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Moody's affirms deposit ratings of VTB Bank (Armenia) at Ba3/B1; outlook negative

December 9, 2015
Moody's Investors Service has today affirmed VTB Bank (Armenia)'s long-term local currency deposit rating of Ba3 and the long-term foreign currency deposit rating of B1, as well as the bank's short-term local and foreign currency deposit ratings of Not-Prime. At the same time, the raging agency affirmed the bank's adjusted Baseline Credit Assessment of ba3, long-term Counterparty Risk Assessment (CRA) of Ba2(cr) and short-term Counterparty Risk Assessment (CRA) of Not-Prime(cr). Moody's downgraded the bank's Baseline Credit Assessment (BCA) to b2 from b1. All long term ratings carry a negative outlook.


Moody's downgrade of VTB Bank (Armenia)'s BCA to b2 from b1 is driven by: (1) the high, and increasing, share of non-performing assets in the bank's loan book that -- in Moody's opinion - are insufficiently covered by provisions; (2) the loss-making nature of its operations; and (3) dependence on capital injections from its core shareholder -- VTB Bank (Ba1/negative, b1). At the same time, the rating agency's affirmation of the bank's local currency deposit ratings of Ba3 incorporates its assumptions of a high probability of parental support from VTB Bank, resulting in a two-notch uplift from the bank's BCA of b2. The bank's foreign currency deposit rating of B1 is constrained by Armenia's country's ceiling for foreign currency deposits.

As of October 1, 2015, VTB Bank (Armenia)'s non-performing loans -- defined as overdue over 90 days -- accounted for a high 15.5% of the total gross loan book (in accordance with unaudited local GAAP accounts) and were only 41% covered by loan loss provisions. However, negative credit conditions in Armenia -- characterized by sluggish economic growth and challenges for local currency stability -- exerts pressure both on the quality of performing loan book and the recovery of the problem portfolio. The rating agency therefore anticipates further provisioning to be required in next 12-18 months. At the same time, the bank's profitability was already eroded by a squeeze in net interest margins and already-high credit costs.

Rapid increase of funding costs, with interest expenses at 7.1% of average interest bearing liabilities in January-September 2015 (up from 6.1% in 2014) and a drop in interest generating assets (with the loan book contacting by close to 20% over the same period and liquid assets growth driven by change in regulatory requirements for minimum reserves with the Central bank of Armenia) resulted in a sharp decline of VTB Bank (Armenia)'s net interest margin to 4.6% in Q1-Q3 2015 (down from 6.4% in 2014). As a result, the bank's operating revenues contracted by 24% and were not sufficient to cover operating expenses, and credit costs accounted for 2.9% of the average loan book in January-September 2015. Tight liquidity controls and high competition for local deposits are unlikely to ease pressure on the bank's recurring revenues in remaining 2015 and 2016. The rating agency does not therefore expect the bank's profitability metrics to recover soon.

Nevertheless, VTB Bank has been supportive to its Armenian subsidiary. In October 2015, VTB Bank Armenia received a ADM17 billion Tier 1 capital injection, which, in Moody's view, provides an adequate safety cushion against potential losses. A track record of ongoing capital and liquidity support as well as the high integration of VTB Bank (Armenia) to the group, supports Moody's view of the high probability of parental support in case of need. This results in a two-notch uplift of the bank's local currency deposit rating of Ba2 from its stand-alone BCA of b2.


Moody's considers that upward pressure on the long-term ratings of VTB Bank (Armenia) is unlikely given the negative outlook attached to the ratings due to a combination of negative pressure both on the parent bank's ratings and its stand-alone credit fundamentals. The supported ratings of the bank would be negatively affected if the ratings of VTB Bank were downgraded.

The bank's standalone credit BCA could come under pressure in the event of any further significant deterioration in its asset quality, profitability and stable-to-date liquidity profile amid the challenging domestic operating environment and/or the bank's specific issues.


The principal methodology used in these ratings was Banks published in March 2015. Please see the Credit Policy page on www.moodys.com for a copy of this methodology.


For ratings issued on a program, series or category/class of debt, this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the rating action on the support provider and in relation to each particular rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this rating action, and whose ratings may change as a result of this rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.
Company — VTB (Armenia)
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    AO "VTB Bank" (Armenia)
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