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Rating Action:

Moody's downgrades Vostochny Express Bank's deposit and debt ratings to Caa1; outlook negative

18 Sep 2015

London, 18 September 2015 -- Moody's Investors Service has today downgraded the long-term local- and foreign-currency deposit ratings of Vostochny Express Bank to Caa1 from B3, as well as the bank's local-currency senior unsecured debt rating to Caa1 from B3. The outlook on the bank's long-term debt and deposit ratings remains negative.

Concurrently, Moody's downgraded Vostochny Express Bank's baseline credit assessment (BCA) and adjusted BCA to caa1 from b3. The bank's short-term local-currency and foreign-currency deposit ratings were affirmed at Not-Prime.

Moody's has also downgraded Vostochny Express Bank's long-term Counterparty Risk Assessment (CR Assessment) to B3(cr) from B2(cr) and affirmed the bank's short-term CR Assessment of Not-Prime(cr).

Moody's assessment of Vostochny Express Bank's ratings is primarily based on the bank's unaudited financial statements for the first half of 2015 prepared under IFRS, as well as information received from the bank.

RATINGS RATIONALE

The downgrade of Vostochny Express Bank's ratings reflects (1) a continued deterioration of the bank's asset quality and profitability because of the heightened risks in the bank's unsecured consumer loan portfolio; and (2) its low capital buffer, which has been eroded by the bank's substantial net IFRS losses posted in 2014 and the first half of 2015.

Retail loans make up the bulk of Vostochny Express Bank's total loans, with unsecured consumer loans and credit card loans dominating the loan book (67% and 19% of the total retail portfolio, respectively, according to IFRS as of 1 July 2015). Similar to other specialist consumer lenders in Russia, the bank displays weak asset-quality metrics and posted losses in both 2014 and the first half of 2015. This poor performance is due to (1) the rapid growth of household indebtedness in Russia in recent years; and (2) the country's currently weak macroeconomic environment, which suppresses the population's net income and hence debt-servicing capacity. As of 1 July 2015, the share of Vostochny Express Bank's retail loans overdue by more than 90 days soared to 24.2% of the bank's total retail loans from the already high 21.3% reported as of year-end 2014, and the bank's credit costs (expressed as provisioning charges as a percentage of average gross loans) remained high at 22.3% (annualised) in the first half of 2015 (2014: 21.7%).

The high credit charges faced by Vostochny Express Bank led to a substantial net IFRS loss of RUB6.6 billion ($119 million) for the first six months of 2015, which translated into negative annualised return on average equity (ROAE) of 84% (in 2014, the ROAE was also negative at 46.6%). Moody's does not expect Vostochny Express Bank to return to profits in the second half of 2015, because profitability metrics are under a double pressure from the substantial credit losses and elevated funding costs. Furthermore, the bank's revenue generation will be suppressed by the decreased proportion of performing loans, as its retail loan portfolio (net of loan loss reserves) shrank 23% in the first half of 2015.

Moody's notes that Vostochny Express Bank received RUB2.6 billion capital injection from its shareholders in the first half of 2015, but this was not sufficient to compensate for the bank's loss-making performance. As a result, the bank's Basel I Tier 1 and total capital adequacy ratios declined to 8.3% and 12.4%, respectively, as of 1 July 2015, from 10.5% and 15.8% reported as of year-end 2014, and the rating agency expects the weakening trend to protract into the future. Furthermore, Vostochny Express Bank is now approaching the regulatory capital adequacy minimums: on 1 August 2015, its reported statutory Tier 1 (N1.2) and total (N1.0) capital adequacy ratios were at 6.63% and 10.71%, respectively, whereas the minimum required levels are 6% and 10% respectively.

As has been announced publicly, on 2 October 2015, Vostochny Express Bank's shareholders will hold a meeting to discuss a new share issuance with the total nominal value of shares at RUB3 billion. However, the precise amount and the targeted deadline of this capital injection are currently uncertain, and this may not be sufficient to fully cover the losses Moody's expects the bank to incur in the second half of 2015.

WHAT COULD MOVE THE RATINGS DOWN / UP

Further downward pressure might develop on Vostochny Express Bank's ratings as a result of (1) failure to recover and sustain profitability and/or (2) failure to match any further losses with an adequate increase in capital.

Vostochny Express Bank's Caa1 deposit and debt ratings are unlikely to be upgraded in the next 12 to 18 months given the negative outlook on the ratings. The rating agency might revise the outlook on the bank's deposit and debt ratings to stable if it observes a sustainable stabilisation of the bank's asset quality, profitability and capital adequacy parameters.

PRINCIPAL METHODOLOGIES

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 the City of Khabarovsk in Russia's Far East region, Vostochny Express Bank reported total assets of RUB176 billion ($3.2 billion) and total equity of RUB13.7 billion ($246 million) under unaudited IFRS as of 1 July 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

Yves Lemay
MD-Banking & Sovereign
Financial Institutions Group
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

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Moody's downgrades Vostochny Express Bank's deposit and debt ratings to Caa1; outlook negative
No Related Data.
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