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Rating Action:

Moody's Interfax downgrades National Reserve Bank's National Scale Rating to Baa3.ru

Global Credit Research - 28 Aug 2013

Moscow, August 28, 2013 -- Moody's Interfax Rating Agency has today downgraded National Scale Rating (NSR) of National Reserve Bank (Russia) to Baa3.ru from Baa1.ru. The NSRs carry no specific outlooks.

Moody's Interfax rating action primarily reflects National Reserve Bank's weakening earnings generation and its poor profitability and cost-efficiency metrics. The rating action is primarily based on the bank's audited financial statements for 2012 prepared under IFRS.

Please see ratings tab on the issuer/entity page on moodys.com for information on Global Scale Rating.

RATINGS RATIONALE

National Reserve Bank's business volumes have contracted over the past 18 months, prompting weakening earnings generation, and poor profitability and cost-efficiency metrics. The bank's holdings of substantial investments in securities have aggravated this weaker performance because the securities render the bank's financial results vulnerable to negative market trends. Moody's notes that National Reserve Bank's capital adequacy levels have been suppressed by a prolonged track record of weak financial performance, and capital remains under pressure.

MATERIALLY WEAKENED FRANCHISE

Moody's explains that due to negative publicity surrounding National Reserve Bank throughout 2012 the bank scaled down its third-party business. As a result of these developments, the total gross loan portfolio has contracted by more than two-thirds over the past 18 months, and the customer deposit base more than halved over the same period, with around half of these volumes now represented by related-party business. National Reserve Bank reduced its network to three regional offices as of August 2013 from 15 offices as of year-end 2012.

LOSS-MAKING PERFORMANCE

National Reserve Bank posted a net IFRS loss of RUB1.8 billion in 2012. The loss-making performance was driven by: (1) the reduction in the bank's recurring earnings (as a result of reduction in the loan book) which were insufficient to cover the bank's administrative costs: the bank's cost-to-income ratio surged to 218% in 2012 and Moody's expects the ratio to exceed 100% in 2013; (2) the plunge in the value of the bank's investments in equity securities, which at year-end 2012 accounted for 62% of National Reserve Bank's total shareholder equity; and (3) heightened loan loss provisions accounting for 3.9% of the bank's average gross loan portfolio in 2012.

WEAKENED CAPITAL BASE

National Reserve Bank's loss-making performance, coupled with a substantial dividend payout in 2012, led to a material reduction of its statutory capital adequacy (N1) ratio, which declined to 23.97% at mid-2013 from 28.43% reported at 1 January 2012, despite the substantial decrease in the bank's risk-weighted assets over the same period.

STABILISED LIQUIDITY

More positively, Moody's notes that National Reserve Bank's liquidity profile and depositor base stabilised by mid-2013 after the bank had experienced significant outflow of customer deposits during 2012. According to the bank's management data, only approximately RUB2 billion (less than 10% of the bank's total assets) of all customer funding is now owed to third-party customers (individuals and corporate clients); the rest of National Reserve Bank's funding mainly stems from the bank's related parties and market facilities collateralised by the bank's securities holdings. Moody's believes that National Reserve Bank's liquidity risks have now moderated and are additionally mitigated by the liquidity cushion that accounts for more than half of the bank's total assets.

WHAT COULD MOVE THE RATING UP/DOWN

An upgrade of National Reserve Bank's NSR could materialise following a consistent reinstatement of the bank's third-party business if the restoration of this business is accompanied by good diversification and robust quality of newly generated assets. Any significant improvement in the bank's recurring revenue generation and cost-efficiency, as well as a substantial reduction of its market risk exposures would also have positive rating implications.

National Reserve Bank's NSR could be downgraded (1) if the bank faces further significant losses due to low recurring income streams that are insufficient to cover operating costs, negative revaluation of its investments in securities and/or defaults by any large borrowers; and (2) if these losses erode the bank's capital buffer leading to a material decline of its capital adequacy ratios.

PRINCIPAL METHODOLOGIES

The principal methodology used in this rating was "Global Banks", published in May 2013. Please see the Credit Policy page on www.moodys.com for a copy of this methodology.

Headquartered in Moscow, Russia, National Reserve Bank reported total audited IFRS assets of US$990 million and total equity of US$514 million as at year-end 2012. The bank's net IFRS loss for 2012 amounted to US$60 million.

Moody's Interfax Rating Agency's National Scale Ratings (NSRs) are intended as relative measures of creditworthiness among debt issues and issuers within a country, enabling market participants to better differentiate relative risks. NSRs differ from Moody's global scale ratings in that they are not globally comparable with the full universe of Moody's rated entities, but only with NSRs for other rated debt issues and issuers within the same country. NSRs are designated by a ".nn" country modifier signifying the relevant country, as in ".ru" for Russia. For further information on Moody's approach to national scale ratings, please refer to Moody's Rating Methodology published in October 2012 entitled "Mapping Moody's National Scale Ratings to Global Scale Ratings".

ABOUT MOODY'S AND MOODY'S INTERFAX

Moody's Interfax Rating Agency (MIRA) specializes in credit risk analysis in Russia. MIRA is a joint-venture between Moody's Investors Service, a leading provider of credit ratings, research and analysis covering debt instruments and securities in the global capital markets, and the Interfax Information Services Group. Moody's Investors Service is a subsidiary of Moody's Corporation (NYSE: MCO).

REGULATORY DISCLOSURES

For ratings issued on a program, series or category/class of debt, this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the rating action on the support provider and in relation to each particular rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this rating action, and whose ratings may change as a result of this rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

Olga G Ulyanova
Vice President - Senior Analyst
Financial Institutions Group
Moody's Investors Service Limited, Russian Branch
7th floor, Four Winds Plaza
21 1st Tverskaya-Yamskaya St.
Moscow 125047
Russia

Yves J Lemay
MD - Banking
Financial Institutions Group
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Releasing Office:
Moody's Interfax Rating Agency
7th floor, Four Winds Plaza
21 1st Tverskaya-Yamskaya St.
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Telephone: +7 495 228 6060
Facsimile: +7 495 228 6091

Moody's Interfax downgrades National Reserve Bank's National Scale Rating to Baa3.ru
No Related Data.

 

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