Fitch Rates Russia’s Primsotsbank 'B-'; Outlook Stable
February 4, 2009 "Fitch Ratings"
Fitch Ratings-London/Moscow- 3 February 2009: Fitch Ratings has today assigned Russia’s Primsotsbank (Primsots) a Long-term Issuer Default Rating (IDR) of 'B-' (B minus) with a Stable Outlook. A full list of assigned ratings is provided at the end of this announcement.
Primsots’s ratings reflect its limited franchise and small size by international standards, high credit risk exposure from its loan portfolio, potentially vulnerable liquidity and modest capitalisation. The ratings also take into account its historically good profitability and internal capital generation, the current reasonable liquidity position and potential support for funding and corporate governance from the bank’s minority shareholders, the European Bank for Reconstruction and Development (EBRD) and International Finance Corporation (IFC).
Primsots’s reliance on on-demand and short-term deposits for its funding means it tends to run sizeable negative liquidity gaps on its balance sheet. The risk is exacerbated by the early withdrawal option for retail term depositors, with retail funding in total accounting for 54% of liabilities at end-Q308. At the same time, Primsots focuses on short-term, high-yield and amortising and, therefore, highly cash-generative lending. This makes the bank more able to swiftly adjust its balance sheet structure when necessary. Between end-September and end-December 2008, when its liquidity position came under pressure due to an approximate 10% outflow of customer funding (broadly in line with the overall Russian banking system), Primsots managed to reduce its loan portfolio by almost 20%, enabling it to build up a reasonable liquidity cushion by end-2008 despite the deposit outflow. At year-end 2008, available liquidity (cash and cash equivalents) provided 33% coverage of customer funding.
Primsots’s main focus is on lending to SMEs and unsecured retail lending, which results in relatively high credit risk exposure. Nevertheless, Primsots has maintained an acceptable level of loan quality. NPLs (those more than 90 days in arrears) accounted for 3.8% of gross loans at end-Q308, with loan impairment reserves (LIR) covering them by 182%. However, Fitch expects asset quality to deteriorate from Q308 given the sharp weakening of economic fundamentals in Russia. In this light, although supported by healthy internal capital generation and contracting risk-weighted assets, Fitch considers the bank’s capital adequacy measures to be fairly modest at present (total capital adequacy ratio (CAR): 12.6%, Tier 1 CAR: 12% under Basel I at end-Q308).
Primsots is a small regional bank with a niche franchise centred on the city of Vladivostok in the Russian far east. The EBRD and IFC acquired a combined 25% of the bank in 2007. The remainder is owned by the bank’s CEO and his son.
Primsots’s ratings have been assigned as follows:
Long-term IDR: ‘B-’ (B minus); Outlook Stable
Short-term IDR: 'B'
Support rating: ‘5’
Support Rating Floor: No Floor
National Long-term rating: ‘BB(rus)’; Outlook Stable
Individual rating: 'D/E'
Company — PRIMSOTSBANK
Full nameThe Public Joint Stock Social Commercial Bank of Primorye