MOBILE TELESYSTEMS
Fitch Ratings has revised
Fitch has also affirmed the bank's Viability Rating (VR) at 'b+'. A full list of rating actions is below.
KEY RATING DRIVERS
The revision of the Outlook on MTSB's IDR follows a similar action on the bank's majority shareholder, PJSC Mobile TeleSystems (MTS, BB+/Positive). The bank's IDR of 'BB-' and Support Rating of '3' are driven by potential support from its parent, in case of need. In Fitch's view, MTS has a strong propensity to support its subsidiary given its almost 100% ownership; increased integration between the bank and the telecom company in recent years; and shared brand and reputational risk for the parent from a subsidiary's default.
The two-notch difference between MTS's and MTSB's ratings reflects the subsidiary's small, although growing, franchise and therefore currently modest strategic importance for the parent and a short record of profitable performance.
MTSB's VR of 'b+' reflects a narrow franchise in the concentrated Russian banking sector with a focus on high-risk/high-return consumer lending (50% of total assets at end-1Q21). The VR also factors in the bank's high loan growth in the unsecured retail segment (by 14% in 1Q21, not annualised), which exposes asset quality and profitability to potential downswings of the credit cycle, and only modest capital buffers.
Impaired loans (Stage 3 under IFRS 9) were 8.6% of gross loans at end-1Q21, slightly down from 9% at end-1H20, aided by resumed loan growth and write-offs. Coverage of Stage 3 loans by specific loan loss allowances (LLAs) was robust at 84%, while coverage by total LLAs was 133% at end-1Q21. The impaired loans origination ratio (increase in impaired loans plus write-offs divided by average performing loans) in the unsecured retail portfolio increased to 10% in 2020 (from 7%-8% in 2018-2019) before moderating to 7% in 1Q21 (annualised) on the back of economic recovery and accelerated loan growth.
The share of Stage 2 loans improved to 6.4% at end-1Q21 from 14.4% at end-1H20, mainly driven by lower risks in the corporate book. Loans restructured since the beginning of 2020 accounted for 3.6% of gross loans at end-1Q21, with about 80% classified as Stage 2 and Stage 3.
Weaker economic activity and higher loan impairment charges (LICs) put pressure on MTSB's profitability in 2020, which had been gradually improving before the pandemic. In 2020, operating profit declined to 0.3% of regulatory risk-weighted assets (RWAs) from 1% in 2019. This was mainly driven by higher LICs (7% of gross loans in 2020 compared with 4% in 2019).
Pre-impairment operating profit remained strong at 8% of average loans in 2020, supported by healthy margins (9%), net fees and commissions (5% of average loans) and improved operating efficiency (cost/income was 50% in 2020). However, LICs consumed more than 90% of pre-impairment operating profit in 2020. The bank's performance improved notably in 2H20-1Q21 on the back of economic recovery but we expect the cost of risk to remain high in the short term due to the bank's rapid expansion in consumer lending.
MTSB's capital buffers are modest but are likely to be supported by the shareholder in case of need, as illustrated by past record. Fitch core capital (FCC) stood at 8% of regulatory RWAs at end-1Q21. The consolidated regulatory common equity Tier 1 (CET1) ratio of 8.2% at end-1Q21 displayed only limited headroom above the regulatory minimum requirement of 7% including buffers. Capitalisation was supported by a
MTSB is mainly customer-funded (86% of total liabilities at end-1Q21). Funds from related-parties (36% of liabilities) have been stable in recent years. Third-party deposits (50% of liabilities) are mainly attracted from retail clients. MTSB's liquidity buffer (cash, short-term placements with banks and unpledged securities eligible for repo) was reasonable at 19% of total assets and covered 26% of customer accounts at end-1Q21.
RATING SENSITIVITIES
Factors that could, individually or collectively, lead to positive rating action/upgrade:
MTSB's IDRs and Support Rating could be upgraded if MTS's ratings are upgraded. Significantly improved synergies and further integration with the parent could result in a narrower notching but this is likely to be a long-term development.
An upgrade of the VR would require a moderation in credit growth and some improvement in profitability, while maintaining reasonable capital buffers.
Factors that could, individually or collectively, lead to negative rating action/downgrade:
The bank's IDRs could be downgraded if MTS's ratings are downgraded or if Fitch views that MTS's propensity to support the bank deteriorates. A sale of a controlling stake in the bank's capital to a lower rated or non-rated investor would result in a downgrade of the IDRs.
The bank's VR could be downgraded if pre-impairment operating profit is insufficient to cover LICs and the bank is loss-making for a few consecutive periods. Capital erosion as a result of losses or rapid loan growth, particularly if statutory capital ratios fall below the minimum requirements, can also be credit- negative, if not promptly addressed by shareholder support.
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 '
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.
PUBLIC RATINGS WITH CREDIT LINKAGE TO OTHER RATINGS
MTSB's ratings are driven by support from MTS.
ESG CONSIDERATIONS
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
RATING ACTIONSENTITY/DEBT RATING PRIOR
Public Joint-Stock Company MTS Bank LT IDR BB- Affirmed BB-
ST IDR B Affirmed B
Viability b+ Affirmed b+
Support 3 Affirmed 3
VIEW ADDITIONAL RATING DETAILS
Additional information is available on www.fitchratings.com
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