(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 for Reconstruction and Development (UBRD) reflects our view of improvements in the bank's earnings capacity and asset quality, as well as its still weak, although improving, capitalization. Historically high single-name and single-industry lending concentrations, including those to the related parties, constrain our assessment of the bank's risk position. The stable outlook assumes that we continue to view the bank's systemic importance for the Russian banking system as "low." We also do not incorporate into our base-case scenario any possible external Tier 1 capital injections for 2013-2014.
We could consider upgrading UBRD if unexpected external capital increases cause us to raise our 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 its capitalization 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 most likely to change positively in the medium term. An upgrade would likely follow a sustainable improvement in the diversification of the bank's loan portfolio alongside a continuing improvement in its asset quality metrics toward the sector average. Conversely, material deterioration of UBRD's asset quality to below the sector average would lead us to revise the risk 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 credit profile (SACP) is 'b'.
Anchor:'bb' for banks operating only in Russia
Under our bank criteria, we use our Banking Industry Country Risk Assessment economic and industry risk scores to determine a bank's anchor, the starting point in assigning an issuer credit rating. The anchor for a commercial bank operating only in Russia is 'bb'. Russia's economic risk score is '7'. This reflects the country's only moderate growth prospects, the moderate pace of credit expansion, the economy's moderate level debt, and very high credit risk in the economy due to foreign currency lending, the poor credit standing of the nonexport economy, and Russia's weak and arbitrary legal system. The industry risk score is '7'. This is based on deficiencies in Russia's bank supervision; the dominance of state-owned banks, which unfavorably distorts competition for private sector banks; and risky bank funding markets characterized 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 retail deposits 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) 126.9 billion (about $4 billion) of assets in accordance with Russian generally accepted accounting principles (GAAP) on Sept. 1, 2012, UBRD is a midsize regional bank located in Russia's Urals Federal District, where the economy is dominated by the metallurgy industry. The bank has good market knowledge and position in its home region Sverdlovsk Oblast (BB+/Stable/--), where it possesses 20% of retail deposits, and improving positions in neighboring regions.
UBRD has a historical focus on servicing metallurgical companies; however, currently the bank is shifting its business model toward retail lending. It expects its retail loan portfolio to reach two-thirds of total loans by 2015, from 41% on Sept. 1, 2012. We believe that the successful implementation of this strategy will allow the bank to improve diversification of its business lines and strengthen earnings capacity.
Capital and earnings: Key negative rating factor
UBRD's historically "weak" capital and earnings constrain its loss absorption capacity and further business development. We project UBRD's Standard & Poor's-adjusted RAC ratio to be slightly 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. This injection temporarily supported bank's capitalization, which we expect to be gradually eroded by further assets growth. In our view, capitalization will remain the bank's stumbling block, and will constrain business growth in the medium term.
At the same time, planned expansion into higher-margin retail lending should improve UBRD's earnings 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, we anticipate improvements in earnings quality, as the bank benefits from its stronger focus on cost containment, together with progress in cross-selling of products and an increased share of fee and commission income in its total revenues.
Risk position: Historically high single-name and single-industry concentrations in the loan portfolio
Our risk position assessment for UBRD is "moderate." The bank has a high degree of credit risk stemming from its high related-party exposure and lending concentration. Lending to Russian Copper Company (not rated) and other related parties represented 16% of the bank's total loans at June 30, 2012, which is a material vulnerability in our view. Russian Copper Company's main shareholders own about 85% of UBRD. Single-party concentration risks are high, with the 20 largest borrowers accounting for about 40% of gross loans, which is almost three-times higher than its total equity at June 30, 2012. We anticipate improvements in the diversification of UBRD'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 over 2010-2011, and accounted for 8.6% of gross loans on June 30, 2012, which is slightly above the industry average. The bank's performance continues to benefit from improved and stabilized market conditions since 2008 in the metallurgy industry, which accounts for almost one-half of the bank's total corporate loans.
Funding and liquidity: Risks of confidence-sensitive funding base are partly mitigated by good liquidity management
We view UBRD's funding as "average" and liquidity as "adequate." The deposit base has shown stable growth since 2009, in part due to the bank's good market position and brand recognition within the Ural region. However, we understand that the bank might be subject to panic-driven outflows, as was the case in the autumn of 2008, when almost 20% of retail deposits were withdrawn.
Positively, there are no any significant single-name depositor concentrations. We believe the risks of its confidence-sensitive deposit base are partly mitigated by its track record of prudent liquidity management. As of June 30, 2012, cash instruments, short-term interbank placements, and repoable bonds comprised a high, albeit potentially volatile, 30% of total assets. We expect UBRD to maintain a relatively sizable portion of liquid assets on the balance sheet, what somewhat shelters the bank from a possible moderate liquidity squeeze in the medium term.
External support: None
UBRD is owned by a number of individuals. We consider their ability to provide support in times of stress as uncertain; therefore we do not include any notches of uplift in the bank's ratings for extraordinary parental support. We deem UBRD to be of "low" systemic importance, and consequently we do not incorporate any uplift in the bank's ratings for extraordinary government support.
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