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Rating Action:

Moody's assigns B2 deposit ratings to Bank Solidarnost

21 Oct 2020

London, 21 October 2020 -- Moody's Investors Service ("Moody's") has today assigned the following ratings and assessments to Bank Solidarnost (Solidarnost): B2 long-term and NP short-term bank deposit ratings, b3 Baseline Credit Assessment (BCA) and Adjusted BCA, B1 long-term and NP short-term Counterparty Risk Ratings (CRR) and B1(cr) long-term and NP(cr) short-term Counterparty Risk (CR) Assessments. The B2 long-term bank deposit ratings carry a stable outlook, and the issuer outlook is also stable.

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

RATINGS RATIONALE

Solidarnost's B2 long-term deposit rating incorporates a one-notch uplift above its b3 BCA, due to a moderate probability of state support. The bank's BCA reflects the bank's "Weak+" macro profile and is constrained by its weak asset quality and profitability, as well as substantial related-party lending and high concentration of the loan book. At the same time, the BCA is supported by Solidarnost's strengthened capital buffers, following the merger with Moscow Mortgage Agency (MMA) in August 2020, strong loan loss reserve coverage and ample liquidity.

Solidarnost's problem loans (defined as Stage 3 loans) accounted for a high 25.2% of gross loans at the end of June 2020, however, these problem loans are fully covered with loan loss reserves. Moody's estimates that the problem loan ratio and coverage haven't changed significantly following the merger with MMA, however, the rating agency expects that more loans will become problematic in the next 12-18 months, on the back of worsened economic conditions.

Solidarnost's capital buffer strengthened significantly following the merger with MMA, which had an ample capital cushion. Moody's estimates that the merged bank's tangible common equity amounts to around 18% of its risk-weighted assets, representing a solid loss-absorption cushion. However, the rating agency expects that the bank's capital adequacy will decline in the next 12-18 months, as its currently low profitability is insufficient to match the planned asset growth.

Solidarnost was loss-making in 2019 and approximately break-even in the first half of 2020, but following the merger with profitable MMA, management targets positive profits in 2021. However, the merged bank's ability to sustainably generate positive earnings remains theoretical, particularly given the deteriorated economic conditions, which will likely require more substantial loan loss provisions in the next 12-18 months. Accordingly, Moody's currently forecasts that the merged bank's earnings will remain negative in the next 12-18 months.

Moody's expects Solidarnost's liquidity and funding profiles to remain stable over the next 12-18 months, supported by its solid liquidity buffer, very low reliance on market funding and granular deposit base.

Governance considerations were a key driver of this rating action. Specifically, Solidarnost's BCA incorporates a one-notch downward adjustment for corporate behavior, to reflect the bank's substantial related-party exposure (around 30% of tangible common equity) and implementation risk with respect to its strategy. The bank's key strategic priority is providing banking services to facilitate international trade and a variety of economic transactions between Russia and its trading partners in Asia Pacific, Africa and CIS.

MODERATE GOVERNMENT SUPPORT

Moody's factors in a moderate probability of support from the Government of Russia (Baa3, stable), given that (1) Solidarnost receives government support in the form of a financial rehabilitation package funded by the Deposit Insurance Agency (DIA) and the Central Bank of Russia (CBR), and (2) the City of Moscow (Baa3 stable) holds a significant indirect ownership stake in the merged bank. In June 2020, Solidarnost's controlling shareholder, JSC Zarubezhenergoproekt (JSC ZEP), acquired 100% of MMA's shares from the Central Fuel Company (CFC), while the latter acquired a 49.72% stake in JSC ZEP itself. As a result, the city government's indirect stake in Solidarnost currently amounts to 49.72% (via CFC and JSC ZEP) [1].

STABLE OUTLOOK

The outlook on Solidarnost's long-term deposit ratings is stable, which reflects Moody's view that the elevated risks stemming from the deteriorated operating conditions will be counter-balanced by the bank's ample liquidity and robust capital position. Thus, a likelihood of any rating changes for Solidarnost in the next 12 to 18 months is limited.

FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS

Solidarnost's deposit ratings will not likely be upgraded in next 12 months because of unfavorable operating conditions related to the coronavirus outbreak. Beyond this period, significant progress towards achieving the bank's strategic goals, greater loan book diversification and sustained profitable performance could lead to an upgrade. Negative pressure would be exerted on Solidarnost's ratings, if its asset quality, capitalization and profitability deteriorate significantly beyond our expectations, as a result of material deterioration in economic conditions amid the coronavirus pandemic.

LIST OF AFFECTED RATINGS

...Issuer: Bank Solidarnost

Assignments:

.... Adjusted Baseline Credit Assessment, Assigned b3

.... Baseline Credit Assessment, Assigned b3

.... Long-term Counterparty Risk Assessment, Assigned B1(cr)

.... Short-term Counterparty Risk Assessment, Assigned NP(cr)

.... Long-term Counterparty Risk Rating, Assigned B1

.... Short-term Counterparty Risk Rating, Assigned NP

.... Short-term Bank Deposits, Assigned NP

.... Long-term Bank Deposits, Assigned B2, Outlook Assigned Stable

Outlook Actions:

....Outlook, Assigned Stable

PRINCIPAL METHODOLOGY

The principal methodology used in these ratings was Banks Methodology published in November 2019 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1147865. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

REGULATORY DISCLOSURES

For further specification of Moody's key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. Moody's Rating Symbols and Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.

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.

The ratings have been disclosed to the rated entity or its designated agent(s) and issued with no amendment resulting from that disclosure.

These ratings are solicited. Please refer to Moody's Policy for Designating and Assigning Unsolicited Credit Ratings available on its website www.moodys.com.

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

Moody's general principles for assessing environmental, social and governance (ESG) risks in our credit analysis can be found at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1133569.

At least one ESG consideration was material to the credit rating action(s) announced and described above.

REFERENCES/CITATIONS

[1] According to Solidarnost's regulatory filings on the Central Bank of Russia's website

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

Yaroslav Sovgyra, CFA
Associate Managing Director
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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