(The following statement was released by the rating agency)
Oct 10 - =============================================================================== Summary analysis -- Ural Bank for Reconstruction and Development -- 10-Oct-2012 =============================================================================== CREDIT RATING: B/Stable/B Country: Russia Primary SIC: Commercial banks, nec =============================================================================== Credit Rating History: Local currency Foreign currency 15-Dec-2011 B/B B/B 07-Mar-2007 B-/C B-/C =============================================================================== Ratings Score Snapshot Issuer Credit Rating B/Stable/B SACP b Anchor bb Business Position Moderate (-1) Capital and Earnings Weak (-1) Risk Position Moderate (-1) Funding and Liquidity Average and Adequate (0) Support 0 GRE Support 0 Group Support 0 Sovereign Support 0 Additional Factors 0 Outlook
Standard & Poor's Ratings Services' stable outlook on Russia-based Ural Bank forReconstruction and Development (UBRD) reflects our view of improvements in the bank's earningscapacity and asset quality, as well as its still weak, although improving, capitalization.Historically high single-name and single-industry lending concentrations, including those to therelated parties, constrain our assessment of the bank's risk position. The stable outlookassumes that we continue to view the bank's systemic importance for the Russian banking systemas "low." We also do not incorporate into our base-case scenario any possible external Tier 1capital injections for 2013-2014.
We could consider upgrading UBRD if unexpected external capital increases cause us to raiseour forecast of the bank's risk-adjusted capital (RAC) ratio to more than 5%.
Conversely, we would consider downgrading UBRD if its loan portfolio expands, weakening itscapitalization to the point that we lower our forecast RAC ratio to less than 3%.
In our base-case scenario, our assessment of UBRD's "moderate" risk position is that mostlikely to change positively in the medium term. An upgrade would likely follow a sustainableimprovement in the diversification of the bank's loan portfolio alongside a continuingimprovement in its asset quality metrics toward the sector average. Conversely, materialdeterioration of UBRD's asset quality to below the sector average would lead us to revise therisk position assessment to "weak" and lower our ratings on the bank.
Our ratings on Ural Bank for Reconstruction and Development reflect its 'bb' anchor,"moderate" business position, "weak" capital and earnings, "moderate" risk position, "average"funding, and "adequate" liquidity, as our criteria define these terms. The stand-alone creditprofile (SACP) is 'b'.
Anchor:'bb' for banks operating only in Russia
Under our bank criteria, we use our Banking Industry Country Risk Assessment economic andindustry risk scores to determine a bank's anchor, the starting point in assigning an issuercredit rating. The anchor for a commercial bank operating only in Russia is 'bb'. Russia'seconomic risk score is '7'. This reflects the country's only moderate growth prospects, themoderate pace of credit expansion, the economy's moderate level debt, and very high credit riskin the economy due to foreign currency lending, the poor credit standing of the nonexporteconomy, and Russia's weak and arbitrary legal system. The industry risk score is '7'. This isbased on deficiencies in Russia's bank supervision; the dominance of state-owned banks, whichunfavorably distorts competition for private sector banks; and risky bank funding marketscharacterized by a lack of long-term financing in rubles and prevalent use of foreign currency.Nevertheless, bank funding has improved since 2008 due to a significant increase in retaildeposits and the Russian Central Bank's regular and effective liquidity support operations.
Business position: Midsize bank with good franchise in the home region
Our assessment of UBRD's "moderate" business position is based on the bank's limited,although improving, business diversity and market presence. With Russian ruble (RUB) 126.9billion (about $4 billion) of assets in accordance with Russian generally accepted accountingprinciples (GAAP) on Sept. 1, 2012, UBRD is a midsize regional bank located in Russia's UralsFederal District, where the economy is dominated by the metallurgy industry. The bank has goodmarket knowledge and position in its home region Sverdlovsk Oblast (BB+/Stable/--), where itpossesses 20% of retail deposits, and improving positions in neighboring regions.
UBRD has a historical focus on servicing metallurgical companies; however, currently thebank is shifting its business model toward retail lending. It expects its retail loan portfolioto reach two-thirds of total loans by 2015, from 41% on Sept. 1, 2012. We believe that thesuccessful implementation of this strategy will allow the bank to improve diversification of itsbusiness lines and strengthen earnings capacity.
Capital and earnings: Key negative rating factor
UBRD's historically "weak" capital and earnings constrain its loss absorption capacity andfurther business development. We project UBRD's Standard & Poor's-adjusted RAC ratio to beslightly above 4% in the next 12-18 months. The bank's RAC ratio at year-end 2011 stood at 3.6%before adjustments for diversification and concentration, and 2.8% after these adjustments.
In June 2012, UBRD received RUB2 billion of Tier 1 capital from its main shareholder. Thisinjection temporarily supported bank's capitalization, which we expect to be gradually eroded byfurther assets growth. In our view, capitalization will remain the bank's stumbling block, andwill constrain business growth in the medium term.
At the same time, planned expansion into higher-margin retail lending should improve UBRD'searnings capacity and somewhat ease pressure on the bank's capitalization. In the medium term,we expect the bank's net interest margin to widen to 8%-9%, from 7.2% in 2011. Besides, weanticipate improvements in earnings quality, as the bank benefits from its stronger focus oncost containment, together with progress in cross-selling of products and an increased share offee and commission income in its total revenues.
Risk position: Historically high single-name and single-industry concentrations in the loanportfolio
Our risk position assessment for UBRD is "moderate." The bank has a high degree of creditrisk stemming from its high related-party exposure and lending concentration. Lending to RussianCopper Company (not rated) and other related parties represented 16% of the bank's total loansat June 30, 2012, which is a material vulnerability in our view. Russian Copper Company's mainshareholders own about 85% of UBRD. Single-party concentration risks are high, with the 20largest borrowers accounting for about 40% of gross loans, which is almost three-times higherthan its total equity at June 30, 2012. We anticipate improvements in the diversification ofUBRD's loan portfolio, as the bank further develops its retail franchise.
The percentage of UBRD's loans overdue by more than 90 days gradually decreased over2010-2011, and accounted for 8.6% of gross loans on June 30, 2012, which is slightly above theindustry average. The bank's performance continues to benefit from improved and stabilizedmarket conditions since 2008 in the metallurgy industry, which accounts for almost one-half ofthe bank's total corporate loans.
Funding and liquidity: Risks of confidence-sensitive funding base are partly mitigated bygood liquidity management
We view UBRD's funding as "average" and liquidity as "adequate." The deposit base has shownstable growth since 2009, in part due to the bank's good market position and brand recognitionwithin the Ural region. However, we understand that the bank might be subject to panic-drivenoutflows, as was the case in the autumn of 2008, when almost 20% of retail deposits werewithdrawn.
Positively, there are no any significant single-name depositor concentrations. We believethe risks of its confidence-sensitive deposit base are partly mitigated by its track record ofprudent liquidity management. As of June 30, 2012, cash instruments, short-term interbankplacements, and repoable bonds comprised a high, albeit potentially volatile, 30% of totalassets. We expect UBRD to maintain a relatively sizable portion of liquid assets on the balancesheet, what somewhat shelters the bank from a possible moderate liquidity squeeze in the mediumterm.
External support: None
UBRD is owned by a number of individuals. We consider their ability to provide support intimes of stress as uncertain; therefore we do not include any notches of uplift in the bank'sratings for extraordinary parental support. We deem UBRD to be of "low" systemic importance, andconsequently we do not incorporate any uplift in the bank's ratings for extraordinary governmentsupport.
Additional rating factors: None No additional factors affect this rating. Related Criteria And Research -- Banks: Rating Methodology And Assumptions, Nov. 9, 2011 -- Banking Industry Country Risk Assessment Methodology And Assumptions, Nov. 9, 2011 -- Bank Capital Methodology And Assumptions, Dec. 6, 2010 -- Banking Industry Country Risk Assessment: Russia, March 19, 2012 -- Capital Erosion Threatens Asset Growth At Russia's Largest Banks, Aug. 28, 2012