Actions follow weakening of sovereign creditworthiness
On July 29, 2016, the press release was corrected as follows: the LC Senior Unsecured Bank Credit Facility rating of Bank VTB, JSC was removed from the list of affected ratings. Revised release follows
London, 24 February 2015 -- Moody's Investors Service has today taken rating actions on the seven
Russian financial institutions -- Sberbank, Bank VTB
JSC, Gazprombank, Russian Agricultural Bank, Agency
for Housing Mortgage Lending OJSC (AHML), Vnesheconombank and Alfa-Bank.
These actions follow the weakening of Russia's credit profile, as
reflected by Moody's downgrade of Russia's government debt rating to Ba1
from Baa3 on 20th of February, 2015. For additional information,
please refer to the related announcement: https://www.moodys.com/research/--PR_318857
Specifically, Moody's downgraded the supported senior unsecured,
subordinated debt and deposit and issuer ratings of the Russian financial
institutions. These ratings incorporate uplift based on Moody's
assessment of the likelihood of government (systemic) support being made
available to each institution, in case of need. The supported
ratings of all seven entities have been lowered by one notch. The
outlook on the long-term ratings of these institutions is negative,
in line with the outlook on the sovereign rating.
In the same rating action the rating agency has also lowered the standalone
bank financial strength ratings (BFSR) of Sberbank, Bank VTB,
JSC , Gazprombank and Alfa bank. This is due to Moody's expectation
that the prolonged recessionary environment in Russia will produce a very
challenging operating environment for the country's leading banks
and thereby impact their financial fundamentals.
This rating action concludes the review for downgrade placed on these
ratings in December 2014.
RATINGS RATIONALE
--- LONG TERM DEBT AND DEPOSIT RATINGS
The weakening of Russia's credit profile has prompted the rating actions
on the Russian financial institutions' supported ratings, which
benefit from various levels of uplift due to systemic support assumptions.
While Moody's considers that the Russian government will remain willing
to assist these banks in the event of need, its capacity has declined
as expressed by the downgrade of the government debt rating to Ba1 from
Baa3.
The negative outlook on the supported long-term ratings of these
institutions reflects the fact that any further downgrade of the sovereign
rating could affect Moody's assessment of ratings uplift resulting from
systemic support assumptions.
The foreign-currency deposit ratings of Sberbank and Bank VTB,
JSC were downgraded to Ba2, one notch below the debt ratings at
Ba1, following the lowering of the country's foreign-currency
deposit ceiling to Ba2 from Ba1, on 20 February 2015. For
additional information on the changes to country ceilings, please
refer to the related announcement: https://www.moodys.com/research/--PR_318857
Following the downgrade, the supported ratings of these seven financial
institutions will continue to benefit from the systemic support uplift
ranging from one to five notches from their standalone BCAs.
--- EFFECT OF OPERATING ENVIRONMENT ON THE STANDALONE
RATINGS
The worsening operating environment in Russia will impact the asset quality
and profitability of Russian financial institutions and has prompted Moody's
to lower the BFSRs of Sberbank, VTB, Gazprombank and Alfa
bank. Moody's believes that Russia is facing the possibility of
a protracted economic downturn, with GDP contracting by 5.5%
in 2015 and 3% in 2016.
Overall, Moody's expects total problem loans in the system to double,
and given the low probability of a quick recovery arrears levels could
exceed those seen during the 2008-09 crisis. In addition,
an elevated interest-rate environment, likely to remain in
place in the near term, has increased funding costs in the banking
system. In a low-growth environment, the banks will
struggle to pass increased funding costs to their customers. This
will result in a contraction of interest margins and, consequently,
operating revenues. Overall, the operating revenue contraction
combined with a substantially increased cost of risk is likely to generate
a loss-making year for the banking system, although some
leading banks with stronger pricing power and established market shares
could remain profitable, albeit with substantially worse indicators
compared with previous years.
As a result, Russian banks' capital buffers have already come
under pressure and could decline further in the absence of additional
injections from private shareholders and the prompt implementation of
a government support package. However, the timeliness and
conditionality of the government support measures remain uncertain;
furthermore, it would likely be conditional on the banks increasing
their lending to key strategic industries, thus rendering the net
effect broadly neutral from the perspective of capital ratios.
In Moody's view, FX refinancing risk in the banking system seems
contained for the near future, given the system's reliance
on the domestic funding sources, of which the Central Bank of Russia
(CBR) is one of the largest. However, if the current situation
and constrained access to international financial markets persists for
another year, heightened funding shortages and deleveraging pressure
on the system could develop.
--- BFSRs OF INDIVIDUAL BANKS
SBERBANK
Moody's expects pressures on the bank's asset quality and profitability
given the adverse trends in the operating environment, and has thus
lowered Sberbank's BFSR to D (BCA of ba2) from D+ (ba1),
with a negative outlook.
The bank's problem loans (calculated as per Moody's standard approach
and including impaired and overdue loans) worsened to 6.72%
as at September 2014 from 4.7% as at end-2013,
whilst provisioning coverage of non-performing loans at 75%
declined during the year compared with historical averages. The
bank's Tier 1 ratio, although sufficient to absorb Moody's
base case losses, declined somewhat to 10% as at September
2014 from 10.5% as at end-2013.
The bank's net profitability, while substantially higher than
those of its Russian peers, has also come under downward pressure
in 2014 relative to the previous year and is unlikely to recover to historical
levels in the near future.
At the same time, Moody's notes that Sberbank's funding position
remains robust with limited refinancing risk in 2015. Its established
market shares and access to customers gives it strong pricing power within
its market and a competitive edge over domestic peers. Therefore,
despite the lower ba2 BCA, it remains the highest compared with
BCAs for other Russian-owned financial institutions.
Given its system-wide importance, Sberbank's long-term
local and foreign-currency debt and local-currency deposit
ratings benefit from one notch of systemic support uplift from its BCA,
placing the ratings at Ba1, the same level as Russia's sovereign
rating.
Bank VTB, JSC
The headwinds in the operating environment and impact on the profitability
and asset quality of the bank prompted Moody's to lower VTB's
BFSR to E+ (b1) from D-(ba3), with a stable outlook
which reflects the positioning of the ba1 BCA within the E+ category.
The bank's provisioning expenses (calculated as loan loss provisions
as a percentage pre-provision income) have increased notably during
the last year to 90% as of September 2014 from 47% as at
end-2013, prompting the bank to reach break-even net
profitability level for the same period. However, the provisioning
coverage ratio of non-performing loans has improved and remains
above 100%, reducing the impact on capital. Moody's
expects that asset-quality pressures will continue to mount,
exerting further pressure on the bank's profitability with the possibility
of a negative return on capital in 2015.
Moody's also notes that the bank's Tier 1 capital ratio at 11%
as at September 2014 has improved following the conversion of the existing
sub-debt into a Tier 1 instrument. Although this conversion
improves the quality of the bank's capital, given the weaker
post-provisioning profitability VTB's internal capital generation
capacity is not as strong as those of its higher-rated peers.
In addition, with a loan-to-deposit ratio of 140%,
the bank relies heavily on wholesale funding, albeit a large proportion
of it is due to the CBR whose funding historically have high roll-over
rates. Although Moody's considers that the bank's refinancing
risk is manageable, the high interest-rate environment implies
that this funding structure places interest margin pressures and negatively
alters its lending strategy.
As the second-largest systemically important bank, VTB's
long-term local and foreign-currency debt and local-currency
deposit ratings continues to benefit from three notches of systemic support
uplift from its BCA.
GAZPROMBANK
The adverse trends in the operating environment and their current impact
on the profitability and asset quality of the bank prompted Moody's'
to lower Gazprombank's BFSR to E+ (b1) from D-(ba3),
with a stable outlook which reflects the positioning of the b1 BCA within
the E+ category.
The bank's weakening loan portfolio quality is reflected in its
problem loans (calculated as per Moody's standard approach and corporate
impaired loans and retail overdue 90+ days loans), which worsened
to 11.2% of gross loans as of Q3 2014 relative to only around
2% as of year-end 2013 driven by recognition of a few large
impaired loans in Ukraine and Russia. Moody's notes that
the bank's already modest net income has weakened in 2014 compared
with the previous year, and the current operating environment will
put pressure on the bank's profitability over the next 12-18
months. In turn, the bank's capital adequacy ratio,
although sufficient to absorb anticipated base case losses, declined
to 11.5% as of Q3 2014 from 13.2% at end-2013.
At the same time, Moody's notes that Gazprombank's funding
and liquidity positions remain strong with only limited refinancing requirements
in 2015-16. Moody's also expects that additional capital,
which Russian state authorities could inject into the bank during 2015,
will help to absorb potential losses stemming from deteriorating asset
quality.
As the third-largest systemically important bank, Gazprombank's
long-term local and foreign-currency debt and local-currency
deposit ratings continues to benefit from two notches of systemic support
uplift from its BCA.
Alfa Bank
Although the bank's adequate capitalisation with a Tier 1 ratio
of 11.8% as at June 2014 is likely to absorb the base case
deterioration in asset quality, Moody's considers that the
adverse operating environment will weaken the bank's profitability
and overall credit profile. Therefore Alfa bank's BFSR was
lowered to D- (ba3) from D (ba2), with a stable outlook,
which is due to its resilient position in the assigned rating category.
The bank's problem loans (calculated as per Moody's standard approach
and including impaired and overdue loans) worsened to 4.5%
as at June 2014 from 3.5% as at end-2013 and provisioning
expenses (calculated as loan loss provisions as percentage pre-provision
income) almost doubled to 62% from 32% for the same period.
At the same time, the provisioning coverage ratio of non-performing
loans remains above 100%, reducing the impact on capital.
Nevertheless, Moody's expects that the adverse asset-quality
trends will exert negative pressure on the bank's profitability,
reducing its hitherto high internal capital creation rates (historically
at 20%) to low single-digit levels.
In addition, Moody's believes that the bank partly depends on external
market funding sources, given its loan-to-deposit
ratio of 125%, which given the current funding conditions
can be expensive. With limited market share compared with the larger
government-owned banks, Alfa bank remains exposed to volatility
in the corporate deposit base and, consequently, to margin
pressure, although its net interest margin remains one of the highest
compared with the peer group. At the same time, Moody's notes
that refinancing risk is manageable and Alfa bank maintains a conservative
level of liquid assets as a percentage of total assets (historically at
30%), one of the highest of its peer group.
As the fifth-largest bank in Russia, Alfa bank's long-term
local and foreign-currency debt and local-currency deposit
ratings benefit from one notch of systemic support uplift from its BCA.
Russian Agricultural Bank
The standalone BFSR of Russian Agricultural Bank at E+(b3) was not
affected by this rating action and remains on a negative outlook.
Government Related Institutions (GRIs)
The supported issuer ratings of Vnesheconombank and AHLM who are fully
owned by the Russian government with policy mandates were downgraded in
line with Russia's government debt ratings.
WHAT COULD MOVE THE RATINGS UP/DOWN
Moody's considers that upward pressure on the supported ratings of all
seven Russian financial institutions is unlikely in the near term because
the key drivers of today's actions relate to the weakening of the sovereign's
credit profile, as well as deterioration in the operating environment.
As expressed by the negative outlooks on the long-term ratings
of all seven Russian financial institutions, their ratings could
be downgraded further in the event of any further downgrade of the government
debt rating. Downward adjustments could also be triggered by a
further significant erosion of the banks' standalone credit profiles.
Conversely, the outlooks on the ratings of these entities could
be changed to stable in the event of a corresponding change in outlook
on the current government bond rating.
LIST OF AFFECTED CREDIT RATINGS
Sberbank:
BSFR was downgraded to D from D+ (now equivalent to a BCA of ba2),
outlook was revised to negative;
Long-term LC Deposit rating was downgraded to Ba1 from Baa3,
outlook was revised to negative;
Short-term LC Deposit rating was downgraded to NP from P-3;
Long-term FC Deposit rating was downgraded to Ba2 from Ba1,
outlook was revised to negative;
Long-term LC and FC Senior Unsecured and FC BACKED Senior Unsecured
ratings were downgraded to Ba1 from Baa3, outlook was revised to
negative;
Long-term FC BACKED Senior Unsecured MTN program rating was downgraded
to (P)Ba1 from (P)Baa3;
Long-term FC BACKED Subordinate rating was downgraded to Ba2 from
Ba1, outlook was revised to negative;
Long-term FC BACKED Subordinate MTN program rating was downgraded
to (P)Ba2 from (P)Ba1,;
FC BACKED Short-term MTN program rating was downgraded to (P)NP
from (P)P-3.
Bank VTB, JSC:
BSFR was downgraded to E+ from D- (now equivalent to a BCA
of b1), outlook was revised to stable;
Long-term LC Deposit rating was downgraded to Ba1 from Baa3,
outlook was revised to negative;
Long-term FC Deposit rating was downgraded to Ba2 from Ba1,
outlook was revised to negative;
Short-term LC Deposit rating was downgraded to NP from P-3;
Short-term FC MTN program rating was downgraded to (P)NP from (P)P-3;
Long-term LC and FC Senior Unsecured ratings were downgraded to
Ba1 from Baa3, outlook was revised to negative;
Long-term FC Senior Unsecured MTN program rating was downgraded
to (P)Ba1 from (P)Baa3;
Long-term FC Subordinate rating was downgraded to Ba3 from Ba2,
outlook was revised to negative;
Long-term FC Subordinate MTN program rating was downgraded to (P)Ba3
from (P)Ba2;
Long-term FC BACKED Senior Unsecured rating was downgraded to Ba1
from Baa3, outlook was revised to negative;
Long-term FC BACKED Senior Unsecured MTN program rating was downgraded
to (P)Ba1 from (P)Baa3.
Alfa-Bank:
BSFR was downgraded to D- from D (now equivalent to a BCA of ba3),
outlook was revised to stable;
Long-term LC and FC Deposit ratings were downgraded to Ba2 from
Ba1, outlook was revised to negative;
Long-term LC and FC Senior Unsecured ratings were downgraded to
Ba2 from Ba1, outlook was revised to negative;
Long-term FC Subordinate, BACKED Subordinate ratings were
downgraded to B1 from Ba3, outlook was revised to negative;
Long-term FC BACKED Senior Unsecured rating was downgraded to Ba2
from Ba1, outlook was revised to negative.
Alfa MTN Invest Ltd:
Long-term FC BACKED Senior Unsecured MTN program rating was downgraded
to (P)Ba2 from (P)Ba1.
Alfa MTN Markets Lmited:
Long-term FC BACKED Senior Unsecured MTN program rating was downgraded
to (P)Ba2 from (P)Ba1.
Alfa MTN Projects Limited:
Long-term FC BACKED Senior Unsecured MTN program rating was downgraded
to (P)Ba2 from (P)Ba1.
Alfa MTN Issuance Limited:
Long-term FC BACKED Senior Unsecured rating was downgraded to Ba2
from Ba1, outlook was revised to negative;
Long-term FC BACKED Senior Unsecured MTN program rating was downgraded
to (P)Ba2 from (P)Ba1.
Gazprombank:
BSFR was downgraded to E+ from D- (now equivalent to a BCA
of b1), outlook was revised to stable;
Long-term LC and FC Deposit ratings were downgraded to Ba2 from
Ba1, outlook was revised to negative;
Long-term LC and FC Senior Unsecured ratings were downgraded to
Ba2 from Ba1, outlook was revised to negative;
Long-term FC Senior Unsecured MTN program rating was downgraded
to (P)Ba2 from (P)Ba1;
Long-term FC Subordinate rating was downgraded to B2 from B1,
outlook was revised to negative;
Long-term FC BACKED Senior Unsecured rating was downgraded to Ba2
from Ba1, outlook was revised to negative;
Long-term LC and FC Subordinate MTN program ratings were downgraded
to (P)B2 from (P)B1.
Russian Agricultural Bank:
Long-term LC and FC Deposit ratings were downgraded to Ba2 from
Ba1, outlook was revised to negative;
Long-term LC and FC Senior Unsecured ratings were downgraded to
Ba2 from Ba1, outlook was revised to negative;
Long-term FC Senior Unsecured MTN program rating was downgraded
to (P)Ba2 from (P)Ba1;
Long-term FC Subordinate rating was downgraded to B2 from B1,
outlook was revised to negative;
Long-term FC Subordinate MTN program rating was downgraded to (P)B2
from (P)B1.
Vnesheconombank:
Long-term LC and FC Issuer ratings were downgraded to Ba1 from
Baa3, outlook was revised to negative;
Short-term LC and FC Issuer ratings were downgraded to NP from
P-3.
Agency for Housing Mortgage Lending OJSC:
Long-term LC and FC Issuer ratings were downgraded to Ba1 from
Baa3, outlook was revised to negative;
Short-term LC and FC Issuer ratings were downgraded to NP from
P-3;
Long-term LC Senior Unsecured and BACKED Senior Unsecured ratings
were downgraded to Ba1 from Baa3, outlook was revised to negative;
The principal methodology used in rating Agency for Housing Mortgage Lending
OJSC and Vnesheconombank was Government-Related Issuers published
in October 2014.
The principal methodology used in rating Sberbank, Bank VTB,
JSC, Gazprombank, Russian Agricultural Bank, Alfa-Bank,
Alfa MTN Issuance Limited, Alfa MTN Markets Limited, Alfa
MTN Projects Limited and Alfa MTN Invest Ltd was Global Banks published
in July 2014. Please see the Credit Policy page on www.moodys.com
for a copy of these methodologies.
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.
The below contact information is provided for information purposes only.
Please see the ratings tab of the issuer page at www.moodys.com,
for each of the ratings covered, Moody's disclosures on the
lead analyst and the Moody's legal entity that has issued the ratings.
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.
Irakli Pipia
Vice President - Senior Analyst
Financial Institutions Group
Moody's Investors Service Ltd.
One Canada Square
Canary Wharf
London E14 5FA
United Kingdom
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454
Yves J Lemay
MD - Banking
Financial Institutions Group
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454
Releasing Office:
Moody's Investors Service Ltd.
One Canada Square
Canary Wharf
London E14 5FA
United Kingdom
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454
