 16.5% at June 2014 (2013: 16.7%), with Tier 1 at 11.8% (2013: 11.7%). The increase in nominal capital was mainly supported by retained earnings. The quality of capital is somewhat impaired by related-party loans, as discussed in the section above. Alfa's Tier 1 compares favourably with similarly-rated banks. Our base-case scenario analysis on Alfa's risk absorption capacity indicates that the bank has a sufficient capital buffer against potential credit and market losses. PRESSURE ON PROFITABILITY BALANCED WITH GOOD EFFICIENCY For the first six months of 2014, the bank reported a profit of US$237 millions, a 50% reduction compared with the same period last year despite an increase in pre-provision earnings. The main reason of the reduction was an almost a threefold increase in provisioning expenses. We expect Alfa-Bank's profitability metrics to continue to be under pressure in 2014 due to more challenging operating conditions and a slowdown in economic growth in Russia. During the first half of 2014, the bank' maintained a relatively stable margin in the range of 4.8% which supported its net interest income. The bank's efficiency is one of the best among the peer group with cost-to-income ratio at 42% in H1 2014 (2013: 44%). HIGH LOAN-TO-DEPOSIT RATIOS WITH MANAGEABLE REFINANCING RISK We consider Alfa's liquidity management to be adequate. At June 2014, the bank had around US$4.3 billion in cash and equivalents, or 9% of its total assets. An additional layer of liquidity was composed of relatively liquid trading securities of around US$2.6 billion (of which 65% was pledged with the CBR and other banks under repo agreements at June 2014), and an additional US$2.5 billion in liquid fixed income investments (mainly sovereign and corporate bonds), out of which US$0.4 billion is repoed. Total liquid assets (including repo transactions) represented 27% of the bank's total assets. We consider Alfa's liquidity buffer as adequate in the context of its customer-driven deposit funding base. Although around a significant proportion of deposits is either on demand or with short-term maturities; these deposits have been traditionally rolled over, even during the times of crisis. We note however, that Alfa has high concentrations in customer accounts, with the top-10 depositors accounting for around 28% of total customer deposits at June 2014, of which around 40% come from Alfa-Group. Related-party deposits from Alfa Group companies made up US$3.0 billion at June 2014 (around 11% of customer deposits). These group-related deposits tend to be with Alfa's Dutch-based subsidiary, which Alfa bank Russia consolidates for reporting purposes. We consider these deposits as relatively sticky. Wholesale and bilateral borrowings constitute a moderate part of Alfa's liabilities. Based on the most recent financials, the amount of market debt maturing in the current year is small, at US$71 million (euro commercial paper notes), around 0.15% of total liabilities. Alfa's loan-to-deposit ratio was 126% as at June 2014 which is in line with the peer group, although indicates a medium-term dependence on wholesale funding. Notching Considerations Government Support We assign a global local currency (GLC) deposit rating of Ba2 to Alfa-Bank. The GLC rating is supported by (i) the bank's standalone credit strength of ba3, and (ii) Moody's assessment of a low probability of systemic support for the bank in case of need. This results into one notch uplift above the bank's standalone BCA. The bank's relatively sizeable 3% market share in retail deposits (compared with other privately-owned peers) in Russia is a key driver behind the one-notch debt/deposit ratings uplift. We note that Alfa-Bank is the only privatelyowned bank that benefits from such systemic support in Russia and its maintenance could be sensitive to the further pressure on the sovereign debt rating. Foreign Currency Deposit Rating Moody's assigns Ba2 foreign currency deposit rating to Alfa Bank. The rating is not constrained by the country's foreign currency deposing ceiling for Russia at Ba2. Subordinated Debt Ratings Any new "bail-inable" sub-debt issued under Basle III guidelines would be rated lower and notched off the bank's standalone rating. NOTE ON DATA This credit opinion was prepared based on consolidated financial statements of ABH Financial Limited prepared under IFRS. ABH Financial is the holding company that owns Alfa-Bank (Russia), Amsterdam Trade Bank (Netherlands) and a number of smaller financial companies. Unless noted otherwise, all figures shown in this report are sourced from the bank's latest annual and interim financial reports and our Banking Financial Metrics. These metrics are based on our own chart of account, and are adjusted for analytical purposes. Please refer to the documents entitled "Financial Statement Adjustments in the Analysis of Financial Institutions " published on 19 December 2013. About Moody's Bank Scorecard Our Scorecard is designed to capture, express and explain in summary form our Rating Committee's judgment. When read in conjunction with our research, a fulsome presentation of our judgment is expressed. As a result, the output of our Scorecard may materially differ from that suggested by raw data alone (though it has been calibrated to avoid the frequent need for strong divergence). The Scorecard output and the individual scores are discussed in rating committees and may be adjusted up or down to reflect conditions specific to each rated entity. Rating Factors Alfa-Bank Macro Factors Weighted Macro Profile Financial Profile Factor Weak + Historic Ratio Macro Credit Trend Adjusted Score Assigned Score Key driver #1 Key driver #2 Solvency Asset Risk Problem Loans / Gross Loans 4.5% ba3 ↓↓ b2 Expected trend Collateral and provisioning coverage 12.0% ba2 ←→ ba1 Stress capital Nominal leverage resilience 1.0% ba3 ↓↓ b2 Expected trend Capital TCE / RWA Profitability Net Income / Tangible Assets Combined Solvency Score Liquidity Funding Structure Market Funds / Tangible Banking Assets ba3 ba3 29.5% b1 ←→ b1 Extent of market funding reliance 29.6% ba2 ←→ ba2 Stock of liquid assets Liquid Resources Liquid Banking Assets / Tangible Banking Assets Combined Liquidity Score Financial Profile Qualitative Adjustments ba3 ba3 ba3 Adjustment Business Diversification Opacity and Complexity Corporate Behavior 0 Total Qualitative Adjustments 0 0 0 Sovereign or Affiliate constraint Ba1 Scorecard Calculated BCA range ba2 - b1 Assigned BCA ba3 0 Affiliate Support notching Adjusted BCA Instrument Class Deposits Senior unsecured bank debt Dated subordinated bank debt ba3 Loss Given Additional Preliminary Failure notching Rating notching Assessment Government Local Currency Foreign Currency Support rating rating notching 0 0 0 0 ba3 ba3 1 1 -1 0 b1 0 Ba2 Ba2 Ba2 Ba2 B1 This publication does not announce a credit rating action. 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