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Rating Action:

Moody's downgrades Promsvyazbank's deposit ratings to B2; places ratings on review for downgrade

Global Credit Research - 01 Nov 2017

BCA downgraded to caa1 from b2 and placed on review for further downgrade

London, 01 November 2017 -- Moody's Investors Service (Moody's) has today downgraded the long-term local and foreign-currency senior unsecured debt and deposit ratings of Promsvyazbank to B2 from Ba3. Concurrently, Moody's downgraded the bank's baseline credit assessment (BCA), adjusted BCA to caa1 from b2, subordinated debt rating to Caa2/Caa3(hyb) from B3/Caa1(hyb), and long-term Counterparty Risk Assessment to B1(cr) from Ba2(cr).

Promsvyazbank's Not Prime short-term local- and foreign-currency deposit ratings, and short-term Counterparty Risk Assessment of Not Prime(cr) were affirmed.

At the same time Moody's downgraded to Caa1 from B3 the long term local- and foreign-currency issuer ratings and affirmed the Not Prime short-term local- and foreign-currency issuer ratings of Promsvyaz Capital B.V. (Promsvyaz Capital), a Netherlands-based non-operational holding company with a main focus on the Russian banking sector, and which holds a 50.03% equity stake in Promsvyazbank.

All the above mentioned long-term ratings and BCA of Promsvyazbank and Promsvyaz Capital B.V. were placed on review for further downgrade.

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

RATINGS RATIONALE

The downgrade of Promsvyazbank's BCA to caa1 from b2 is driven by Moody's view that the bank's standalone credit profile has weakened as the bank's shareholders failed to vote in favour of the merger with its sister firm Vozrozhdenie Bank on 26 October 2017.

Moody's had expected that the merger between the two banks would be completed by the end of 2017 and that the combined bank's credit profile would benefit from Vozrozhdenie's better solvency metrics, including asset quality, capital adequacy and profitability.

Promsvyazbank has reported persistently weak solvency metrics, including its large stock of impaired assets, modest profitability and a weak capital position. This leaves the bank vulnerable to any further losses on its assets.

Problem loans, which include impaired corporate and non-performing retail loans, accounted for 19% of gross loans as at 30 June 2017. That level is substantially higher than the average of about 12% for Russian banks. At the same time, problem loans coverage by Loan Loss Reserves remained at a low level of 45%, which is below the system average of around 70%.

As of 1 October 2017, Promsvyazvbank reported its regulatory common equity tier 1 (CET1) ratio (N1.1) of 6.49% (compared with 8.13% reported by Vozrozhdenie) and given its designation by the Central Bank of Russia (CBR) as a systemically important bank, will face an increase its CET1 requirement to above 7.025% from 1 January 2018 and to above 8% from 1 January 2019.

The bank's internal capital generating capacity is weaker than that of its peers, mainly due to its modest net interest margin (NIM, around 2.5% in H1 2017) constrained by Promsvyazvbank's focus on large corporate borrowers and high level of impaired assets. This will make it hard for the bank to meet the higher capital requirements.

Furthermore, the prolonged negative publicity surrounding the bank in recent months following the failures of Bank Otkritie Financial Corporation PJSC (LT bank deposits B2 developing, BCA ca) and B&N Bank (unrated) could, in Moody's view, weaken the bank's liquidity and funding profile.

To address these challenges the bank will have to maintain an additional liquidity buffer and offer higher interest rates on deposits, which in turn will exert additional pressure on the bank's profitability.

GOVERNMENT SUPPORT

Moody's recently revised its government support assumption for Promsvyazbank's deposit and senior unsecured ratings to high from moderate. This results in two notches of uplift from the caa1 BCA, to B2. This reflects Moody's expectation that the bank is highly likely to receive support from the CBR should it be needed. The CBR has recently introduced and tested its newly-designed toolkit to provide extraordinary support to large privately-owned banks, via the Banking Sector Consolidation Fund (BSCF), and has supported the senior debt and deposit liabilities of Bank Otkritie Financial Corporation PJSC and B&N Bank. Moody's does not expect this support to extend to subordinated liabilities, however, which are notched down from the adjusted BCA and positioned at Caa2/Caa3(hyb)

PROMSVYAZ CAPITAL B.V.

The downgrade of Promsvyaz Capital's issuer ratings to Caa1 from B3 follows Moody's downgrade of Promsvyazbank's BCA and reflects Promsvyaz Capital's status as a bank holding company and is driven by the weighted average standalone credit profiles of its Russian banking subsidiaries Promsvyazbank and Vozrozhdenie Bank. The Caa1 ratings of the holding company also reflect the structural subordination of the holding company creditors relative to the creditors of its operating subsidiaries. As a result, the long-term ratings of the holding company are positioned one notch below the weighted-average adjusted baseline credit assessment (BCA) of both banking subsidiaries. This rating approach is in line with the rating agency's notching practice for holding companies, as described in Moody's Banks methodology.

FACTORS TO BE CONSIDERED IN THE RATING REVIEW

The rating review for downgrade will predominantly focus on (1) the bank's liquidity and funding profile; and (2) the bank's ability to strengthen its capital adequacy and loss absorption in order to comply with minimum regulatory capital requirements and pass the upcoming CBR stress-test by the end of 2017.

WHAT COULD MOVE THE RATINGS UP / DOWN

As indicated by the review for downgrade, Moody's could downgrade the bank's standalone BCA if Promsvyazbank's credit profile weakens as a consequence of a material deterioration in its liquidity or loss absorption capacity. Conversely, the ratings may be confirmed at their current level if the bank materially strengthens its capital buffers and its liquidity and funding profiles prove resilient to ongoing challenges faced by the bank.

LIST OF AFFECTED RATINGS

Issuer: Promsvyaz Capital B.V.

Downgrade and Placed Under Review for Further Downgrade :

....LT Issuer Rating, Downgraded to Caa1 from B3, Outlook Changed To Rating Under Review From Negative

Affirmations:

....ST Issuer Rating, Affirmed NP

Outlook Actions:

....Outlook, Changed To Rating Under Review From Negative

Issuer: Promsvyazbank

Downgrade and Placed Under Review for Further Downgrade :

....LT Bank Deposits, Downgraded to B2 from Ba3, Outlook Changed To Rating Under Review From Negative

....Senior Unsecured Regular Bond/Debenture, Downgraded to B2 from Ba3, Outlook, Changed To Rating Under Review From Negative

....Subordinate Regular Bond/Debenture, Downgraded to Caa2 from B3

....Subordinate Regular Bond/Debenture, Downgraded to Caa3(hyb) from Caa1(hyb);

....Senior Unsecured MTN Program, Downgraded to (P)B2 from (P)Ba3;

....Subordinate MTN Program, Downgraded to (P)Caa2 from (P)B3;

....Adjusted Baseline Credit Assessment, Downgraded to caa1 from b2;

....Baseline Credit Assessment, Downgraded to caa1 from b2;

....LT Counterparty Risk Assessment, Downgraded to B1(cr) from Ba2(cr);

Affirmations:

....ST Bank Deposits, Affirmed NP

....Other Short Term Program, Affirmed (P)NP

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

Outlook Actions:

....Outlook, Changed To Rating Under Review From Negative

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.

Lev Dorf
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.
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JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454

No Related Data.
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