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Rating Action:

Moody's downgrades six Russian privately owned banks

25 Feb 2015

Actions conclude review

London, 25 February 2015 -- Moody's Investors Service has today taken rating actions on six Russian banks -- Bank Otkritie Financial Corporation PJSC, Promsvyazbank, Bank Saint-Petersburg OJSC, Vozrozhdenie Bank, Zenit Bank and Center-Invest Bank. These actions reflect the deterioration in the operating environment in Russia (Ba1 negative) but are not influenced by the recent downgrade of Russia's sovereign credit rating to Ba1 from Baa3.

Specifically, Moody's lowered the standalone BFSRs and downgraded the long-term debt and deposit ratings of all banks except for Bank Otkritie Financial Corporation PJSC, where Moody's lowered the standalone BFSR but confirmed the long-term debt and deposit ratings, due to the incorporation of one notch of government (systemic) support uplift in Bank Otkritie Financial Corporation's 's long-term ratings. Please refer to the end of the press release for a detailed list of affected ratings.

These rating actions concludes the review for downgrade initiated on 23 December 2014.

RATINGS RATIONALE

--- OPERATING ENVIRONMENT

The possibility of a prolonged recessionary environment in Russia will affect the asset quality and profitability of the six Russian financial institutions (Moody's expects negative GDP growth of 5.5% in Russia in 2015 and 3% in 2016).

Specifically, an accelerated inflation and low salary growth will reduce the creditworthiness of retail borrowers and weaken consumption, negatively affecting banks' asset quality in the retail, SME, construction and real-estate segments. In addition, a substantial devaluation of the Russian rouble has affected the debt-service capacity for borrowers with loans denominated in foreign currencies and, given the expected substantial contraction in imports, will negatively weigh on the creditworthiness of importers and trade companies.

Furthermore, an elevated interest-rate environment, which is likely to remain in place for the near future, has contributed to increased funding costs in the banking system. Given the reduced loan demand from creditworthy borrowers, the banks will struggle to pass increased funding costs to their customers. This will result in a contraction of their net interest income and, consequently, operating revenues. Overall, the operating revenue contraction combined with substantially increased cost of risk is likely to generate a loss-making year for these banks, although some banks might remain profitable because of non-core income, albeit with substantially worse indicators compared with previous years.

BANK SPECIFIC FACTORS

--BANK OTKRITIE FINANCIAL CORPORATION PJSC

Bank Otkritie Financial Corporation PJSC's standalone BFSR was lowered to E+ (BCA of b1) from D- (ba3), reflecting Moody's expectations of further pressures on the bank's asset quality and profitability stemming from the economic recession and the high interest-rate environment. We expect that an anticipated increase in problem loans in the next 12-18 months to substantially weaken the bank's financial results.

The bank's lending to high-risk sectors (construction, real estate, development and SME) accounted for 22% of gross loans as at end-September 2014, which exposes Bank Otkritie Financial Corporation PJSC to elevated credit risk, rendering the loan book vulnerable to the weakening domestic operating environment and adverse market conditions. Moody's notes that the bank's capital levels will only partly mitigate the pressures for the macroeconomic headwinds in 2015/16 (the reported Tier 1 and Total capital adequacy ratio were 10.0% and 14.5%, respectively, as at end-September 2014).

Moody's considers that there is a low likelihood of government support for the bank based on: (1) the bank's growing systemic importance as the leading private banking group in Russia with a market share of 4.5% of assets as of year-end 2014; and (2) an extensive countrywide presence across Russia with a market share of 2.3% in retail deposits (including pensioners' savings). Therefore, the confirmation of the bank's Ba3 long-term senior unsecured debt and deposit ratings captures the systemic support assessment that now results in a one-notch rating uplift from the bank's BCA of b1.

--PROMSVYAZBANK

The lowering of Promsvyazbank's standalone BFSR to E+ (BCA of b1) from D- (ba3) and downgrade of the long-term deposit ratings to B1 from Ba3 with a negative outlook reflect Moody's expectation that the severe deterioration in the operating environment in Russia will lead to a worsening of Promsvyazbank's asset quality, profitability and capital.

In particular, the downgrade reflects increased risks related to the bank's relatively high single-borrower concentration and sizable exposure to loans denominated in foreign currency (30% of gross loans as at end-September 2014). Moody's expects that the sharp depreciation of the rouble in late 2014 has negatively impacted the debt-servicing capacity of many of the bank's borrowers. In addition, the bank's already weak Tier 1 capital ratio of 8.7% (as reported in at end-June 2014) will continue to face significant pressures because of the inflation in risk-weighted assets following the currency depreciation, expected asset-quality deterioration and high probability of losses in 2015.

--BANK SAINT PETERSBURG OJSC

Moody's expects further pressures on the bank's asset quality and profitability stemming from the anticipated recession in Russia and higher interest rate environment. The rating agency therefore lowered Bank Saint Petersburg's standalone BFSR to E+ (BCA of b1) from D- (ba3) and downgraded to (P)B1/B1 from (P)Ba3/Ba3 the long-term senior unsecured and deposit ratings.

Moody's notes the bank's sizeable exposure to investment projects and project-finance deals in construction, development and real estate. Collectively, they account for 25% of gross loans and expose the bank to elevated credit risk, especially amid the expected economic recession in 2015. Moody's expects that credit costs along with the increased funding costs will put significant pressure on Bank Saint Petersburg's profitability this year and next. The rating agency believes that existing capital buffers are likely to weaken due to the potential losses that may crystallise in the medium-term (the reported Tier 1 and Total capital adequacy ratio were 11.3% and 14.0%, respectively, as at end-September 2014).

--VOZROZHDENIE BANK

The lowering of Vozrozhdenie Bank's standalone BFSR to E+ (BCA of b1) from D-(ba3) and downgrade of the long-term deposit ratings to B1 from Ba3 reflect the severe and rapid deterioration in the operating environment that Moody's expects will substantially weaken the bank's asset quality and profitability in 2015. Moody's expects Vozrozhdenie Bank to report a significant increase in non-performing loans that have already risen to 7.7% from 6.8% of gross loans in the first nine months of 2014. As a result of the weaker asset quality the bank's provisioning needs will increase and exert pressure on profitability.

At the same time, the outlook on the bank's long-term ratings is now stable as the risks associated with the expected deterioration in Vozrozhdenie Bank's financial profile are balanced by the bank's currently high coverage of non-performing loans with loan loss reserves (116% as at end-September 2014). This decreases the likelihood of losses in 2015-2016 and, therefore, limits potential negative pressure on the bank's good capital adequacy level (total Basel I capital adequacy ratio stood at 14.9%; end-September 2014; unaudited).

--ZENIT BANK

The lowering of Zenit Bank's standalone BFSR to E+ (BCA of b1) from D- (ba3) and downgrade of the long-term deposit ratings to B1 from Ba3 reflect the expected weakening of the bank's financial fundamentals, in particular asset quality and profitability, because of the severe deterioration in Russia's operating environment. Credit risk is heightened by high single-name concentrations (top 20 borrowers accounted for 232% of the bank's Tier 1 capital; end-June 2014), and exposure to long-term investment projects and project finance deals, including the construction sector, which accounts for 17% of the bank's loan book. Moody's anticipates that increased credit costs and a lower net interest margin will put pressure on the bank's already modest profitability with pre-provision income to average assets at only 1.7% (as at end-June 2014; IFRS); this will likely result in losses from core operations in 2015.

At the same time, Zenit Bank's rating is supported by moderate capitalisation with a total capital adequacy ratio at 16% and a Tier 1 capital ratio at 10.60% as of end-June 2014, and the bank's adequate funding and liquidity, underpinned by strong business ties with Tatarstan-based ultimate shareholder Tatneft OAO.

--CENTER-INVEST BANK

The lowering of Bank Center-Invest's standalone BFSR to E+ (BCA of b1) from D-(ba3) and downgrade of the long-term deposit ratings to B1 from Ba3 reflect the anticipated erosion of the bank's financial metrics such as asset quality, profitability as a result of the recent severe and rapid deterioration in the operating environment. Moody's expects that deterioration of the bank's historically strong asset quality and the expected decline in net interest margin will compress the bank's profits in 2015/16. However, even after anticipated compression, the bank's pre-provision profitability is likely to be sufficient to absorb growing credit cost, and thus we expect the bank remaining marginally profitable in 2015/16. These considerations support a stable outlook on the bank's ratings.

As at year-end 2014, Bank Center-Invest reported total capital adequacy at 15.4%, which was supported by annualized 16.4% return-on-equity in January-June 2014 (in accordance with unaudited IFRS accounts). Moody's notes that the bank's asset quality is more resilient to the effects of the recent sharp local-currency depreciation with only 8% of its loan book allocated to foreign-currency denominated loans. At the same time, Bank Center-Invest's deposit-based funding is granular, providing some diversification that might reduce deposit outflows.

WHAT COULD MOVE THE RATINGS UP/DOWN

Moody's considers that upward pressure on the ratings of all six banks is unlikely in the near term because the key drivers of today's actions relate to the weakening of their credit profiles due to the severe and rapid deterioration in the domestic operating environment in Russia.

Moody's could downgrade the banks' ratings if there is any further erosion of their standalone credit profiles. Conversely, the outlooks on the long-term debt and deposit ratings on four out of six these entities could be changed to stable if there are improvements in the operating environment conditions.

The following actions were taken:

BANK OTKRITIE FINANCIAL CORPORATION PJSC

- BFSR downgraded to E+ from D-,now equivalent to a bca of b1 (formerly ba3)

- Long-term local-currency and foreign-currency deposit ratings of Ba3 confirmed

- Long-term local-currency and foreign-currency senior unsecured debt ratings of Ba3 confirmed

- Long-term foreign-currency subordinated debt rating downgraded to B2 from B1

- BFSR carries a stable outlook; all other long-term global-scale ratings carry a negative outlook

PROMSVYAZBANK

- BFSR lowered to E+ from D-, now equivalent to a bca of b1 (formerly ba3)

- Long-term local-currency and foreign-currency deposit ratings downgraded to B1 from Ba3

- Long-term foreign-currency debt rating of senior unsecured MTN program downgraded to (P)B1 from (P)Ba3

- Long-term local-currency and foreign-currency senior unsecured debt ratings downgraded to B1 from Ba3

- Long-term foreign-currency debt rating of subordinate MTN program downgraded to (P)B2 from (P)B1

- Long-term foreign-currency subordinate debt rating downgraded to B2/B3(hyb) from B1/B2(hyb)

- BFSR carries a stable outlook; all other long-term global-scale ratings carry a negative outlook

BANK SAINT-PETERSBURG OJSC

- BFSR lowered to E+ from D-,now equivalent to a bca of b1 (formerly ba3)

- Long-term foreign-currency deposit rating downgraded to B1 from Ba3

- Long-term foreign-currency debt rating of senior unsecured MTN program downgraded to (P)B1 from (P)Ba3

- Long-term foreign-currency debt rating of subordinate MTN program downgraded to (P)B2 from (P)B1

- Long-term foreign-currency subordinate debt rating downgraded to B2 from B1

- BFSR carries a stable outlook; all other long-term global-scale ratings carry a negative outlook

VOZROZHDENIE BANK

- BFSR lowered to E+ from D-,now equivalent to a bca of b1 (formerly ba3)

- Long-term local-currency and foreign-currency deposit ratings downgraded to B1 from Ba3

- The BFSR and all Long-term global-scale ratings carry a stable outlook

ZENIT BANK

- BFSR lowered to E+ from D-,now equivalent to a bca of b1 (formerly ba3),

- Long-term local-currency and foreign-currency deposit ratings downgraded to B1 from Ba3,

- Long-term local-currency senior unsecured debt ratings downgraded to B1 from Ba3

- BFSR carries a stable outlook; all other long-term global-scale ratings carry a negative outlook

CENTER-INVEST BANK

- BFSR lowered to E+ from D-, now equivalent to a bca of b1 (formerly ba3)

- Long-term local-currency and foreign-currency deposit ratings downgraded to B1 from Ba3

- Long-term local-currency senior unsecured debt rating downgraded to B1 from Ba3

- The BFSR and all Long-term global-scale ratings carry a stable outlook

The principal methodology used in these ratings was Global Banks published in July 2014. 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.

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.

Maria Malyukova
Analyst
Financial Institutions Group
Moody's Investors Service Limited, Russian Branch
7th floor, Four Winds Plaza
21 1st Tverskaya-Yamskaya St.
Moscow 125047
Russia
Telephone: +7 495 228 6060
Facsimile: +7 495 228 6091

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
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United Kingdom
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

Moody's downgrades six Russian privately owned banks
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