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TEXT-S&P raises BANK ROSSIYA's ratings to 'BB-/ruAA-'

Overview

-- Pressure on BANK ROSSIYA's projected capitalization has eased thanks to its revised growth expectation, and we now expect that BANK ROSSIYA's RAC ratio before diversification adjustments will remain substantially above 5% in 2012-2014.

-- We have revised our view of BANK ROSSIYA's capital and earnings to "moderate" from "weak".

-- We are raising our long-term and national scale ratings on BANK ROSSIYA to 'BB-/ruAA-' from 'B+/ruA' and affirming the 'B' short-term rating.

-- The stable outlook reflects our expectation that the bank will maintain moderate capitalization, given its revised growth strategy and sound earnings generation capacity over the next 12-24 months.

Rating Action On Oct. 9, 2012, Standard & Poor's Ratings Services raised its long-term issuer credit rating on BANK ROSSIYA to 'BB-' from 'B+' and affirmed its short-term rating at 'B'. The outlook is stable. We also raised the Russia national scale rating on BANK ROSSIYA to 'ruAA-' from 'ruA'.

Rationale

The upgrade reflects Standard & Poor's view of easing pressure on BANK ROSSIYA's projected capitalization from reduced future growth targets and continued sound profitability.

As a result, we believe that bank's risk-adjusted capital (RAC) ratio will remain consistently above 5% before adjustments for diversification in 2012-2014.

Our base-case scenario includes the possible consolidation of Sobinbank, which BANK ROSSIYA has controlled since August 2010, by the end of 2013. Our revised growth expectation for 2013-2014 is 30% lower than our previous expectations. But we expect BANK ROSSIYA's consolidated balance sheet to increase by about 25% by the end of 2013, compared with BANK ROSSIYA's stand-alone one as of year-end 2011. We also project positive effects on the net interest margin, limited effects on provisioning needs, and certain economy of scale. We do not expect any sizable capital injections over the next two years, nor other acquisitions.

BANK ROSSIYA ranks among the Russia's 20-largest financial institutions and had total assets of Russian ruble (RUB) 308.8 billion (about $9.4 billion) as of June 30, 2012. The bank's largest shareholders include Yuriy Kovalchuk (30.33%) and JSC Gazprom gas distribution (12.27%), the latter of which is an affiliate of OAO Gazprom (BBB/Stable/A-2), the world's largest gas producer.

With a market share of about 1% in terms of domestic customer deposits, we consider BANK ROSSIYA to have "moderate" systemic importance. We classify the Russian government as "supportive" toward banks domiciled in the country, which provides a one-notch rating uplift above the stand-alone credit profile (SACP). The bank has several large investments in the financial industry and media through subsidiaries, including its 51% stake in subsidiary OJSC Sogaz (BBB-/Stable/--; Russia national scale 'ruAA+'), one of the largest insurance groups in Russia. We think that, at present, these holdings are a neutral rating factor.

In addition to "moderate" capital and earnings, our ratings on BANK ROSSIYA reflect the 'bb' anchor for a commercial bank operating only in Russia and our view of the bank's "moderate" business position, "moderate" risk position, "average" funding, and "adequate" liquidity. The stand-alone credit profile (SACP) is 'b+'.

Outlook

The stable outlook reflects our base-case scenario, with a possible consolidation of Sobinbank by the end of 2013, and our expectation that BANK ROSSIYA will continue its growth strategy over the next 12-24 months. We expect that this strategy will bring some reduction in concentrations in the loan portfolio and funding and improve its net interest margin, but that it could potentially slightly weaken BANK ROSSIYA's asset quality metrics.

We could lower the ratings if BANK ROSSIYA's financial profile were to deteriorate notably, especially if its growth significantly exceeds our revised expectations and leads to renewed pressure on capitalization levels, with the RAC ratio falling below 5%. We could also lower the ratings if we see significant operational risks materializing as a result of the realization of the consolidation. The deposit base is very concentrated and reliant on some large depositors, including related parties. We could also lower the ratings if we perceive risks on increasing instability of these large deposits, as it would indicate a weakening of the bank's funding profile.

A positive rating action is currently a remote scenario. We could raise the ratings if the bank's business position improved to "adequate" from "moderate", observed through significant diversification and franchise growth. Improvements in the risk position, in particular a significant decrease in concentrations, could also foster an upgrade, although in our opinion such a situation seems further in the future than our two-year rating horizon.

Ratings Score Snapshot To From Issuer Credit Rating BB-/Stable/B B+/Stable/B Russia National Scale Rating ruAA- ruA SACP b+ b Anchor bb bb Business Position Moderate (-1) Moderate (-1) Capital and Earnings Moderate (0) Weak (-1) Risk Position Moderate (-1) Moderate (-1) Funding and Average Average Liquidity and Adequate (0) and Adequate (0) Support 0 0 GRE Support 0 0 Group Support 0 0 Sovereign Support +1 +1 Additional Factors 0 0

Related Criteria And Research All articles listed below are available on RatingsDirect on the Global Credit Portal, unless otherwise stated.

-- Banks: Rating Methodology And Assumptions, Nov. 9, 2011

-- Banking Industry Country Risk Assessment Methodology And Assumptions, Nov. 9, 2011

-- Group Rating Methodology And Assumptions, Nov. 9, 2011

Ratings List Upgraded; Ratings Affirmed To From BANK ROSSIYA Counterparty Credit Rating BB-/Stable/B B+/Stable/B Russia National Scale Rating ruAA- ruA

Complete ratings information is available to subscribers of RatingsDirect on the Global Credit Portal at

. All ratings affected by this rating action can be found on Standard & Poor's public Web site at . Use the Ratings search box located in the left column. (New York Ratings Team)

((e-mail: pam.niimi@thomsonreuters.com; Reuters Messaging: pam.niimi.reuters.com@reuters.net; Tel:1-646-223-6330;))