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Rating Action:

Moody's upgrades Bank Uralsib's deposit ratings to B3 from Caa1; outlook positive

05 Jun 2017

London, 05 June 2017 -- Moody's Investors Service (Moody's) has today upgraded the long-term local- and foreign-currency deposit ratings of Bank Uralsib (Uralsib) to B3 from Caa1. The outlook on the bank's long-term deposit ratings remains positive. Concurrently, Moody's upgraded the bank's baseline credit assessment (BCA) and adjusted BCA to b3 from caa2. Uralsib's Not Prime short-term local- and foreign-currency deposit ratings were affirmed. The overall outlook on Uralsib's long-term ratings is positive.

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

The rating action is primarily based on Uralsib's audited financial statements for 2016 and unaudited financial statements for the first quarter of 2017 prepared under International Financial Reporting Standards (IFRS).

RATINGS RATIONALE

RATIONALE FOR RATING UPGRADE

Moody's upgrade of Uralsib's ratings reflects (1) improving trends in the bank's profitability and capital levels; (2) its stabilised - albeit still weak - asset quality metrics; as well as (3) the bank's sustainable funding profile and conservative liquidity management.

Over 2016, Uralsib returned to operational profitability, as its recurring income, formed by net interest income and net fee-and-commission income, started to fully cover operating expense. The revenue generation was supported by an improved net interest margin which widened to 4.4% in 2016 from 2.2% a year earlier. Although in 2016 Uralsib recorded elevated loan loss provisions of 4.4% of average gross loans, the bank was able to post marginal bottom-line profits for 2016 translating to return on average assets (ROAA) of 0.4%. In the first quarter of 2017, Uralsib reported ROAA of 0.5%, compared to negative ROAA of -0.1% in the first quarter of 2016 (both annualized, Moody's computations). The 2016 and 1Q 2017 financial performance was predominantly driven by recurring income streams, as distinct from the 2015 situation when the bank reported large one-off gains related to the bail-out package, including long-term facilities from Russia's state Deposit Insurance Agency (DIA) provided at lower-than-market interest rate and a write-off of subordinated debt.

The recovery of Uralsib's internal capital generation is critical for the bank to restore its capital adequacy levels undermined by material write-downs on non-core assets made in 2015 upon request of the regulator. As of the year-end 2016, Uralsib's IFRS tangible common equity ratio equaled 14.2%, which was supported by one-off gains derived from the bail-out package. Local GAAP accounting standards provide for different accounting treatment, therefore, at 1 April 2017, Uralsib's statutory consolidated total capital adequacy ratio (CAR) and Tier 1 CAR stood at 7.0% and 5.5%, respectively (below the regulatory minimums of 8% and 6%). As prescribed by Russia's banking law, Uralsib is granted regulatory forbearance for some of the statutory requirements, as it undergoes an official financial rehabilitation procedure.

Moody's also observes some stabilisation of Uralsib's asset quality dynamics. Although the bank's problem loan ratio increased to 29% of gross loans in 2016 from 24% in 2015, this increase is largely due to the 13% shrinkage of the bank's loan portfolio over the same period. Furthermore, more than one third of problem loans are comprised by "impaired but not overdue" loans which continue to perform. The rating agency considers the bank's 67% coverage of problem loans (including impaired but not overdue loans) by loan loss reserves as sufficient, being close to the sector average. In 2017, Moody's expects Uralsib's asset quality trends to reverse to positive as the bank currently applies sufficiently strict underwriting standards for new lending, which is now gaining momentum, while legacy problem assets have all been identified.

Uralsib has a stable funding profile: at 1 April 2017, 70% of its total liabilities came from core customer deposits, another 11% were formed by long-term funding from DIA. This funding profile is matched by conservative liquidity management with the bank's non-encumbered liquidity cushion exceeding 40% of total assets as of the same reporting date.

RATIONALE FOR GOVERNMENT SUPPORT

Moody's assesses the likelihood of government support to Uralsib as low, because the rating agency does not expect the state bail-out package to be expanded from the levels already provided to the bank in 2015. As such, Moody's no longer incorporates any notches of government support uplift in Uralsib's ratings.

RATIONALE FOR POSITIVE OUTLOOK

Moody's positive outlook on Uralsib's long-term ratings derives from the rating agency's expectation that the bank's solvency metrics will continue to improve in the medium term, as Uralsib gradually fills-in its balance sheet with newer, better performing loans, while simultaneously continuing to implement cost-cutting measures. Moody's also expects Uralsib to continue its conservative liquidity management practices, while the bank's funding base will likely remain stable.

WHAT COULD MOVE THE RATINGS UP / DOWN

The positive outlook on Uralsib's long-term deposit ratings might translate to a ratings upgrade over the next 12 to 18 months if the bank demonstrates a sustainable track record of profitable performance coupled with improved asset quality and capital metrics.

Moody's does not anticipate any negative rating action on Uralsib over the next 12 to 18 months, given the positive outlook assigned to the bank's ratings. However, the outlook could be reversed to stable if the bank's performance proves to be weaker than Moody's current expectations.

PRINCIPAL METHODOLOGY

The principal methodology used in these ratings was Banks published in January 2016. Please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

Headquartered in Moscow, Russia, Bank Uralsib reported -- under its 2016 audited IFRS financial statement -- total assets of RUB382 billion and total equity of RUB63 billion. The bank's IFRS profits for 2016 stood at RUB2.0 billion.

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 credit rating action on the support provider and in relation to each particular credit 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 credit rating action, and whose ratings may change as a result of this credit 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
VP - Senior Credit Officer
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
Client Service: 44 20 7772 5454

Nicholas Hill
MD - Banking
Financial Institutions Group
JOURNALISTS: 44 20 7772 5456
Client Service: 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
Client Service: 44 20 7772 5454

No Related Data.
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