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10 Aug 2009
All ratings are on negative outlook
Moscow, August 10, 2009 -- Moody's Investors Service has today upgraded to D from D- the bank
financial strength rating (BFSR) of MDM Bank ("merged MDM",
formerly URSA Bank), which was created on 7 August 2009 by the merger
of two large Russian financial institutions, MDM Bank ("pre-merger
MDM") and URSA Bank (URSA).
Moody's also upgraded the merged MDM's long-term global local
currency (GLC) deposit ratings to Ba2 from Ba3, while affirming
the bank's Not Prime short-term deposit ratings. The
merged MDM's foreign currency debt ratings were upgraded to Ba2
from Ba3 (for senior unsecured debt) and to Ba3 from B1 (for subordinated
Concurrently, Moody's Interfax Rating Agency assigned a long-term
National Scale Rating (NSR) of Aa2.ru to the merged MDM.
Moscow-based Moody's Interfax is majority owned by Moody's.
Simultaneously, Moody's downgraded the BFSR and long-term
global foreign currency deposit ratings of the pre-merger MDM to
D and Ba2, respectively, from D+ and Ba1. The
pre-merger MDM's D/Ba2/Not Prime ratings will be withdrawn,
as the bank is now consolidated into the merged MDM (formerly URSA).
Following the merger, URSA was renamed MDM and assumed all the obligations
of the pre-merger MDM. Moody's downgraded the pre-merger
MDM's debt ratings to Ba2 from Ba1 (for senior unsecured debt) and
to Ba3 from Ba2 (for subordinated debt), reflecting the combined
financial strength of the merged entity. As the pre-merger
MDM's debt remains outstanding, Moody's will continue
to rate these debt instruments.
The outlook on all the global scale ratings is negative, while the
NSR carries no specific outlook.
The D BFSR of the merged MDM is one notch lower than the BFSR on the pre-merger
MDM, and one notch higher than that of URSA. Moody's
believes that the financial risk profile of the newly established bank
is weaker than that of the pre-merger MDM, while it is stronger
than that of URSA. The rating agency expects the forthcoming consolidation
and operational integration to further challenge the combined entity's
financial fundamentals, which have already been weakened during
the protracted economic downturn. In the longer term, Moody's
views as favourable the potential benefits of the commercial synergy between
the corporate pre-merger MDM and the retail-oriented URSA,
although those synergies may take some time to materialise.
The D BFSR assigned to the merged MDM translates into a Baseline Credit
Assessment (BCA) of Ba2 and is underpinned by the bank's:
(i) post-merger position as Russia's second-largest
privately owned bank by assets and shareholders' equity; (ii)
combined expertise in servicing Russia's largest companies and retail
banking; (iii) widespread distribution network; (iv) sound corporate
governance and risk management practices; (v) historically adequate
efficiency and recurring earnings power relative to that of peers;
and (vi) relatively good capitalisation.
At the same time, the BFSR is constrained by: (i) the challenging
macroeconomic environment in Russia, which has increased credit,
liquidity and market risks; (ii) the still-high concentration
of the bank's customer funding base; (iii) the bank's
notable reliance on wholesale market funding, which brings about
refinancing issues; and (iv) weakening asset quality, which
exerts negative pressure on bottom-line profitability and capitalisation.
Moody's believes that these weaknesses may be exacerbated during
the operational integration of the merged institutions.
Following the significant deterioration of the economic environment in
Russia, the banks' combined problem loans increased to 8.2%
of total gross loans as of 1 April 2009 from 4.9% at YE2008.
The merged MDM's capital cushion is relatively robust, with
a Tier 1 ratio of 15.3% and a total capital adequacy ratio
of 17.4% (according to Basel I) at 1 April 2009, which
is higher compared to peers'; however, if asset quality metrics
approach the level anticipated by Moody's worst case stress-test
scenario for the Russian banking sector, the bank's capital
adequacy may closely approach the minimum required levels thus making
its loss absorption capacity weaker.
Both merged banks relied significantly on wholesale market funding.
Both experienced noticeable pressure on their funding bases in Q4 2008
on the back of the outflow of customer deposits. Pre-merger
MDM maintained a stronger liquidity cushion, while URSA was more
exposed to refinancing risks. The combined entity benefits from
a more balanced liquidity position, with the liquid assets maintained
at a quarter of the total assets. Both pre-merger MDM and
URSA used to tap liquidity provided by the Central Bank of Russia (CBR),
but these funds have now been fully repaid. The merged MDM continues
to enjoy a committed facility limit provided by the CBR of an amount exceeding
its total capital.
The merged MDM's Ba2 debt and deposit ratings are based on its BCA of
Ba2 and do not incorporate any probability of systemic support from the
Russian government. Moody's acknowledges that the merged
MDM is now the second-largest privately owned bank in Russia;
however, its market position is only moderate due to the dominance
of state-owned banks. The bank's combined share of
system-wide retail deposits was just 1.0% as of the
end of 2008.
The negative outlook on the merged MDM's ratings reflects Moody's
medium-term expectations that the bank's financial fundamentals
will be adversely affected by both the overall hostile economic environment
and the challenges related to post-merger integration.
Moody's previous rating actions on both the pre-merger MDM and
URSA were implemented on 4 December 2008 when the rating agency changed
the outlook on the pre-merger MDM's global scale ratings
to negative from stable, while simultaneously changing the outlook
on URSA's global scale ratings to positive from stable following
the announcement by the shareholders of the two institutions' intention
The principal methodologies used in rating the merged MDM are "Bank Financial
Strength Ratings: Global Methodology" and "Incorporation of Joint-Default
Analysis into Moody's Bank Ratings: A Refined Methodology",
which can be found at www.moodys.com in the Credit Policy
& Methodologies directory, in the Ratings Methodologies sub-directory.
Other methodologies and factors that may have been considered in the process
of rating the merged MDM can also be found in the Credit Policy &
Headquartered in the city of Novosibirsk, the Russian Federation,
the merged MDM ranks 11th by total assets among all Russian banks and
second among privately owned institutions. As per the IFRS pro-forma
statements, at Q1 2009 the merged banks reported combined consolidated
assets of RUB511.6 billion (US$15.0 billion) and
combined shareholders' equity of RUB69.6 billion (US$2.0
billion). The combined net income of the merged institutions for
Q1 2009 made up RUB469 million (US$13.8 million).
NATIONAL SCALE RATINGS
Moody's Interfax Rating Agency's National Scale Ratings (NSRs) are intended
as relative measures of creditworthiness among debt issues and issuers
within a country, enabling market participants to better differentiate
relative risks. NSRs in Russia are designated by the ".ru"
suffix. NSRs differ from global scale ratings, as assigned
by Moody's Investors Service, in that they are not globally comparable
to the full universe of Moody's rated entities, but only with other
rated entities within the same country.
ABOUT MOODY'S AND MOODY'S INTERFAX
Moody's Interfax Rating Agency (MIRA) specialises in credit risk analysis
in Russia. MIRA is controlled by Moody's Investors Service,
a leading provider of credit ratings, research and analysis covering
debt instruments and securities in the global capital markets.
Moody's Investors Service is a subsidiary of Moody's Corporation (NYSE:
Further information is available at www.moodys.com
Asst Vice President - Analyst
Financial Institutions Group
Moody's Eastern Europe LLC
Telephone: +7 495 228 6060
Facsimile: +7 495 228 6091
Moody's rates merged MDM Bank at D/Ba2 (Russia)
Reynold R. Leegerstee
Financial Institutions Group
Moody's Investors Service Ltd.
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454
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