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

November 17, 2015 | Moody's Investors Service

London, 16 November 2015 -- Moody's Investors Service has today changed to stable from positive the outlook on IBA-Moscow's B3 long-term local- and foreign-currency deposit ratings and affirmed the ratings. Concurrently, IBA-Moscow's standalone baseline credit assessment (BCA), adjusted BCA and counterparty risk assessment (CRA) were affirmed at b3 and B2(cr)/Not-Prime(cr), respectively. The bank's Not-Prime short-term local- and foreign-currency deposit ratings were also affirmed; theshort-term ratings carry no specific outlook.

Moody's assessment is primarily based on IBA-Moscow's audited financial statements for 2014, prepared under IFRS and local GAAP reports for H1 2015.

RATINGS RATIONALE

STANDALONE RATINGS
The rating outlook change to stable from positive is driven by the reversal of asset quality improvement trends seen in recent years. In Moody's opinion, IBA-Moscow's asset quality remains challenged by a relatively high level of impaired loans. Under audited IFRS statements, restructured loans as a proportion of gross loans increased to 32% as of December 31, 2014 (year-end 2013: 19%; year-end 2012: 30%; year-end 2011: 42%). As per management data, the level of restructured lending remained high and amounted to 26% of gross lending as of June 30, 2015. Moody's understands that these loans have been granted for long-term investment projects, and are largely funded and guaranteed by the parent company, the International Bank of Azerbaijan (Ba3 stable, b3 BCA).



Moody's notes that IBA-Moscow's BCA remains constrained by: (1) high level of restructured loans; (2) high loan book concentration, including high exposure to the construction and real estate sectors; and (3) 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 funding profile and moderate capitalisation.



IBA-Moscow's foreign currency exposure to largely unhedged borrowers and high credit concentration represents one of the key risks. As of mid-2015, foreign currency loans accounted for 76% of gross loans as per management data (year-end 2014: 76%). As reported in audited IFRS statements at year-end 2014, the bank's aggregate exposure to the six largest customers amounted to 29% of total gross loans or 404% of its Tier 1 capital, although the majority of this exposure is guaranteed by the parent company. 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 notes that although in recent years IBA-Moscow has notably decreased its dependence on parental funding, the share of parent-related resources remains significant, accounting for approximately 31% of IBA-Moscow's total liabilities as of June 30, 2015 (year-end 2014: 25%; year-end 2013: 27%). In addition, the parent company used to provide guarantees under the syndicated loans attracted by IBA-Moscow from local and foreign banks (around 13% of liabilities as of June 30, 2015).

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

Upward pressure on the ratings could develop following a material reduction in the volume of restructured loans or a BCA upgrade of the bank's parent company, the International Bank of Azerbaijan. Downward pressure on the bank's ratings could develop following higher-than-expected asset-quality deterioration and credit costs, which would significantly erode the bank's capital buffers.

Company: IBA-MOSCOW

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

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