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Rating Action:

Moody's concludes review of large Russian banks' ratings

05 Jul 2013

London, 05 July 2013 -- Moody's Investors Service has today downgraded the long-term senior debt and deposit ratings of Sberbank (to Baa1 from A3), Bank VTB, JSC (to Baa2 from Baa1), VTB24 (to Baa2 from Baa1) and Russian Agricultural Bank (to Baa3 from Baa1). These rating actions conclude the review for downgrade initiated on 2 April 2013, and are mainly driven by Moody's reassessment of the level of capacity of the Russian government (Baa1 stable) to provide systemic support to these banks in case of need. The outlook on these ratings is stable.

Concurrently, Moody's has also downgraded the subordinated debt ratings of Sberbank, Bank VTB and Russian Agricultural Bank (VTB24 has no subordinated debt ratings). The adjustments for subordinated debt ratings (by two to four notches) were somewhat greater relative to senior debt ratings (by one to two notches), to reflect Moody's global view on systemic support for junior debt instruments in light of heightened risk of burden-sharing for these types of instruments. At the same time and, in contrast to its standard treatment for subordinated bank debt, Moody's has retained elements of rating uplift from the baseline credit assessments (BCAs) of the three banks to capture the high level of government ownership, its track record on the treatment of subordinated debt of stressed institutions and a grandfathering clause in Russian law offering elements of protection to "legacy" subordinated debt holders.

In addition, Moody's has revised the outlook on Bank VTB's standalone D- BFSR to stable from negative and lowered Russian Agricultural Bank's BCA to b3 from b1. The latter's BFSR remains at E+ but with a negative outlook.

The list of Russian banks affected by today's rating actions can be found at the end of this press release.

RATINGS RATIONALE

--- DOWNGRADE OF SENIOR DEBT AND DEPOSIT RATINGS

Moody's review for downgrade focused on the sustainability of Russian government finances and reserves to cover for any capital and liquidity shortfall at large Russian banks in the context of a systemic crisis. The rating agency considers that the government's capacity to provide systemic support to large banks has weakened relative to pre-crisis levels (2007-08). Despite the lower support capacity, the rating agency continues to incorporate a very high likelihood of systemic support into the ratings of large Russian banks, based on the government's track record of support, its controlling ownership in these large banks and their market share and / or policy role.

The two factors stated below are the key drivers behind our reassessment of the capacity of the Russian government to provide systemic support to the large Russian government controlled banks in the case of need.

Factor 1 --- The government's fiscal position has weakened compared to 2008, reducing the country's ability to absorb potential shocks, such as a prolonged decline in oil prices. Hence, the government finances could face material adverse pressure in case of lower oil prices. The federal budget currently balances at a high break-even price of around $105 per barrel (2008: around $40). Although Moody's central scenario anticipates elevated oil prices in 2013, the rating agency also sees demand-side tail risks for oil prices related to the possibility of (1) a more pronounced and prolonged recession in the euro area, and (2) slower-than-expected growth in major emerging economies.

The increased vulnerability of public finances to an oil shock and the adverse impact of lower oil prices on the economy suggest that the ability of the country to support banks in a systemic crisis has been eroded. Systemic support to large Russian banks would also be constrained under such a scenario given the high likelihood of multiple demand for state support from large industrial companies and sub-sovereigns at a time when the economy and the government's finances would be under intense pressure.

Factor 2 --- Moody's notes that fiscal reserves (Reserve Fund and National Wealth Fund) accumulated by the government to cover the budget and pension deficits diminished materially since 2008, and accounted for 8.5% of the country's GDP at mid-2013, as opposed to 16.1% in 2008. The likelihood of the funds' replenishment to higher levels is uncertain. As such, fiscal reserves now provide a somewhat weaker layer of protection to the banking system. While the government's new fiscal rule (spending cap) should help to contain expenditures, this rule has not been tested yet.

In Moody's opinion, the downgrade of Sberbank's senior debt and deposit ratings to Baa1 -- to the same level as the rating of the Russian government -- more appropriately captures the correlation between the creditworthiness of Sberbank and that of Russia, which in part reflects the bank's large investments in sovereign bonds (as a share of Tier 1 capital). Previously, Sberbank's ratings were positioned one-notch above the government, to reflect Moody's assumption that the government will support that bank "beyond the country's own credit strength" in case of need.

The rating agency notes that the more severe downgrade of Russian Agricultural Bank's senior debt and deposit ratings (by two notches, as opposed to one notch for Sberbank and Bank VTB) was driven by the bank's pressured standalone creditworthiness (as discussed below).

As part of the review, Moody's has also analysed the potential effect that the Russian bank privatisation plan might have on the government's willingness to support large banks. In Moody's opinion, the government's willingness to provide systemic support to large state-controlled banks remains strong, as highlighted by the mostly cancelled bank privatisation plan in June 2013. However, Moody's considers that the support capacity constraints discussed above outweigh the government's strong willingness to provide support.

--- DOWNGRADE OF SUBORDINATED DEBT RATINGS

The downgrade of the subordinated debt ratings of Sberbank, Bank VTB and Russian Agricultural Bank is driven by Moody's view that the risk profile of junior debt instruments has increased in Russia, given the global trends of imposing losses on junior creditors as part of bank bailouts orchestrated by governments.

Moody's standard rating approach for treatment of subordinated bank debt fully excludes systemic support from these junior instruments, and subordinated debt ratings are typically positioned below the banks' BCAs. However, in the case of large Russian banks, the rating agency applied an exception to its standard approach and retained elements of rating uplift for subordinated debt from the BCAs of these banks. This exception is driven by the high level of government ownership, its supportive stance towards junior creditors during previous bank failures, and a legislative grandfathering clause that offers elements of protection to "legacy" subordinated debt holders.

Despite the exception outlined above, Moody's sees a moderate risk that these junior instruments could be "bailed-in" alongside the new Basel III-compliant contractual non-viability securities that are starting to emerge in Russia. Basel III-compliant instruments can absorb losses outside of bank liquidation through either conversion to common shares, or a principal write-down; loss absorption is triggered when predefined regulatory ratios are breached, or if the Central Bank of Russia considers the bank as non-viable. The "bail-in" risk for "legacy" junior debt explains the greater severity of the subordinate debt downgrade (by two to four notches) relative to senior debt ratings (downgraded by one to two notches).

--- RATIONALE FOR THE STABLE OUTLOOK ON DEBT AND DEPOSIT RATINGS

The outlook is stable on the debt and deposit ratings of Sberbank, Bank VTB, VTB24 and Russian Agricultural Bank. The stable outlook reflects Moody's opinion that the debt and deposit ratings of large Russian government-controlled banks are unlikely to come under severe negative pressure in the next 12-18 months.

--- STANDALONE RATINGS

The standalone ratings of Sberbank (D+/ba1 stable) and VTB24 (D-/ba3 stable) are not affected by today's rating actions. Moody's notes that the standalone credit profile of Sberbank is underpinned by its leading business franchise in Russia, its dominant position in all major market segments, and its good profitability, asset quality and liquidity position. VTB24's standalone credit profile is supported by its position as the second largest retail bank in Russia (after Sberbank), its good profitability and adequate capital adequacy.

Moody's has revised its outlook on Bank VTB's D- BFSR to stable from negative, to reflect the bank's enhanced capital adequacy following the $3.3 billion core capital issuance in May 2013. As a result, its pro-forma Tier 1 ratio increased to around 11.8% from 9.0% in 2011. This enhanced core capital position provides VTB with improved loss coverage against credit and market risks. The bank's previously low core capital adequacy was the major driver behind the negative outlook on its standalone rating. VTB's Tier 1 ratio substantially weakened in 2010-11 due to rapid growth and the troubled acquisition of Bank of Moscow. According to the bank, it plans to maintain its Tier 1 at around 11% in 2013, which we consider as prudent in the currently volatile economic environment in Russia.

Moody's lowered Russian Agricultural Bank's BCA to b3 from b1, mainly driven by the material increase in problem loans in 2012. The bank reported that its problem loans ratio (defined by Moody's as individually impaired loans) increased to a very high 27% in 2012 from 21% in 2011 (2010: 20%). Moreover, the rating agency notes that long-overdue corporate exposures dominated problem loans: corporate loans 180 days+ overdue formed 19% of gross corporate loans in 2012, compared with 13% in 2011. According to the bank, a large part of these overdue loans is in the process of restructuring; however, the fact that overdue loans materially increased in 2012 is a signal that restructurings could largely fail to get problem borrowers back on track. For this reason, we expect that the bank's problem loans could deteriorate in 2013; this is the main driver behind the negative outlook on the bank's E+ BFSR.

In Moody's opinion, Russian Agricultural Bank had a provisioning shortfall at year-end 2012, because its corporate loans 180 days+ overdue were provisioned at 52%, while the overall coverage of individually impaired loans was 31%. We acknowledge that some problem loans could be recovered. However, the bank's coverage levels are materially inferior to other large Russian banks, which typically fully provision their 90 days+ overdue exposures. Based on Moody's central scenario analysis, the bank's capital adequacy is weak in the context of the provisioning shortfall.

LIST OF AFFECTED RATINGS

Sberbank

- Long-term foreign-currency deposit rating of Baa1, affirmed; stable outlook

- Long-term local-currency deposit rating downgraded to Baa1 from A3; stable outlook

- Long-term foreign and local-currency senior debt ratings downgraded to Baa1 from A3; stable outlook

- Long-term foreign currency subordinated debt rating downgraded to Baa3 from Baa1; stable outlook

+++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++

Bank VTB, JSC

- Long-term foreign and local-currency deposit ratings downgraded to Baa2 from Baa1; stable outlook

- Long-term foreign and local-currency senior debt ratings downgraded to Baa2 from Baa1; stable outlook

- Long-term foreign currency subordinated debt ratings downgraded to Ba1 from Baa2; stable outlook

- Short-term debt and deposit ratings of P-2, confirmed

- BFSR of D-, affirmed; outlook revised to stable from negative

+++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++

Bank VTB North-West (special-purpose vehicle)

- Long-term subordinated debt ratings downgraded to Ba1 from Baa2; stable outlook

+++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++

VTB Capital S.A. (special-purpose vehicle)

- Long-term foreign-currency senior secured and senior unsecured debt ratings downgraded to Baa2 from Baa1; stable outlook

+++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++

VTB24

- Long-term foreign and local-currency deposit ratings downgraded to Baa2 from Baa1; stable outlook

- Long-term local-currency senior secured and senior unsecured debt ratings downgraded to Baa2 from Baa1; stable outlook

- Short-term deposit ratings of P-2, confirmed.

+++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++

Russian Agricultural Bank

- Long-term foreign and local-currency deposit ratings downgraded to Baa3 from Baa1; stable outlook

- Long-term foreign and local-currency senior debt ratings downgraded to Baa3 from Baa1; stable outlook

- Long-term foreign currency subordinated debt ratings downgraded to Ba3 from Baa2; stable outlook

- Short-term deposit ratings downgraded to P-3 from P-2

- BFSR of E+, affirmed; outlook revised to negative from stable

The principal methodology used in these ratings was Global Banks published in May 2013. Please see the Credit Policy 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 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.

Eugene Tarzimanov
VP - Senior Credit Officer
Financial Institutions Group
Moody's Investors Service Limited, Russian Branch
7th floor, Four Winds Plaza
21 1st Tverskaya-Yamskaya St.
Moscow 125047
Russia

Yves J Lemay
MD - Banking
Financial Institutions Group
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Moody's concludes review of large Russian banks' ratings
No Related Data.
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