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Rating Action:

Moody's Interfax downgrades Svyaznoy Bank to Ba3.ru from Baa3.ru

Global Credit Research - 11 Oct 2013

Moscow, October 11, 2013 -- Moody's Interfax Rating Agency has today downgraded the long-term national scale deposit rating (NSR) of Svyaznoy Bank Joint Stock Company (Svyaznoy Bank) to Ba3.ru from Baa3.ru. Svyaznoy Bank's Ba3.ru NSR maps to the Caa1 (negative) global scale long-term local-currency rating (assigned by Moody's Investors Service).

The downgrade of Svyaznoy Bank's ratings is driven by (1) the fact that the bank's business remains loss-making, which is putting pressure on the bank's capitalisation and makes it reliant on external capital injections from its shareholder; (2) the pressure on asset quality and profitability due to the increasing risks in the bank's loan portfolio; and (3) the bank's weak loss-absorption capacity due to its low pre-provisioning profitability and insufficient reserve coverage of non-performing loans (NPLs).

Moody Interfax's assessment of Svyaznoy Bank's ratings is largely based on its audited financial statements for 2012, regulatory filings for January-August 2013 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

2012 was Svyaznoy Bank's only profitable year since the launch of its retail business in 2010, and even then its annual ROAA was a modest 0.25%. The lack of profitability of the bank's operations can partly be attributed to its start-up nature. However, Moody's Interfax says that the current operating environment is exerting further downward pressure on Svyaznoy bank's financial results and makes it increasingly challenging for the bank to reach and sustain profitability. Please see Moody's Special Comment " Rising Credit Risks Accelerate Asset Quality Weaknesses" (https://www.moodys.com/research/Russian-Consumer-Finance-Banks-Rising-Credit-Risks-Accelerate-Asset-Quality--PBC_157644) published in September 2013.

Against the background of general deterioration in the quality of retail portfolios in the Russian market, Svyaznoy Bank displays asset-quality erosion, with an increase in its cost of risk to 12.9% in H1 2013 (2012: 9.5%). The bank's sub-par pre-provisioning profitability (PPI/Total assets of around 6% vs the peers' average of 12%) falls far short of the levels required to absorb credit losses in the current high-risk environment. Moody's Interfax therefore expects Svyaznoy Bank's capital base to remain reliant on external capital injections from its shareholder, which has provided significant capital support to the bank every year since 2011 (H1 2013: RUB1.5 billion).

Moody's Interfax expects that the negative asset-quality trends will continue to exert pressure on Svyaznoy Bank's profitability and capitalisation. Moody's Interfax estimates that the bank's loss-absorption capacity is weaker than that of other Russian consumer lenders, driven by its weak pre-provisioning profit, insufficient reserves (covering 81% of NPLs and not covering any portion of performing loans) and modest capital adequacy (a regulatory capital adequacy ratio of 11.3% as of 1 September 2013).

WHAT COULD MOVE THE RATINGS UP/DOWN

Svyaznoy Bank's ratings are currently unlikely to be upgraded given the negative outlook. Positive pressure could be exerted on the ratings if Svyaznoy Bank strengthens its capital base and sustains profitable performance. The ratings might be downgraded as a result of any of the following: (1) further asset-quality erosion not matched with an adequate increase of reserves; or (2) further deterioration in the bank's capitalisation.

PRINCIPAL METHODOLOGY

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, Svyaznoy Bank reported total assets of RUB76.6 billion ($2.5 billion) and net profit of RUB143 million ($4.6 million), according to audited IFRS for 2012.

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.

Svetlana Pavlova
Asst Vice President - 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:
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Moody's Interfax downgrades Svyaznoy Bank to Ba3.ru from Baa3.ru
No Related Data.

 

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