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Rating Action:

Moody's Interfax downgrades National Scale Rating of First Czech Russian Bank to Ba3.ru

29 Oct 2015

Moscow, October 29, 2015 -- Moody's Interfax Rating Agency has today downgraded the National Scale Rating (NSR) of First Czech Russian Bank (FCRB) to Ba3.ru from Baa3.ru. The NSR carries no specific outlook.

Moody's assessment of FCRB's rating is based primarily on the bank's audited financial statements for 2014 and unaudited financial statements for the first half of 2015 prepared under IFRS, its unaudited financial statements for 2015 year to date prepared under local GAAP, as well as information received from the bank.

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

RATINGS RATIONALE

The rating downgrade reflects: (1) the deterioration of the bank's liquidity profile; (2) poor quality of the bank's loan portfolio coupled with insufficient coverage of problem loans by loan loss reserves (LLR); (3) the bank's low capital buffer; and (4) its weak financial performance.

Moody's is concerned that FCRB's liquidity cushion has declined recently to very low levels, with liquid assets (comprising cash and cash equivalents, loans to banks and unpledged liquid securities) accounting for just 7% of total assets as at October 1, 2015 (as reported under local GAAP) compared to the already weak 10% ratio reported as at July 1, 2015 under IFRS. This reveals FCRB's very weak liquidity profile when compared to its local peers and given the maturity gap between the bank's assets and liabilities, because a significant portion of FCRB's relatively short-term customer funding is channelled into long-term investment loans and construction loans.

FCRB's asset risk and solvency positions also appear weak. Although the aggregate share of problem loans (defined by the rating agency as impaired corporate loans and retail loans overdue by more than 90 days) was low -- at 1% of the bank's gross loan book as of July 1, 2015, as disclosed in the bank's IFRS statement (year-end 2014: 2%) -- restructured loans accounted for a substantial proportion (29%) of gross loans as of the same reporting date (year-end 2014: 31%). Moody's notes that the restructured loans bear high risk of migrating into non-performing loan category, because many of them are represented by risky exposures to borrowers operating in investment and construction segments (these lending segments accounted -- at July 1, 2015 -- for 46% and 19% of FCRB's total gross loan book, respectively). In this context, LLR of 1.7% of gross loans reported both at July 1, 2015 and at year-end 2014 provide insufficient coverage of potential credit losses and necessitate further build-up, in Moody's view.

FCRB's credit costs (expressed as loan loss provisions divided by average gross loan portfolio), as reported under IFRS, were very low at 0.35% (annualised) in the first half of 2015 and 0.93% in 2014. However, in Moody's opinion, given the low coverage of the potential problem loans by LLR, the bank's credit costs could be underestimated.

Although FCRB's statutory Tier 1 capital adequacy ratio (N1.2) of 6.94% and total capital adequacy ratio (N1.0) of 12.65%, reported at October 1, 2015, exceeded the regulatory minimum levels of 6% and 10%, respectively, these metrics would drop if the bank were to make more conservative loan loss provisions, in Moody's view.

FCRB's internal capital generation capacity is weak and does not address the bank's capital replenishment needs. In 2014, the bank posted RUB27 million net loss under IFRS. Furthermore, in the first half of 2015, against the backdrop of increased funding costs, FCRB became operationally loss-making, with its recurring earnings (net interest income and net fee-and-commission income) of around RUB331 million being insufficient to cover the administrative expense for the same period of around RUB531 million, as reported in the bank's unaudited IFRS for the first six months of 2015. Moody's expects that in the next 12 to 18 months FCRB's financial performance will continue to be challenged by the elevated interest rate environment in Russia and high credit losses.

FCRB's shareholder has not publicly communicated any plans to inject new capital into the bank. At the same time, the bank has recently launched a conversion of EUR31 million subordinated debt currently qualifying as Tier 2 capital into a longer-term subordinated instrument potentially qualifying for Tier 1 capital. Moody's notes, however, that this transaction is pending regulatory approval and the rating agency is also concerned that the expected amount might be insufficient to fully cover for the actual level of the bank's credit losses in the next 12 to 18 months.

WHAT COULD MOVE THE RATINGS DOWN / UP

Moody's could upgrade FCRB's NSR if the bank demonstrates enhanced liquidity profile and sustainable improvements in its asset quality and profitability metrics, while simultaneously maintaining an adequate LLR/capital buffer.

The rating agency might downgrade FCRB's NSR if it observes further deterioration of the bank's liquidity position as a result of a shrinkage of its already scarce cash buffer. Also, if a deterioration of FCRB's asset quality and/or profitability protracts into the long term and if these negative trends are not sufficiently covered by a LLR buffer and/or capital increases, these may become additional factors to negatively affect the bank's NSR.

PRINCIPAL METHODOLOGY

The principal methodology used in this rating was Banks published in March 2015. Please see the Credit Policy page on www.moodys.com for a copy of this methodology.

Headquartered in Moscow, Russia, FCRB reported total assets of RUB37.9 billion ($682 million) and total equity of RUB3.0 billion ($53.9 million) under unaudited IFRS as of July 1, 2015.

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 June 2014 entitled "Mapping Moody's National Scale Ratings to Global Scale Ratings".

ABOUT MOODY'S AND MOODY'S INTERFAX

Moody's Interfax Credit 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 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
Telephone: +7 495 228 6060
Facsimile: +7 495 228 6091

Yves Lemay
MD-Banking & Sovereign
Financial Institutions Group
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

Releasing Office:
Moody's Interfax Rating Agency
7th floor, Four Winds Plaza
21 1st Tverskaya-Yamskaya St.
Moscow 125047
Russia
Telephone: +7 495 228 6060
Facsimile: +7 495 228 6091

Moody's Interfax downgrades National Scale Rating of First Czech Russian Bank to Ba3.ru
No Related Data.
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