Moscow, May 27, 2015 -- Moody's Interfax Rating Agency has today downgraded the National Scale Rating (NSR) of ProbusinessBank to Baa3.ru from Baa2.ru. The NSR carries no specific outlook.
Moody's rating action is primarily based on the bank's audited financial statements for 2014 prepared under IFRS, as well as information received from the bank.
Please see ratings tab on the issuer/entity page on moodys.com for information on Global Scale Rating.
Moody's says that the downgrade of ProbusinessBank's NSR 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 exertfurther 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 furtheraugmentation to preserve the entity's financial sustainability.
WHAT COULD MOVE THE RATINGS DOWN / UP
Further downward pressure might develop on ProbusinessBank's NSR 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.
The rating agency might upgrade the bank's NSR if it observes a sustainable stabilisation of the bank's asset quality, profitability and capital adequacy.