CIS Credit Monitor: Promsvyazbank

Promsvyazbank (BB-/Ba2/B+): FY2008 IFRS results
Promsvyazbank Eurobonds have been gradually recovering from 50% of par to 80%-90% of par since autumn 2008. The main upside potential has been realised and we give a Neutral recommendation on the Eurobonds.
Promsvyazbank reported its 2008 IFRS results last week and held a conference-call with investors. The main indicators have already been published; however, the IFRS report brings the NPL breakdown and FY2008 net income lower than expected (RUB 1.56bn instead of RUB 1.9bn). This was due to a higher-than-expected provision charge of RUB 18.5bn instead of RUB 13.2bn which led to a higher Q4 2008 net loss than expected of RUB 1.56bn. In addition, the bank posted a RUB 1.27bn trading loss, despite its trading book having had a quite conservative composition of securities and it used the option to reclassify some of the instruments as “held to maturity”.

The loan portfolio quality is facing a serious deterioration which is in line with the general banking system trends. The bank still posts quite a low NPL ratio (90+ days overdue) of 2.8% FYE 2008. In 9M 2008 the general NPL ratio was 1 p.p. lower, at 1.8%. We recall that the loan portfolio quality of the bank had been high historically. The quality of loans to corporate clients still remained strong with NPL ratio in 1.1% area in the main segments. In the factoring segment NPLs reached 2.8%, in SME 1.8%. The situation with loans to individuals seems far less favourable with NPLs in the consumer loans segment up to 10.8% from 4.2% in 2007, in auto loans segment to 10.2% from 3.2%. Loans to individuals account for only 15.7% of the bank’s loan portfolio and the low loan portfolio quality is well compensated for by the high quality of corporate loans. We believe that worsening economic conditions will lead to a deterioration in both segments.
The bank remains one of the most sustainable credits in the Russian banking universe in terms of debt repayments. FYE 2008 it had c. $3.5bn cash and equivalents on its balance sheet, two times covering outstanding debt securities. RUB 51 bn (c. $1.7bn) of the amount was provided by the Central Bank as term deposits, so the net position of the bank is around $1.8bn. We believe that the bank is able to repay the CBR funding, however it is using the money on the interbank market. The bank has liquidity gaps in its position on 1m – 1year horizon. Cumulative gap from 1-6m stood at RUB 42bn, from 6m to 1y – at RUB 36bn. The fact of increasing liquidity gaps seems to us negative, however we believe it should be manageable for the bank. The bank’s capitalisation seems to us sufficient, but not high, with TCAR of 13.1%. However, the bank is receiving regular capital injections from shareholders which help to support capitalisation at a sufficient level. We do not rule out that more capital will be needed by the bank in 2009.
In Q1 2009 the bank posted a net loss of RUB 1.9bn according to RAS. The loss was generated due to an additional loan provision in accordance with CBR regulations. the loan loss reserve increased to 8.2% of the total loan portfolio as of 1 April. The bank commented that the loss in January was due to the deterioration of the rouble-denominated loan portfolio. In February the loss was lower than in January and in March the bottom line changed sign to positive. The bank is planning to increase provisioning to 11% in 2009 and still expects a positive bottom line. We believe the bank will be able to remain profitable if it does not have to create provisions higher then 11% of gross loan portfolio.