11 September 2009
Standard & Poor’s Ratings Services changed Bank Vozrozhdenie long-term counterparty credit rating to “B+” from “BB-” and the Russia national scale rating to “ruA+” from “ruAA-”. These ratings were removed from CreditWatch, where they were placed on June 17, 2009. The “B” short-term counterparty credit rating was affirmed. The outlook on all ratings is stable.
“Standard & Poor’s was monitoring the influence of the turbulent environment on the Russian banking system since the crises beginning in autumn 2008. We understand that the change in the rating reflects worsening of the external financial situation that caused general deterioration of Russian borrowers’ creditworthiness. — said Andrey Shalimov, member of the Management Board and the Head of Treasury — In our loan book the most significant decline in credit quality took place during last winter and early spring. Currently the situation has started to stabilize and we hope that the trend should change to positive next year. At the moment total provisions for loan impairment totaled around RUB 8 billion and we continue to build them up using sound operating revenue stream. We believe that in the future the bank keeps bringing profit to its shareholders and pass the crises without losing any part of its capital. We are pleased to note that our strong liquidity position and adequate capitalization were recognized by Standard & Poor’s as positive achievements of Bank Vozrozhdenie in a stressed market environment as well as the change of the rating outlook to stable from negative”, — added Andrey Shalimov.
The downgrade primarily reflects deteriorating asset quality for Bank Vozrozhdenie, and the entire Russian banking industry, owing to the continuing economic slowdown in Russia.The ratings on Bank Vozrozhdenie broadly reflect the increasing systemwide risks in Russia due to the economic recession and deteriorating operating environment. The ratings also take into account the moderately high single-party concentrations in the bank’s loan book, and its confidence-sensitive funding base. These risks are mitigated by the bank’s adequate capitalization, limited debt repayment burden, and relatively low market risk appetite.
In the Standard & Poor’s release it was mentioned that in response to the stressed market environment and deteriorating asset quality, the bank has implemented a number of measures to mitigate credit risk and formed a reasonable liquidity cushion against potential deposit volatility, with cash and cash equivalents representing 26% of the bank’s total assets. In their opinion, Vozrozhdenie’s funding profile is more balanced than that of many local peers due to its relatively low dependence on wholesale funding and borrowings, representing about 6% of total liabilities.
The stable outlook reflects Standard & Poor’s expectation that the bank’s loss absorption capacity will be maintained in the currently difficult operating environment and will be sufficient to mitigate further asset quality deterioration in the medium term. Because Vozrozhdenie is likely to reduce underwriting of new loans in 2009, they do not expect its core capitalization to weaken materially despite significant pressures on asset quality.
A positive rating action would be considered if the bank’s asset quality and financial performance improved significantly, and if liquidity and capitalization was satisfactory. However, ratings upside is limited until the Russian financial market and economy stabilize. Negative pressure on the ratings could come from significantly falling capitalization, worsening lending concentrations, or a deterioration of the quality of the loan portfolio and earnings structure.