Moody's downgrades Investment Trade Bank's deposit ratings to Caa3
August 24, 2015 Moody's Investors Service
London, 21 August 2015 -- Moody's Investors Service has today downgraded Investment Trade Bank's long-term global local and foreign currency deposit ratings to Caa3 from B3 and placed them on review for further downgrade. Also the rating agency affirmed the bank's Not Prime short-term local and foreign currency deposit ratings.
Concurrently, Moody's downgraded the bank's Baseline Credit Assessment (BCA) /Adjusted BCA to caa3 from b3 and placed them on review for downgrade.
Moody's downgraded the bank's long-term Counterparty Risk Assessment (CR Assessment) to Caa2(cr) from B2(cr) and placed it on review for downgrade.
The rating agency affirmed the bank's short-term CR Assessment of Not Prime(cr).
Moody's decision to downgrade the bank's ratings and place them on review for further downgrade follows the sharp deterioration in the bank's liquidity profile and its weakening capital buffer which has been eroded by substantial losses in the first half of 2015.
Investment Trade Bank's liquidity buffer declined sharply to 7% of total assets as of 1 August 2015 from 12% as of 1 July 2015, as reported under local GAAP. Furthermore, as cited by media sources, the bank has stated publicly that in August 2015 it has experienced an outflow of deposits in the Ivanovo region, which exceeded RUB2 billion. Moody's considers the bank's current liquidity cushion may be insufficient to withstand a further material liquidity stress, given the volatility of its deposit funding.
The rating agency also notes that Investment Trade Bank's solvency metrics point to increasing vulnerability. Moody's considers that Investment Trade Bank's capital adequacy has weakened due to the negative trends in asset quality and heightened credit costs, and these factors will continue to erode the bank's capital buffer further. As of 1 August 2015, Investment Trade Bank's regulatory total capital adequacy (N1.0) ratio stood at 10.44%, just marginally above the statutory minimum requirement of 10.0%, and the regulatory Common Equity Tier 1 (N1.1) ratio was 6.94% as of the same reporting date (compared to the statutory minimum requirement of 5%). These ratios reveal the bank's high reliance on Tier 2 capital components. Based on the latest available public information, Investment Trade Bank's shareholders intend to provide a RUB1.85 billion subordinated loan (Tier 2) to the bank, although this plan does not have a specific publicly available completion date. More importantly, there continues to be a significant degree of uncertainty regarding potential Tier 1 capital injection plans.
In addition, Investment Trade Bank's asset quality is weak, especially in corporate segment. According to 2014 audited IFRS, the proportion of corporate loans overdue by more than 90 days accounted for 9.9% of the bank's total corporate loan portfolio as of year-end 2014. At the same reporting date, the proportion of impaired corporate loans that are not overdue or those overdue less than 90 days was also material, at 4.9% of the total corporate loan book. Investment Trade Bank accumulated loan loss reserves at 7.5% of total gross corporate loans as at year-end 2014 under IFRS, which is weak in Moody's view.
This low provisioning policy applied in the past has resulted in heightened provisioning charges in 2015, whereby Investment Trade Bank's cost of risk (defined as loan loss provisions as a percentage of average gross loans) surged to 6.1% (annualised) in the first half of 2015 compared to 0.7% in 2014, as reported under local GAAP. This resulted in a RUB2.3 billion net loss posted by the bank for the first half of 2015 under local GAAP, which is equivalent to 18% of the bank's equity as of year-end 2014.
FOCUS OF THE REVIEW
In the process of Moody's review of Investment Trade Bank's ratings, the rating agency will monitor the bank's liquidity profile, stability of its deposit base and relevant remedial actions, as well as the extent to which the bank can rapidly replenish its capital buffer.
WHAT COULD MOVE THE RATINGS DOWN/UP
Moody's might downgrade Investment Trade Bank's ratings if the bank's liquidity profile and liquidity cushion continue to weaken. Further delays relating to capital injections to the bank may also contribute to a downgrade of the bank's ratings.
The ratings are currently on review for downgrade, therefore an upgrade is unlikely at this time.
Company — Investtorgbank
Full nameJoint-Stock Commercial Bank "Investment Trade Bank" (Open Joint-Stock Company)"