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Rating Action:

Moody's reviews for downgrade ratings of 16 Russian financial institutions

23 Dec 2014

Downgrades foreign currency deposit ratings of four Russian financial institutions due to lower country ceiling

London, 23 December 2014 -- Moody's Investors Service has today placed on review for downgrade the long-term deposit, debt and issuer ratings and bank financial strength ratings (BFSRs) of 16 Russian financial institutions in response to the ongoing severe deterioration in Russia's operating environment and financial market conditions. With a much more pronounced weakening in Russia's economic outlook in the next two years than previously anticipated, financial institutions now face more significant pressures on their funding costs, asset quality and profitability in the medium term. The review will focus on each institution's resilience to these much stronger headwinds.

Moody's has also downgraded the long-term and short-term foreign-currency deposit ratings of four Russian financial institutions, following the lowering of the country's foreign currency deposit ceiling to Ba1 from Baa2, on 22 December 2014. For additional information on the changes to country ceilings, please refer to the related announcement: https://www.moodys.com/research/--PR_315606

Please click the following link to access the full List of Affected Credit Ratings, which is an integral part of this Press Release and identifies each affected issuer: http://www.moodys.com/viewresearchdoc.aspx?docid=PBC_178368

RATINGS RATIONALE

-- RATIONALE FOR RATING REVIEW

The review for downgrade reflects the severe and rapid deterioration in the operating environment in Russia and the heightened risk of a more prolonged and more acute economic downturn than originally anticipated. As a result, Moody's now expects Russian GDP to contract by 5.5% in 2015 and 3% in 2016.

Substantial and persistent volatility in macroeconomic fundamentals has strengthened the headwinds against the Russian banking system and may lead to a lasting deterioration in the credit profiles of many Russian financial institutions, which would place downward pressure on their ratings.

Specifically, the Russian rouble has lost more than 40% of its value against the dollar since the beginning of 2014. To counter this trend, the Central Bank of Russia (CBR) has been increasing its key interest rates, although its efforts have had limited impact in stabilising the currency. Since the beginning of 2014, the CBR has hiked interest rates by 11.5 percentage points in total, contributing to a notable increase in domestic wholesale funding costs for Russian banks. The severity of the negative trend in domestic wholesale markets for the leading Russian financial institutions has been accentuated by severely constrained access to European and US capital markets. Such unfavourable funding conditions could potentially heighten refinancing and liquidity risks in the banking system. In Moody's view, the measures undertaken by the CBR to supply additional foreign currency liquidity to the system via medium-term repo operations only partly mitigates this pressure.

In addition, the rating agency expects that a substantially higher interest rate environment will constrain lending opportunities, worsen asset quality and affect financial institutions' profitability, which has been on the decline since the beginning of 2014. Moody's also expects that foreign currency and interest rate volatility will be detrimental to borrower creditworthiness and, therefore, negatively affect the asset quality of Russian banks. Such volatility would have the greatest impact on foreign currency loans without underlying foreign-currency revenues, which by Moody's estimates account for 7%-9% of the total system-wide loan book. High single-borrower and related-party exposures, which represent a chronic problem for the Russian banking system, also exacerbate asset quality risks.

FACTORS TO BE CONSIDERED IN THE RATING REVIEW

Considering the adverse changes to the operating environment for the 16 affected Russian financial institutions, the rating review for downgrade will focus on (1) the magnitude of any further volatility in the operating environment and its impact on the banking system; and (2) the ability of affected financial institutions to absorb additional negative shocks, and stabilise their deposit base and credit profiles under the prevailing negative operating conditions.

Moody's will also consider the effectiveness of regulatory measures introduced by the Russian authorities aimed at stabilising the banking system. Such measures include the bill approved by the Russian Duma (on 19 December 2014), under which RUB1 trillion (approximately $17 billion) will be injected into the banking sector with the help of the Deposit Insurance Agency, the retail deposit watchdog.

Finally, Moody's will also consider whether any adjustments should be made to its assumptions regarding the Russian government's willingness to provide extraordinary support to financial institutions, in the event of need. This follows Moody's decision to lower Russia's foreign currency bond and deposit ceilings to reflect the rising, though still very low, risk that domestic Russian entities will be unable to access foreign currency to service their foreign currency bond- and deposit-related obligations, given recent and prospective pressure on Russia's foreign currency reserves, which nevertheless remain substantial. However, if Russia's foreign currency reserves continue to diminish rapidly over the coming months, the government may be forced to prioritise which non-sovereign issuers to support in an adverse scenario.

-- DOWNGRADE OF THE FOREIGN-CURRENCY DEPOSIT RATINGS

The downgrade of the long-term and short-term foreign currency deposit ratings of four Russian financial institutions, takes into account the lowering of Russia's foreign currency deposit ceiling to Ba1 from Baa2 on 22 December 2014. Moody's foreign currency ceilings determine the highest rating possible in a given country for debt instruments denominated in foreign currency issued by domestic borrowers other than the national government.

Moody's maintains its review for downgrade on the affected foreign currency deposit ratings given their sensitivity to further downward pressure on the standalone ratings of these entities.

WHAT COULD MOVE THE RATINGS UP/DOWN

The ratings of the financial institutions affected by today's rating action could be lowered in case the risk absorption capacity and financial fundamentals of the affected entities are eroded, in Moody's view, by the recent events and increasing challenges stemming from the operating environment. Conversely, improvements in Russia's economic growth prospects could stabilise ratings at current levels.

Given the ongoing review for further downgrade, Moody's considers that upward pressure on the long-term debt and deposit ratings of Russian financial institutions affected by today's action is unlikely in the near term.

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, VTB Capital S.A., Gazprombank, Russian Agricultural Bank, Zenit Bank, Vozrozhdenie Bank, JSB Rosbank, Promsvyazbank, ING Bank Eurasia, Center-Invest Bank, Bank Saint-Petersburg OJSC, Bank Otkritie Financial Corporation PJSC, Banca Intesa (Russia), 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

Moody's reviews for downgrade ratings of 16 Russian financial institutions
No Related Data.
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