London, 16 May 2012 -- Moody's Investors Service has today assigned the following ratings
to Derzhava Bank: E+ standalone bank financial strength rating
(BFSR) mapping to a baseline credit assessment (BCA) of b3, B3 long-term
local and foreign currency deposit ratings, and 'Not Prime'
short-term local and foreign currency deposit ratings. All
the bank's long-term ratings carry a stable outlook.
Moody's assessment is primarily based on Derzhava's audited
financial statements for 2010 -- prepared under IFRS, and unaudited
financial statements as at 31 December 2011 -- prepared under Russian
Accounting Standards (RAS).
RATINGS RATIONALE
According to Moody's, Derzhava's ratings are constrained
by: (i) high market, credit and liquidity risk appetite,
(ii) weak franchise value, and (iii) weak recurring revenue generation.
At the same time, the ratings reflect the bank's currently
adequate liquidity position.
Moody's explains that Derzhava's appetite for market and credit
risks stems from its sizeable investments in risky financial instruments
(that accounted for around a third of Tier 1 capital), and from
high borrower concentration (of up to 3x Tier 1 capital). Moody's
views these risk concentrations as a significant challenge for the bank
given its modest capital cushion (14% as at YE2011).
Moody's notes that Derzhava's depositor concentration is considerably
higher compared to similarly rated peers. As a result, the
rating agency views Derzhava's significant liquidity cushion as
necessary, with free-from-pledge liquid assets exceeding
30% of total liabilities as at YE2011.
Derzhava has a relatively small scale of operations, limited business
geography and narrow customer base operating from a single office in Moscow.
According to Moody's, in the absence of a clearly articulated
strategy, Derzhava's ability to maintain its current customer
base and overall franchise value will prove challenging in the longer
term.
Moody's adds that Derzhava's recurring revenue generation
capacity is also weak, as 60% of its pre-provision
income is derived from trading transactions. The bank's relatively
solid bottom-line profitability under RAS in 2011 was a result
of release of loan loss reserves.
WHAT COULD CHANGE THE RATINGS UP / DOWN
According to Moody's, Derzhava's ratings have limited
upside potential in the medium term. Some upward pressure could
be exerted on the ratings if the bank augments its capital base and/or
its provision buffer. Derzhava's ratings could also be positively
affected as a result of improvement of the bank's core profitability
and franchise value, provided the level of related-party
transactions and/or risky investments do not increase.
However, Derzhava's standalone BFSR and deposit ratings could
be downgraded as the result of a significant decrease in the liquidity
buffer, or substantial and ongoing deterioration of the bank's
asset quality. An increase in the level of the bank's related-party
transactions and/or risky investments could also exert downward pressure
on its ratings.
PRINCIPAL METHODOLOGIES
The methodologies used in this rating were Bank Financial Strength Ratings:
Global Methodology published in February 2007, and Incorporation
of Joint-Default Analysis into Moody's Bank Ratings:
Global Methodology published in March 2012. Please see the Credit
Policy page on www.moodys.com for a copy of these methodologies.
Headquartered in Moscow, Russia, Derzhava reported --
under (unaudited, non-consolidated) RAS -- total assets
of US$422 million and total equity of US$67 million as at
31 December 2011; net income for 2011 stood at US$8 million.
REGULATORY DISCLOSURES
For ratings issued on a program, series or category/class of debt,
this announcement provides relevant 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 relevant 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 relevant 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.
The rating has been disclosed to the rated entity or its designated agent(s)
and issued with no amendment resulting from that disclosure.
Information sources used to prepare the rating are the following :
parties involved in the ratings, public information, and confidential
and proprietary Moody's Investors Service information.
Moody's considers the quality of information available on the rated
entity, obligation or credit satisfactory for the purposes of issuing
a rating.
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uses in assigning a rating is of sufficient quality and from sources Moody's
considers to be reliable including, when appropriate, independent
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for information on (A) MCO's major shareholders (above 5%) and
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the lead rating analyst and to the Moody's legal entity that has issued
the rating.
Maxim Bogdashkin
Asst Vice President - Analyst
Financial Institutions Group
Moody's Investors Service Limited, Moscow 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 J Lemay
MD - Banking
Financial Institutions Group
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Moody's assigns B3/NP/E+ to Derzhava Bank; stable outlook
