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BANK ROSSIYA Upgraded To 'BB-/ruAA-' On Improved Capital Position; Outlook Stable

October 9, 2012 Standard & Poor's
• Pressure on BANK ROSSIYA's projected capitalization has eased thanks to its revised growth expectation, and we now expect that BANK ROSSIYA's RAC ratio before diversification adjustments will remain substantially above 5% in 2012-2014.
• We have revised our view of BANK ROSSIYA's capital and earnings to "moderate" from "weak".
• We are raising our long-term and national scale ratings on BANK ROSSIYA to 'BB-/ruAA-' from 'B+/ruA' and affirming the 'B' short-term rating.
• The stable outlook reflects our expectation that the bank will maintain moderate capitalization, given its revised growth strategy and sound earnings generation capacity over the next 12-24 months.

MOSCOW (Standard & Poor's) Oct. 9, 2012--Standard & Poor's Ratings Services said today that it had raised its long-term issuer credit rating on BANK ROSSIYA to 'BB-' from 'B+' and affirmed its short-term rating at 'B'. The outlook is stable. We also raised the Russia national scale rating on BANK ROSSIYA to 'ruAA-' from 'ruA'.

The upgrade reflects Standard & Poor's view of easing pressure on BANK ROSSIYA's projected capitalization from reduced future growth targets and continued sound profitability.

As a result, we believe that bank's risk-adjusted capital (RAC) ratio will remain consistently above 5% before adjustments for diversification in 2012-2014.

BANK ROSSIYA ranks among the Russia's 20-largest financial institutions and had total assets of Russian ruble 308.8 billion (about $9.4 billion) as of June 30, 2012. The bank's largest shareholders include Yuriy Kovalchuk (30.33%) and JSC Gazprom gas distribution (12.27%), the latter of which is an affiliate of OAO Gazprom (BBB/Stable/A-2), the world's largest gas producer.

In addition to "moderate" capital and earnings, our ratings on BANK ROSSIYA reflect the 'bb' anchor for a commercial bank operating only in Russia and our view of the bank's "moderate" business position, "moderate" risk position, "average" funding, and "adequate" liquidity. The stand-alone credit profile (SACP) is 'b+'.

The stable outlook reflects our base-case scenario, with a possible consolidation of Sobinbank by the end of 2013, and our expectation that BANK ROSSIYA will continue its growth strategy over the next 12-24 months. We expect that this strategy will bring some reduction in concentrations in the loan portfolio and funding and improve its net interest margin, but that it could potentially slightly weaken BANK ROSSIYA's asset quality metrics.

We could lower the ratings if BANK ROSSIYA's financial profile were to deteriorate notably, especially if its growth significantly exceeds our revised expectations and leads to renewed pressure on capitalization levels, with the RAC ratio falling below 5%. We could also lower the ratings if we see significant operational risks materializing as a result of the realization of the consolidation. The deposit base is very concentrated and reliant on some large depositors, including related parties. We could also lower the ratings if we perceive risks on increasing instability of these large deposits, as it would indicate a weakening of the bank's funding profile.

A positive rating action is currently a remote scenario. We could raise the ratings if the bank's business position improved to "adequate" from "moderate", observed through significant diversification and franchise growth. Improvements in the risk position, in particular a significant decrease in concentrations, could also foster an upgrade, although in our opinion such a situation seems further in the future than our two-year rating horizon.
Company — Bank Rossiya
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