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Russia-Based Krayinvestbank Downgraded To 'B' And 'ruA-' On Owner's Weakened Capacity To Provide Support; Outlook Stable

October 2, 2014 Standard & Poor's
Oct. 2, 2014--Standard & Poor's Ratings Services said today that it had lowered its long-term counterparty credit rating on Russia-based Krayinvestbank to 'B' from 'B+' and affirmed the 'B' short-term counterparty credit rating. The outlook is stable.

At the same time, Standard & Poor's lowered the Russia national scale rating on Krayinvestbank to 'ruA-' from 'ruA'.

The downgrade reflects Standard & Poor's views that a significant weakening of Krasnodar Krai's budgetary performance and liquidity position have undermined its creditworthiness and hence its ability to support regional government-related entities such as Krayinvestbank. Krasnodar Krai owns 98.04% of Krayinvestbank, and Standard & Poor's previously factored one notch of uplift for extraordinary support from the region into the long-term rating on the bank. Standard & Poor's has removed this notch of uplift because Standard & Poor's now believes the region's capacity to provide such support has reduced. This is shown by the government's postponement of a capital injection to 2014 from 2013 and the decrease of that injection to Russian ruble (RUB) 500 million (about $13 million) from RUB2 billion. Standard & Poor's believes that limited capital support from the region and Krayinvestbank's weak earnings capacity constrain the bank's ability to strengthen its business position. The long-term rating on the bank now reflects its stand-alone creditworthiness.

Nevertheless, Standard & Poor's continues to regard Krayinvestbank as a government-related entity with a moderately high likelihood of extraordinary support. Krayinvestbank is ultimately controlled by the government of Krasnodar Krai, which keeps a tight rein on the bank's affairs with the deputy governor acting as the chairman of the board. The bank plays a public policy role for Krasnodar krai by lending to agricultural producers and financing local socially important investment projects.

Standard & Poor's still assesses Krayinvestbank's stand-alone credit profile at 'b'. Although the bank's earnings metrics are weak, earnings levels have been very stable over past years, including during downcycles. The bank benefits from its strong foothold in its home region, which allows it to generate stable revenues and maintain a solid deposit base. Like that of other Russian banks, Krayinvestbank's financial profile will continue to be influenced in 2014 and 2015 by the evolution of the cost of risk, which according to Standard & Poor's base case should be about 2%.

The stable outlook reflects Standard & Poor's expectation that, over the next 12-18 months, Krayinvestbank's capitalization and asset quality will remain resilient to mounting economic and industry risks in Russia. In particular, Standard & Poor's believes that Krayinvestbank's solid regional franchise will prove an advantage that supports stable deposits and the capacity to generate core revenues.

Standard & Poor's may take a negative rating action if the bank's liquidity position were to deteriorate abruptly, for example because of deposit instability, rising credit or funding costs, lower earnings, or a more aggressive risk appetite.

Standard & Poor's does not expect to raise the ratings in the currently depressed economic environment.
Company — Krayinvestbank
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