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Rating Action:

Moody's affirms B1 ratings of Transkapitalbank; outlook negative

02 Jun 2017

London, 02 June 2017 -- Moody's Investors Service, ("Moody's") has today affirmed the B1 long-term foreign-currency deposit rating of Transkapitalbank (TKB). Concurrently, the rating agency affirmed the bank's baseline credit assessment (BCA) and adjusted BCA of b1, its long-term Counterparty Risk Assessment (CR Assessment) of Ba3(cr), the Not Prime short-term foreign-currency deposit rating and the Not Prime(cr) short-term CR Assessment. Subordinated foreign-currency debt rating of B2 was also affirmed. The outlook on the bank's long-term deposit ratings and the overall outlook on its ratings remains negative.

RATINGS RATIONALE

Today's affirmation of TKB's ratings reflects: (1) Recent strengthening of the bank's capital position, as its Basel II Tier 1 ratio reached 11.1% as of 1 April 2017, up from 7.5% a year ago; and (2) Moody's expectations of a gradual recovery of the bank's profitability in the next 12-18 months, as economic growth in Russia resumes, the bank's asset quality stabilizes and its cost base -- which is inflated following the recent acquisition of Investment Trade Bank (ITB) -- is optimized.

However, the negative outlook on TKB's ratings reflects the risk that the bank fails to stabilize its asset quality and recover its profitability metrics in the next 12-18 months.

TKB's IFRS problem loans reached 24% of gross loans as of 1 April 2017, up from 13.6% as of year-end 2015, with approximately 80% of the increase attributed to problem loans reported by ITB, net of loan loss reserves. However, the amount and proportion of problem loans have remained approximately stable since H1 2016, and their coverage with loan loss reserves is currently adequate: the coverage ratio amounted to 71.7% as of year-end 2016, if calculated based on gross problem loans and the corresponding loan loss reserves for TKB and ITB. This coverage level is similar to the sector average, while the predominantly secured nature of TKB's loan book (approximately 80% of total) adds an extra layer of protection.

TKB's historically robust profitability came under pressure in 2016: excluding the one-off accounting gain associated with state support, the bank was just above break-even last year, and in Q1 2017 it reported a small net loss. The key factors weighing on TKB's bottom-line performance are: (1) Elevated cost of risk (loan loss provisions at 3.9-4.9% of gross loans in 2015-2016); and (2) the consolidation of ITB. This consolidation contributed a large volume of non-cash generating assets and relatively expensive retail deposits, pressuring TKB's net interest margin and increasing its cost base by approximately 45% in 2016.

Moody's expects TKB's profitability to gradually recover in 2H 2017 and 2018, as the bank optimizes its operating expenses and funding costs, while its cost of risk normalizes. In Q1 2017, annualized loan loss provisions amounted to a moderate 1.6% of average gross loans.

WHAT COULD MOVE THE RATINGS UP/DOWN

A positive rating action on TKB's ratings is unlikely in the next 12-18 months, given the negative outlook. However, Moody's may change the outlook on the long-term ratings to stable if the bank demonstrates its ability to recover problem loans and materially improve profitability.

TKB's ratings could be downgraded if its asset quality continues to deteriorate, pressuring capital, and the bank fails to restore sustainable profitable performance.

PRINCIPAL METHODOLOGY

The principal methodology used in these ratings was Banks published in January 2016. Please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

Headquartered in Moscow, Russia, Transkapitalbank reported -- at 1 January 2017 -- total IFRS assets of RUB249 billion and total equity of RUB23.7 billion.

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 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
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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