Fitch Ratings has downgraded PJSC Bank Zenit's (Zenit), Public Joint-Stock Company MTS Bank's (MTSB) and JSB Almazergienbank's Long-Term Issuer Default Ratings (IDRs) to 'B' and Viability Ratings (VRs) to 'b'. All the ratings have been placed on Rating Watch Negative (RWN). A full list of ratings is below.

The rating actions follow Fitch's downgrade of Russia's sovereign rating to 'B'/RWN on 2 March 2022.

Sanctions imposed by the US and the EU put significant pressure on Russian banks' profiles, undermining their ability to service obligations in foreign currency, and in the medium term could lead to a significant weakening of lenders' financial profiles. The Central Bank of Russia's (CBR) ability to support banks with foreign currency has also severely been weakened due to sanctions potentially blocking a large proportion of its reserves, although support in local currency is still available, as evident in increased rouble borrowings by banks from the CBR.

Rating Withdrawals

Fitch has withdrawn the Support Ratings of all three banks, as they are no longer relevant to the agency's coverage following the publication of its updated Bank Rating Criteria on 12 November 2021. In line with the updated criteria, Fitch has assigned Shareholder Support Ratings (SSR) of 'ccc+' to Zenit and MTSB and 'ccc' to Almazregienbank.

Key Rating Drivers

The banks' IDRs are now driven by their VRs. The downgrades of the banks' IDRs to 'B' and VRs to 'b' capture the heightened country and sovereign risks and the close linkage of their credit profiles with that of the Russian sovereign.

The RWNs on the banks' ratings mirror that on the sovereign rating, but also reflect increased pressures on the banks' profiles as a result of recent sanctions imposed against Russia, although these three banks are not under sanctions. Regulatory forbearance measures introduced by the CBR should help the banks manage their asset-quality and capital metrics; however, risks to the banks' profiles and their ability to service debt are very high.

Key Rating Driver 1

Zenit's and MTSB's SSRs of 'ccc+' reflect the possibility that the banks will be supported by their shareholders, PJSC Tatneft (B/RWN) and PJSC Mobile TeleSystems (B/RWN), respectively, but that support cannot be relied on, given high country and sovereign risks and moderate synergies with the corporate shareholders.

Almazregienbank's SSR of 'ccc' reflects its limited strategic importance for Republic of Sakha (Yakutia; B/RWN) and the low flexibility of the local authorities to provide immediate extraordinary support.

The RWNs on the banks' SSRs mirror that on the parents' ratings.

Key Rating Driver 2

Zenit's senior unsecured debt rating has been downgraded to 'B'/'RR4' and placed on RWN in line with the bank's IDRs.

Rating Sensitivities

Factors that could, individually or collectively, lead to negative rating action/downgrade:

The banks' IDRs and debt ratings could be downgraded if their VRs are downgraded. The VRs are primarily sensitive to changes in the sovereign rating. Ratings could also be downgraded in the absence of a sovereign downgrade, if the operating environment results in substantial deterioration of the banks' financial profiles.

The IDRs could also be downgraded if the banks' ability to service their obligations is impaired further by sanctions or by restrictions on payments by the Russian authorities leading to material economic losses for creditors.

The SSRs could be downgraded if the ability or propensity of the shareholders to provide support weakens.

Factors that could, individually or collectively, lead to positive rating action/upgrade:

Ratings could be upgraded or affirmed in case of a similar action on the sovereign rating.

VR ADJUSTMENTS

The operating environment score of 'b' is below the 'bb' category implied score, due to the following adjustment reason: 'sovereign rating' (negative).

Best/Worst Case Rating Scenario

International scale credit ratings of Financial Institutions and Covered Bond issuers have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of three notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of four notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from 'AAA' to 'D'. Best- and worst-case scenario credit ratings are based on historical performance. For more information about the methodology used to determine sector-specific best- and worst-case scenario credit ratings, visit https://www.fitchratings.com/site/re/10111579

REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING

The principal sources of information used in the analysis are described in the Applicable Criteria.

ESG Considerations

Almazregienbank has an ESG Relevance Score of '4' for Governance Structure in view of significant exposure to related parties and Sakha's involvement in the management of the bank at board level and, in particular, in its business origination. This has a moderate negative impact on the bank's credit profile due to governance risks and involvement in directed financing, and is relevant to the ratings in conjunction with other factors.

Unless otherwise disclosed in this section, the highest level of ESG credit relevance is a score of '3'. This means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. For more information on Fitch's ESG Relevance Scores, visit www.fitchratings.com/esg

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