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Rating Action:

Moody's affirms Absolut Bank (PAO)'s ratings of B2, downgrades its BCA to caa1, outlook negative

26 Nov 2019

London, 26 November 2019 -- Moody's Investors Service ("Moody's") today affirmed the B2 long-term local and foreign currency deposit ratings of Absolut Bank (PAO) ("Absolut"); its senior unsecured debt rating of B2; its long-term counterparty risk assessment (CRA) of B1(cr) and its long-term Counterparty Risk Ratings (CRRs) of B1. At the same time, Moody's downgraded the bank's baseline credit assessment (BCA) and Adjusted BCA to caa1 from b3. The bank's Not Prime short-term deposit ratings and CRRs and its Not Prime(cr) short-term CRA were affirmed as well. Absolut's issuer outlook, as well as the outlook on its long-term deposit ratings and senior unsecured debt rating, remained negative.

Absolut is the parent bank of a group, which includes subsidiary Baltinvestbank (ratings withdrawn), a bank under financial rehabilitation since 2015. Moody's analysis and assessment are based on the group's consolidated financials, with all the financial indicators mentioned in this press release referring to the group, unless otherwise specified. Absolut is ultimately controlled by the non-state pension fund Blagosostoyanie.

Moody's downgrade of Absolut's BCA reflects its persistently slim capital cushion, weak asset quality and profitability. At the same time, Absolut's affirmed deposit ratings are underpinned by a high probability of government support.

A full list of affected ratings can be found at the end of this press release.

RATINGS RATIONALE

Despite Absolut's standalone capital adequacy ratios comfortably exceeding the regulatory thresholds, the group's consolidated capital metrics remain weak, with the ratio of tangible common equity to risk-weighted assets (TCE / RWA ratio) at just 1.8% as of 30 June 2019. The impact of the recent capital injections by Blagosostoyanie Fund (two injections of RUB6 billion each in August 2018 and April 2019) was largely negated by the group's bottom-line losses. These were, in turn, driven by sizeable loan-loss provisions against a number of large problem loans that crystallized in the group's corporate loan portfolio in the past 12 months.

Management expects third-party support to result in a significant accounting gain for the group, which would bring the TCE / RWA ratio to 7-7.5% by year-end 2020, on Moody's estimates. Moody's expects the final decision on this support to be made by the end of March 2020.

Despite a reduction of Absolut's problem loans in the third quarter, they remained high at 27.6% of gross loans and 113% of the combined equity and reserves buffer as of 30 September 2019. Absolut's profitability also recently improved, as the group posted positive earnings of RUB1.2 billion for the third quarter of 2019, however, its cumulative return on average assets for the first nine months of 2019 remained negative (-0.8% annualized). The bank's sustainable return to profitability will be subject to (1) further improvements in asset quality and consistently lower need for provisions, and (2) sufficiency of the revenues from the new business, with a focus on mortgage business growth and servicing the Russian Railways group, to sustainably cover operating costs and loan loss provisions.

Moody's does not have any particular governance concern for Absolut, and does not apply any corporate behaviour adjustment to the bank.

HIGH GOVERNMENT SUPPORT

Absolut's affirmed B2 long-term deposit and senior unsecured debt ratings benefit from two notches of uplift due to a high probability of government support, which reflects (1) the government of Russia (Baa3 stable) being Absolut's indirect ultimate owner, following the incorporation of Blagosostoyanie Fund in 2018, and (2) Absolut's significant subsidiary Baltinvestbank being a recipient of government support in the form of a financial rehabilitation package funded by the Deposit Insurance Agency and the Central Bank of Russia.

NEGATIVE OUTLOOK

The negative outlook reflects (1) uncertainty with respect to the timing of third-party capital support, and (2) the bank's unproven ability to stabilize its asset quality and restore profitability, to ensure a stable capital position going forward.

WHAT COULD MOVE RATINGS UP/DOWN

An upgrade of Absolut's deposit ratings is currently unlikely, given the negative outlook. However, the outlook may be changed to stable, if (1) the proposed capital support from a third party comes in the next 12 months and in an amount sufficient to cover the current capital shortfall; (2) the bank's asset quality stabilizes; and (3) its profitability is restored.

Absolut's ratings may be downgraded if the proposed capital support from a third party does not arrive and no other action is taken in the next 12 months to significantly improve the bank's capital position. Further significant bottom-line losses, eroding the bank's capital position, may also result in a downgrade.

LIST OF AFFECTED RATINGS

Issuer: Absolut Bank (PAO)

..Downgrades:

.... Baseline Credit Assessment downgraded to caa1 from b3

.... Adjusted Baseline Credit Assessment downgraded to caa1 from b3

..Affirmations:

.... LT Bank Deposit ratings affirmed B2, outlook remains Negative

.... ST Bank Deposit ratings affirmed NP

.... LT Counterparty Risk Ratings affirmed B1

.... ST Counterparty Risk Ratings affirmed NP

.... LT Counterparty Risk Assessment affirmed B1(cr)

.... ST Counterparty Risk Assessment affirmed NP(cr)

.Senior Unsecured Regular Bond/Debenture rating affirmed B2, outlook remains Negative

Outlook Action:

....Outlook remains Negative

PRINCIPAL METHODOLOGY

The principal methodology used in these ratings was Banks Methodology published in November 2019. Please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

REGULATORY DISCLOSURES

For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security 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 credit rating action on the support provider and in relation to each particular credit 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 credit rating action, and whose ratings may change as a result of this credit 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, CFA
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
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454

Nicholas Hill
MD - Banking
Financial Institutions Group
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454

Releasing Office:
Moody's Investors Service Ltd.
One Canada Square
Canary Wharf
London E14 5FA
United Kingdom
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454

No Related Data.
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