Moody's changes outlook on ProbusinessBank's B3 deposit ratings to negative
May 27, 2015 Moody's Investors Service
London, 27 May 2015 -- Moody's Investors Service has today affirmed ProbusinessBank's B3 long-term local and foreign-currency deposit ratings and changed the outlook of these ratings to negative from stable, owing to the rapid deterioration of the bank's asset quality and profitability, and its weakening capital buffer.
The ratings are aligned with the bank's b3 baseline credit assessment
(BCA) and do not incorporate any uplift from external support.
ProbusinessBank's b3 BCA was affirmed. Concurrently, Moody's affirmed ProbusinessBank's Not Prime short-term local and foreign-currency deposit ratings. The bank's provisional senior unsecured local and foreign-currency MTN program ratings of (P)B3, provisional subordinated local and foreign-currency MTN program ratings of (P)Caa1 and provisional short-term local-and foreign-currency MTN program ratings of (P)Not Prime were also affirmed.
Moody's assessment of ProbusinessBank's ratings is primarily based on the bank's audited financial statements for 2014 prepared under IFRS, as well as information received from the bank.
Moody's has also assigned long-term and short-term Counterparty Risk Assessments (CR Assessment) of B2(cr)/Not Prime(cr) to ProbusinessBank, following the rating agency's publication of its revised Banks methodology. Please click this link to access the methodology, published on 16 March 2015:
Moody's says that the change of outlook on ProbusinessBank's deposit ratings reflects (1) the heightened risks in the bank's loan portfolio that have caused a rapid deterioration of the bank's asset quality and profitability; and (2) its weakening capital buffer, which, coupled with substantial net IFRS losses posted in 2014 and insufficient coverage of problem loans by loan loss reserves, reveals overall weak loss-absorption capacity.
According to the rating agency, ProbusinessBank's asset-quality metrics are weak, as the proportion of problem loans in the bank's loan book remains high. At 1 January 2015, loans to retail customers and Small and Medium Sized entities (SMEs), which account for 65% of the bank's total gross loan portfolio and mainly comprise unsecured consumer loans, included 20.5% share of loans overdue by more than 90 days. These overdue loans were only 82% covered by loan-loss reserves, which represents low coverage compared to the average of more than 100% that most of other retail banks report. In the segment of large corporate borrowers, the proportion of impaired loans was 19.4% as of the same reporting date. The coverage of impaired large corporate loans by loan loss reserves was close to 100%, however, "watch-list" loans granted to large corporates accounted for another 8.8% of the total gross corporate portfolio at 1 January 2015 and the current hostile operating environment will exert further negative pressure on corporate borrowers' financial standing. As such, Moody's expects that further credit losses in this segment will crystallise.
ProbusinessBank reported RUB3 billion ($54 million) IFRS loss in 2014 translating into a negative Return on average equity (ROAE) of 21.1%.
Heightened credit costs was the main driver for the negative ROAE, as the bank's ratio of loan loss provisions to average gross loans grew to 11.2% in 2014 from 8.3% in 2013. The rating agency expects that losses will continue into 2015, given the need for further provisions as a result of asset-quality deterioration coupled with the low level of coverage of problem loans by loan loss reserves. Furthermore, ProbusinessBank's high exposure to market risk will also add volatility to the bank's financial performance. Market risk arises owing to the bank's investments in securities and non-core real-estate property accounting for 315% and 16%, respectively, of its Tier 1 capital as at 1 January 2015.
ProbusinessBank's Basel II total and Tier 1 capital adequacy ratios, as reported under consolidated IFRS, stood at 12.5% and 8.16%, respectively, at 1 January 2015, a low buffer, in Moody's view, given the insufficient loan loss reserves and the credit costs looming in 2015. The rating agency considers that ProbusinessBank's capital buffer needs further augmentation to preserve the entity's financial sustainability.
WHAT COULD MOVE THE RATINGS DOWN / UP
Further downward pressure might develop on ProbusinessBank's ratings as a result of (1) failure to recover and sustain profitability; and/or (2) failure to match any further deterioration of asset quality with an adequate increase in capital and/or loan loss reserves.
ProbusinessBank's B3 ratings are unlikely to be upgraded in the next 12 to 18 months given the negative outlook on the ratings. The rating agency might revise the outlook on the bank's deposit and debt ratings to stable if it observes a sustainable stabilisation of the bank's asset quality, profitability and capital adequacy.
ASSIGNMENT OF COUNTERPARTY RISK ASSESSMENTS
As part of today's actions, Moody's has also assigned long-term and short-term CR Assessments of B2(cr)/Not Prime(cr) to ProbusinessBank.
The CR Assessment reflects an issuer's ability to avoid defaulting on certain senior operating bank obligations and other contractual commitments, but it is not a rating. The CR Assessment takes into account the issuer's standalone strength as well as the likelihood of affiliate and government support in the event of need, reflecting the anticipated seniority of counterparty obligations in the liabilities hierarchy. The CR Assessment also takes into account other steps authorities can take in order to preserve the key operations of a bank in the event of a resolution.
Company — Probusinessbank