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Moody's downgrades the deposit and debt ratings of Bank Petrocommerce to B1 from Ba3

September 28, 2012 Moody's Investors Service
All long-term ratings carry a negative outlook.

London, 28 September 2012 -- Moody's Investors Service has today downgraded the long-term foreign and local currency deposit ratings of Bank Petrocommerce (Petrocommerce) to B1 from Ba3. The local currency debt ratings were also downgraded to B1 from Ba3, and the standalone bank financial strength rating (BFSR) was downgraded to E+ from D-. The Not Prime short-term foreign and local currency deposit ratings were affirmed. The outlook on all long-term ratings is negative while the outlook on the bank's standalone BFSR is stable./// Please see ratings tab on the issuer/entity page on moodys.com for information on the National Scale Rating.

RATINGS RATIONALE

"The downgrade of Petrocommerce's ratings reflects its consistently weak financial fundamentals over recent years that prompted Moody's decision to reposition the bank's standalone rating into a lower rating category, resulting in a downgrade of the bank's standalone BFSR by one notch to E+ (now mapping to the standalone credit assessment of b1 -- formerly ba3)," says Semyon Isakov, a Moody's Assistant Vice-President and lead analyst for the bank.

Petrocommerce has changed its management team and it embarked on a new strategy that commenced in early 2011. This new strategy envisages greater focus on high-margin business, including lending to smaller companies and retail customers. According to Moody's, it is premature to ascertain whether this strategy will yield positive and sustainable outcomes given that the SME sector, whilst generating higher revenues, also involves higher risks. Petrocommerce's ability to create a prudent risk-reward lending framework also represents a key challenge for the bank.

As of YE2011, the level of Petrocommerce's problem loans (defined as individually impaired in the corporate segment, and 90+ days overdue in the retail segment) stood at RUB34.7 billion ($1.1 billion) or 23% of the gross loan book (vs. approximately 10% average for Russia), with the majority of problem loans concentrated in the corporate segment ("individually impaired" corporate loans amounted to RUB31.8 billion, in accordance with Petrocommerce's audited IFRS report as at YE2011). This level of non-performing loans demonstrates the poor quality of the bank's underwriting standards prior to the global financial crisis. Moody's notes that during the period 2009-H1 2012, Petrocommerce off-loaded RUB21.1 billion of problem loans at nominal value, having recorded an overall RUB6.2 billion profit from the sale of these problem loans. These problem loans were sold to a company controlled by the bank's shareholders, and Moody's considers profits recorded on these transactions to be a form of shareholder support.

Moody's believes that, over the medium term, Petrocommerce will not be able to recover most of these problem loans. In this context, the 12% of loan loss reserves created against problem loans as of YE2011 is unlikely to be sufficient to fully compensate for the expected level of credit losses that may additionally crystallise from the problematic loan portfolio in the longer term, thereby undermining the bank's capital adequacy ratio (as at end-June 2012, the Tier 1 ratio declined to 15.2%, from 16.2% at YE2011 and 18.3% at YE2010) and putting pressure on its profitability.

The implementation of Petrocommerce's new strategy that commenced in early 2011 has led to growth of the bank's loan book in H1 2012 (gross loans grew by 10.1%) and revenue (interest income grew by 31%, and net fee and commission income grew by 12%). However, Moody's notes that these positive results have been offset by the increase in average funding costs (to 5% in H1 2012, from 4.3% in H1 2011) and growth of operating expenses (28% in H1 2012) resulting in a still moderate level of net interest margin (3.1% in H1 2012) and profitability (return on average assets stood at 0.64% in H1 2012).

Petrocommerce's pre-provision income, excluding one-off gains earned from the bank's periodic sale of bad loans, was insufficient to absorb mounting pressure stemming from the bank's loan book, leading to operating losses in H1 2012. Petrocommerce has achieved a degree of progress in increasing the volume of its performing loan book and diversifying into new lending segments (share of retail loans and factoring (combined) grew to 19% of the total loans in H1 2012 from 16% in H1 2011).

However, the negative outlook on Petrocommerce's long-term debt and deposit ratings reflect both the risks associated with the execution of the bank's new strategy and the uncertainty about the bank's ability to rectify previous deficiencies. Consequently, Moody's believes there is a material risk that the bank will be unable to substantially improve its financial fundamentals over the medium term.
Company — Petrocommerce Bank
  • Full name
    Open Joint-Stock Company Commercial bank "Petrocommerce"
  • Registration country
    Russia
  • Industry
    Banks