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Moody's changes outlook on IBA-Moscow's deposit ratings to positive from stable and affirmed the ratings

August 27, 2014 | ​Moody's

On 27 August 2014 Moody's Investors Service has today changed to positive from stable the outlook on IBA-Moscow's B3 long-term local- and foreign-currency deposit ratings and affirmed the ratings. Concurrently, IBA-Moscow's standalone bank financial strength rating (BFSR) was upgraded to E+, equivalent to a baseline credit assessment (BCA) of b3, from E (formerly equivalent to caa1). The outlook on the bank's BFSR is stable. The bank's Not-Prime short-term local- and foreign-currency deposit ratings were also affirmed; the short-term ratings carry no specific outlook.

Moody's assessment is primarily based on IBA-Moscow's audited financial statements for 2013, prepared under IFRS.

RATINGS RATIONALE

-- STANDALONE RATINGS

The rating outlook change to positive from stable is driven by IBA-Moscow's sustained progress in strengthening its credit profile. The rating action reflects the bank's (1) improved asset quality metrics; and (2) improving capital adequacy following the recent Tier 1 capital contribution from the parent -- International Bank of Azerbaijan (IBA, deposits Ba3 positive; BFSR E+ stable/BCA b3).

Moody's notes that IBA-Moscow's standalone E+ BFSR remains constrained by: (1) the bank's limited local market franchise; (2) high loan book concentration, including high exposure to the construction and real estate sectors; (3) high level of restructured loans; and (4) high dependence on the parent's related business projects and funding. At the same time, Moody's notes that IBA-Moscow's standalone ratings are supported by the bank's adequate liquidity profile and moderate profitability.

Moody's notes that in July 2014 International Bank of Azerbaijan approved a RUB1.25 billion capital injection into IBA-Moscow's equity. The proceeds have been allocated to IBA-Moscow's statutory fund, while the Central Bank of Russia's registration of the equity issue is scheduled for October. This contribution is the largest in the past five years and will increase Tier 1 capital by 63% by year-end 2014 compared to year-end 2013.

In Moody's opinion, IBA-Moscow's asset quality remains challenged by a relatively high -- albeit decreasing -- level of restructured loans; under audited IFRS statements restructured loans as a proportion of gross loans fell to 19% at 31 December 2013 (year-end 2012: 30%; year-end 2011: 42%). Moody's understands that these loans have been granted for long-term investment projects, and are funded and guaranteed by International Bank of Azerbaijan.

IBA-Moscow's high credit concentration represents a key risk. As reported in audited IFRS statements at year-end 2013, the bank's aggregate exposure to the 23 largest customers amounted to 42% of total gross loans or 567% of its Tier 1 capital, although more than half of them is guaranteed by the parent. In Moody's opinion, these concentration levels render the bank vulnerable to the financial performance of a limited number of borrowers in risky market segments.

Moody's says that a significant portion of the bank's funding is parent-related, accounting for approximately 23% of IBA-Moscow's total liabilities as at 30 June 2014 (year-end 2013: 27%; year-end 2012: 38%) while customer accounts represented 58% of total liabilities (year-end 2013: 43%, year-end 2012: 33%). Moody's notes that in recent years IBA-Moscow notably decreased its dependence on parental funding and its main strategy is to further diversify funding sources.

In 2013, IBA-Moscow recognised a net income of RUB238 million which translates into 0.77% return on average assets (ROAA) and 8.91% return on equity (ROE). Profitability has been influenced by (1) pressured net interest margin (NIM); (2) deteriorated cost efficiency; and (3) moderate cost of risk. Moody's notes that NIM has been under pressure because it has been outpaced by the increase in cost of funds.

-- SUPPORTED RATINGS

Moody's assessment of a high probability of parental support from International Bank of Azerbaijan results in no rating uplift, as the parent's standalone BCA of b3 is at the same level as IBA-Moscow's standalone BCA.

WHAT COULD MOVE THE RATINGS UP/DOWN

IBA-Moscow's ratings, which carry a positive outlook, will likely be upgraded concurrently with the upgrade of the bank's parent, International Bank of Azerbaijan, whose ratings also carry positive outlook. The outlook on IBA-Moscow's ratings could be changed to stable following a similar change of outlook on the parent bank's ratings, or if the bank's sustainable positive trend in financial performance were to reverse.

Company: IBA-MOSCOW

Full company name"The Bank " IBA-MOSCOW" Limited liability company
Country of riskRussia
Country of registrationRussia
IndustryBanks

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