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I AGREE
22 May 2012
London, 22 May 2012 -- Moody's Investors Service has today upgraded the long-term
local and foreign currency deposit ratings and long-term local
currency debt ratings of Metallurgical Commercial Bank (Metcombank) to
B2 from B3. The bank's Not Prime short-term local
and foreign currency deposit ratings and the E+ standalone bank financial
strength rating (BFSR) remained unchanged, although the BFSR now
maps to a standalone credit assessment of b2 (formerly mapping to b3).
The outlook on the long-term ratings and the BFSR is stable.
RATINGS RATIONALE
According to Moody's, the upgrade of Metcombank's long-term
ratings is driven by (i) continued diversification of the bank's
business profile reflected in the increasing number of products and clients
in its retail portfolio (mainly auto loans), and improvements in
its regional coverage; (ii) a significant decline of related-party
lending; (iii) a track record of adequate financial performance in
the recent years and (iv) the rating agency's expectations of further
improvement in diversification of the bank's funding base and loan
portfolio.
Since 2009, Metcombank has been implementing its strategy related
to diversification of its business. During 2011, the retail
portfolio (predominantly auto loans) recorded a three-fold increase,
year-on-year, and accounted for 61% the total
loan book as at year-end 2011. Moody's observes that
the level of Metcombank's related-party lending to Russia's
largest steel producer -- Severstal Group -- declined significantly
during the past three years. The level of related-party
lending in 2011 (according to audited IFRS) decreased to 31% of
Tier 1 and 4% of the loan book (2010: 58% and 10%,
respectively, and 2009: 78% and 20%, respectively).
In addition, 28% of related-party loans were collateralised
by related-party deposits, which mitigates the credit risk.
In recent years, the bank demonstrated adequate financial performance.
Metcombank's profitability was supported by increased net interest
margin of 6.8% in 2011 (2010: 5.2%),
mainly as a result of the performance of high-yield credit products;
however, profitability was negatively affected by revaluation of
securities, growing loan loss provision charges and higher operating
expenses. Going forward, Moody's believes that the
bank's profitability will continue to be negatively affected by
increasing loan loss provision charges. The bank's total
capital adequacy ratio stood at 11.6% as at 1 May 2012 (according
to Russian Accounting Standards). A new capital increase of RUB700
million in the form of a subordinated loan was injected in the first half
of 2012. Moody's notes that taking into account Metcombank's
growth plans, the bank will need further capital injections to maintain
a sufficient level capital adequacy. The aforementioned capital
increase is expected to come either from the International Financial Corporation
(which plans to acquire around 10% of Metcombank's capital)
or from the bank's shareholder.
Metcombank's asset quality is adequate to date, with problems
loans (defined as impaired and restructured) accounting for 4.5%
of the gross loan book at year-end 2011. However,
Moody's cautioned that -- in the context of such rapid loan
book growth in recent years -- higher risks could be revealed as
the new loan book (generated in 2010 and 2011) starts to season,
which is likely to result in an increase both in the level of problem
loans and in the loan loss provision coverage, thus exerting negative
pressure on the bank's asset quality and profitability indicators.
Despite the declining trend of related-party funding in 2011,
Metcombank's reliance on funds from Severstal Group still remains
considerable (59% of total non-equity funding as at year-end
2011 (according to IFRS), and an average ratio of 65% of
total non-equity funding -- taking into account fluctuation
of funds from Severstal group in 2011). The volatility of these
funds exerts negative pressure on Metcombank's liquidity position
thereby rendering the bank vulnerable to the substantial withdrawal of
funds. This situation is somewhat mitigated by (i) the long-standing
close business relationship between Metcombank and Severstal Group,
which have an agreement whereby Severstal Group seeks to maintain a minimum
balance on its deposit and current accounts amounting to RUB5 billion
and RUB2 billion, respectively, and (ii) sufficient amount
of liquid assets that the bank maintains its balance sheet.
Upward pressure could be exerted on Metcombank's B2 long-term
ratings as a result of (i) its ability to diversify its funding base away
from the largest related-party depositor, (ii) further improvements
in diversification of its business profile that will enable the bank to
improve its market shares, and (iii) the bank's ability to
maintain good financial indicators -- especially in asset quality,
in the context of a rapidly growing retail loan book. Negative
pressure could be exerted on the bank's ratings due to an increase
in related-party and single-name concentrations and/or weakening
of the bank's asset quality and capitalisation.
The methodologies used in this rating were Bank Financial Strength Ratings:
Global Methodology published in February 2007, and Incorporation
of Joint-Default Analysis into Moody's Bank Ratings:
Global Methodology published in March 2012. Please see the Credit
Policy page on www.moodys.com for a copy of these methodologies.
Headquartered in the City of Cherepovets, North-West region
of Russia, Metcombank reported total audited IFRS assets of RUB25
billion (US$778 million) and net income of RUB170 million (US$5.3
million) as at year-end 2011.
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Elena Redko
Asst Vice President - 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
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Yves J Lemay
MD - Banking
Financial Institutions Group
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Moody's upgrades Metallurgical Commercial Bank to B2; stable outlook
No Related Data.
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