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Rating Action:

Moody's assigns first-time B2 deposit rating to Converse Bank CJSC

01 Nov 2017

London, 01 November 2017 -- Moody's Investors Service, ("Moody's") has today assigned the following ratings to Armenia-based Converse Bank CJSC (Converse Bank): B2 long-term and NP short-term local- and foreign-currency deposit ratings, b2 baseline credit assessment (BCA) and adjusted BCA, and B1(cr) long-term and NP(cr) short-term Counterparty Risk Assessment (CR Assessment). The long-term deposit ratings carry a stable outlook.

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

RATINGS RATIONALE

The B2 long-term deposit ratings assigned to Converse Bank incorporates its b2 Baseline Credit Assessment and reflects the bank's: (1) solid loss absorption capacity as evidenced by its high capital adequacy and sound profitability; (2) adequate funding and liquidity profiles; and (3) strong financial and business support from the bank's Argentinean shareholder of Armenian origin. At the same time, Converse Bank's ratings are constrained by the bank's rapidly growing loan book, which could put pressure on its asset quality upon seasoning, as well as high share of foreign-currency exposure.

Converse Bank's current asset quality indicators are robust with problem loans (which include impaired corporate loans, plus retail loans overdue by more than 90 days) amounting to 5.5% of gross loans as of 1 July 2017 (down from 6.2% as of end- 2016), and are adequately covered by loan loss reserves at 60% as of H1 2017. Converse Bank is targeting annual loan book growth of around 25% in 2017-2019, with the focus on SME and retail segment. It has already increased its loan book by 15% in the first half 2017. Although the current rebound in the Armenian economy (Moody's forecasts GDP growth of 4.5% in 2017) suggests better operating conditions for new lending prospects, Moody's views such bank's growth strategy as aggressive. Asset quality might come under pressure upon seasoning and must be tested by time. In addition, exposure to foreign-currency denominated loans accounted for high 78% of total loans as of end-2016, a level that is, although typical for many Armenian banks, renders asset quality vulnerable to potential FX volatility.

Converse Bank's capital adequacy was recently supported by a Tier 1 capital injection of AMD9.5 billion in 2016, following tightened regulatory minimum capital requirements of AMD30 billion for Armenian banks. Bank's Tier 1 and total capital adequacy ratios (CAR) under Basel II amounted to 15.4% and 19.4% as of 1 July 2017, having marginally decreased from the beginning of the year amid active loan growth. Good internal capital generation, with annualized return on average assets (ROAA) of 1.5% in H1 2017, also contributes to the bank's capital buffer. In addition, shareholder is committed to providing support to the bank, which underpins Moody's view of the bank's sound loss absorption capacity.

The bank also benefits from business inflows thanks to its shareholders' connections. Related-party loans to the shareholders' business abroad are backed by deposits and are thus risk free, but generate sound margins, supporting bank's profitability. Around 70% of related-party loans are cash covered by shareholder's deposits with net related-party exposure amounting to 20.8% of shareholders' equity as of 1 July 2017.

Moody's expects Converse Bank's recurring profitability to strengthen further, supported by an improving interest margin, given the focus on high-yielding products and declining funding cost. In addition, fees and commissions provide a stable revenue source generating around 30% of the bank's pre-provision earnings, supported by Converse Collection and Converse Transfer companies.

Converse Bank's funding and liquidity profiles are adequate with moderate deposit concentrations and a low reliance on market funding of about 11% of assets as of 1 July 2017. Around 80% of the bank's liabilities are represented by customer accounts, half of which are retail deposits. The bank also benefits from servicing suppliers of Yerevan airport and pensions inflows through post offices. The liquidity cushion provides an ample buffer against potential outflows and amounted to 30% of assets as of 1 July 2017. Moody's expects that further lending growth might result in a gradual depletion of the liquidity cushion.

STABLE OUTLOOK

The stable outlook ratings reflects Moody's expectations of the bank's stable performance over the next 12-18 months. It balances the bank's currently adequate solvency profile and shareholders' potential support with the asset quality risks from rapid loan growth and high foreign-currency exposure.

WHAT COULD MOVE THE RATING UP/DOWN

Positive rating action might be considered following further strengthening of bank's financial performance with demonstrated good asset quality despite rapid loan growth, decreased FX exposure, maintained solid capital buffer and liquidity cushions.

Conversely, negative pressure could be exerted on Converse Bank's ratings in the case of a material deterioration of the bank's asset quality, capital erosion and/or liquidity shortage.

LIST OF ASSIGNED RATINGS

Issuer: Converse Bank CJSC

Assignments:

....LT Bank Deposits, Assigned B2 Stable

....ST Bank Deposits, Assigned NP

....Adjusted Baseline Credit Assessment, Assigned b2

....Baseline Credit Assessment, Assigned b2

....LT Counterparty Risk Assessment, Assigned B1(cr)

....ST Counterparty Risk Assessment, Assigned NP(cr)

Outlook Actions:

....Outlook, Assigned Stable

PRINCIPAL METHODOLOGY

The principal methodology used in these ratings was Banks published in September 2017. 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 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.

Maria Malyukova
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
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United Kingdom
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454

No Related Data.
© 2019 Moody’s Corporation, Moody’s Investors Service, Inc., Moody’s Analytics, Inc. and/or their licensors and affiliates (collectively, “MOODY’S”). All rights reserved.

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