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Rating Action:

Moody's changes outlook on Finprombank's B3 deposit ratings to negative from stable

26 Nov 2015

London, 26 November 2015 -- Moody's Investors Service has today changed to negative from stable the outlook on Finprombank's B3 long-term local- and foreign-currency deposit ratings and affirmed these ratings. Simultaneously, Moody's has affirmed Finprombank's baseline credit assessment (BCA) and adjusted BCA of b3. The bank's Not-Prime short-term local-currency and foreign-currency deposit ratings were also affirmed.

Concurrently, Moody's has affirmed Finprombank's long-term and short-term Counterparty Risk Assessments (CR Assessments) of B2(cr) / Not-Prime(cr).

Moody's rating action is primarily based on Finprombank's audited financial statements for 2014 and the first half of 2015 prepared under IFRS, its unaudited financial statements for 2015 year to date prepared under local GAAP, as well as information received from the bank.

RATINGS RATIONALE

The change of the outlook on the deposit ratings reflects: (1) the deterioration of Finprombank's asset quality metrics reflecting its high credit appetite; (2) the bank's low loan loss reserves (LLR) and weak capital buffer that do not sufficiently address the potential magnitude of credit losses; and (3) Finprombank's weakening liquidity cushion coupled with the high concentration of the bank's funding base.

Moody's anticipates that over the next 12 months, the magnitude of deterioration of Finprombank's asset quality will exceed the market-average trend, as the bank's rapidly accumulated loan portfolio starts to season with the backdrop of unfavourable operating conditions. Despite the relatively low ratio of loans overdue by more than 90 days reported under IFRS at June 30, 2015 (3.19% of total gross loans, up from 1.88% at year-end 2014), the proportion of restructured loans was at a high 8% of total gross loans as of the same reporting date, up from 6.8% ratio reported at year-end 2014 (at year-end 2013, restructured loans virtually stood at zero). The deteriorating trend is also evidenced by a declining ratio of interest income from lending activities received in cash as a proportion of the same income accrued in profits-and-loss accounts: this declined to 83% in the first half of 2015 from 92% in 2014.

The rating agency notes that Finprombank demonstrates high credit risk appetite, as reflected in the fast growth of the bank's loan portfolio and the risky nature of its credit exposures. The bank's gross loan book more than doubled in 2014, although in the first half of 2015 it declined slightly (13%) owing to a repayment by one customer of its large debt. At June 30, 2015, 32% of all loans were disbursed to the borrowers operating in the risky finance and investment sectors, whilst relative to the bank's equity this aggregate industry exposure stood at 206%. Furthermore, 50% of the bank's loans were unsecured as of the same reporting date. Single-name borrower concentration is also among the highest reported by Finprombank's peers: at June 30, 2015, the 18 largest credit exposures accounted for 62% of the bank's total gross loan book or 405% of its total equity.

In this context, the LLRs at 6.04% of total gross loans accumulated as of June 30, 2015 appear to provide insufficient coverage for potential credit losses and necessitate further build-up. Finprombank's credit costs (expressed as loan loss provisions divided by average gross loan portfolio), as reported under IFRS, surged to 5.29% (annualised) in the first half of 2015 from 1.55% in 2014, and their further increase seems to be a plausible scenario; the bank's profitability and, consequently, capital adequacy metrics, will continue to be under pressure.

At November 1, 2015, Finprombank's statutory core Tier 1 and total capital adequacy ratios (N1.1 and N1.0 regulatory ratios) stood at 5.8% and 10.79%, respectively, just slightly above the 5% and 10% regulatory minimum requirements. The bank's internal capital generation capacity is weak: in the first half of 2015, it reported RUB166 million net loss under IFRS translating to negative (-8%) annualised return on average equity. Therefore, the bank has to resort to shareholder capital support in order to comply with the regulatory capital requirements. According to Finprombank's shareholders, they intend to provide subsidies to the bank by the end of 2015 for RUB1 billion. However, the rating agency cautions that, although this will support Finprombank's weak capital adequacy in the short term, the expected amount might not be sufficient to fully address the actual level of credit losses looming in the next 12 to 18 months, and further sizeable capital increases might be critical.

Finprombank's funding and liquidity profiles are also vulnerable, in Moody's view. The rating agency is concerned about a gradual decline of the bank's liquidity cushion over the recent months: according to the bank's monthly local GAAP statements, as of November 1, 2015, its ratio of liquid assets (comprising cash and cash equivalents, loans to banks and unpledged liquid securities) to total assets stood at just 14%, down from 18% at October 1, 2015 and 21% at September 1, 2015. This liquidity position does not sufficiently address the high concentrations in Finprombank's funding base. At June 30, 2015, the 20 largest groups of customers, mainly high-net-worth individuals, represented 68% of the bank's total customer funding and 42% of its liabilities. There is also high concentration in Finprombank's interbank funding as -- at June 30, 2015 -- three commercial banks together provided 10% of total liabilities. These concentration levels bear risks of outflow in today's operating environment in Russia, characterized by lack of market confidence.

WHAT COULD MOVE THE RATINGS DOWN / UP

Finprombank's deposit ratings have low upside potential over the next 12 to 18 months, given the negative outlook currently assigned to these ratings. However, Moody's could revise the outlook on the bank's long-term ratings to stable if the bank demonstrates sustainable improvements in its asset quality and profitability metrics, while simultaneously maintaining an adequate LLR/capital buffer, and also builds-up its liquidity cushion to more comfortable levels.

The rating agency might downgrade Finprombank's ratings if a deterioration of the bank's asset quality protracts into the long term, and if this negative trend is not sufficiently covered by a LLR buffer and/or capital increases. Also, if the rating agency observes further shrinkage of Finprombank's liquidity buffer, this may negatively affect the bank's ratings.

PRINCIPAL METHODOLOGY

The principal methodology used in these ratings was Banks published in March 2015. Please see the Credit Policy page on www.moodys.com for a copy of this methodology.

Headquartered in Moscow, Russia, Finprombank reported total assets of RUB55 billion ($454 million) and total equity of RUB4.9 billion under audited IFRS as of June 30, 2015.

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 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 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 rating action, and whose ratings may change as a result of this 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.

Olga Ulyanova
Vice President - Senior 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
SUBSCRIBERS: 44 20 7772 5454

Nicholas Hill
Managing Director
Financial Institutions Group
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

Releasing Office:
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Moody's changes outlook on Finprombank's B3 deposit ratings to negative from stable
No Related Data.
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