Actions follow global review of operating conditions in oil-exporting countries and sovereign debt ratings
Moody’s Investors Service has today placed on review for downgrade the ratings of 36 financial institutions domiciled in Russia and Kazakhstan, due to a combination of likely further erosion in the operating conditions for the financial institutions and their parent entities as well as fiscal pressure on the governments in these countries. The ratings of one entity were affirmed and its long-term deposit ratings were placed on negative outlook.
The baseline credit assessments (BCAs) of 17 of these financial institutions have been placed under review for downgrade to reflect (1) the risk that prolonged oil prices will weaken the macro environment and overall operating conditions for the banks to a greater extent than currently assumed in the bank ratings, resulting in (2) potential pressure on operating revenues; (3) weakening customer creditworthiness and, thus, the asset quality of banks; and consequently (4) higher risk of losses and capital erosion. Additionally, for those banks whose funding includes a substantial portion of market funds, refinancing costs could increase due to additional currency volatility or constrained access to international wholesale markets, further undermining margins and capital generation capacity.
The long-term ratings of 10 financial institutions (including three banks whose BCAs are also on review) have been placed on review for downgrade following the review for downgrade of the government debt ratings of Russia and Kazakhstan, announced on March 4, 2016. The review for downgrade on the sovereigns results from weakening economic and fiscal conditions which may reduce the creditworthiness of the public authorities. This may in turn restrict their ability to provide support to the banks in times of stress and has prompted a re-assessment of Moody’s government support assumptions incorporated in the banks’ ratings.
For six subsidiary banks, the review of the long-term ratings is driven by the weakening creditworthiness of their parents, whose capacity to support their subsidiaries may therefore likewise be constrained.
Finally, the foreign currency deposit ratings of a further six banks were placed on review for downgrade given the likelihood of a lower foreign currency deposit ceiling for Russia, given the review on the government debt rating.
Please click the following link to access the full List of Affected Credit Ratings, which is an integral part of this Press Release and identifies each affected issuer: http://www.moodys.com/viewresearchdoc.aspx?docid=PBC_188229
Today’s rating action is part of a global review of oil-exporting sovereigns and the banks that operate in these countries. For more information on the scope of the review, please follow this link: https://www.moodys.com/research/–PR_345161.
RATINGS RATIONALE
STANDALONE BANK CREDIT PROFILES
The key driver of today’s review for downgrade on the BCAs of 17 Russian and Kazakh banks relates to the expected weakening of the real economy and the potential transmission of this weakness to borrowers and thence to the banks themselves.
Oil prices have fallen substantially over the last six months and despite a recent bounce remain close to their lowest nominal price levels for over a decade. Moody’s has lowered its oil price assumptions considerably in light of the ongoing oversupply in the global oil markets and demand that remains tepid. Moody’s now sees a risk that prices may recover much more slowly over the medium term than the agency previously expected.
In this context, the risk of mutually reinforcing negative feedback between different parts of the real economy and the banking sector is growing. Weaker oil-related economic activity has already contributed to a broader slowdown, while associated domestic currency weakness has further contributed to a rise in risk aversion and a tightening of financial market conditions. Where government budgets are affected by lower commodity prices and depreciating currencies fuel inflation, room to mitigate the resulting downside risks by stimulating their domestic economies is limited.
If prolonged, higher funding costs and constrained market access for corporate borrowers and banks could have a larger impact on investment and economic growth than currently incorporated in our forecasts and ratings.
During the review period, Moody’s will assess (1) the extent to which weaker economic fundamentals will impact the operating environment for banks in Russia and Kazakhstan, as reflected in their macro profiles; and more particularly (2) the impact on banks’ top line income; (3) the potential for further deterioration in asset quality; (4) the banks’ ability to generate and retain capital; and (5) their funding and liquidity.
Similar considerations led to the change in outlook from stable to negative on the long-term deposit ratings of one Kazakh bank.
GOVERNMENT AND AFFILIATE SUPPORT
The review of the long-term ratings of 10 financial institutions is related to a potential weakening of the creditworthiness of oil-exporting governments as signaled by the review for downgrade of their ratings, which in turn results from (1) the possible reduced capacity of the Russian and Kazakh governments to provide support to the banks in times of crisis, and (2) the potential for reduced willingness to provide such support, as governments may want to reduce contingent liabilities in order to protect their own fiscal strength.
During the review, Moody’s will (1) assess the extent to which the governments’ creditworthiness is expected to weaken in light of low oil prices and related economic developments, as will be indicated by the conclusion of the parallel review for downgrade of the sovereign ratings; and (2) assess the likelihood of a shift in policy towards the resolution of ailing banks, and more particularly any evidence that the authorities may want to become more selective in providing support in the future.
In addition, the long-term ratings of six subsidiary banks of Russian and Kazak financial groups have been placed under review for downgrade due to the review for downgrade on the ratings of their parents. These reviews will re-assess affiliate support for these subsidiaries and the degree of uplift that is currently incorporated in the long-term ratings of the subsidiary banks.
FOREIGN CURRENCY COUNTRY DEPOSIT CEILING
Foreign currency deposit ratings are subject to the foreign currency deposit ceiling which is driven by the government debt rating and is currently Ba2 for Russia. A lower rating for Russia would likely lead to a lower deposit ceiling, and hence would affect the foreign currency deposit ratings of six entities which are currently at the same level as the ceiling.
WHAT COULD MOVE RATINGS UP OR DOWN
There is limited upside to the ratings of banks in Russia and Kazakhstan as reflected in the current review for downgrade on both the sovereign and the banks.
For banks placed under review for downgrade as a result of potentially weaker BCAs, ratings could be downgraded if Moody’s anticipates that the deterioration in the macro environment will lead to a meaningful weakening in asset quality and/or in the capital generation capacity of the banks. This would likely be reflected in lower macro profiles.
For banks placed under review for downgrade because of potentially lower government or affiliate support, the ratings could be downgraded if Moody’s concludes that the government’s or parent’s capacity and / or willingness to provide support in the future is materially affected by the weakening environment.
For banks placed under review due to the country’s foreign currency deposit ceiling, the ratings would be downgraded if the ceiling is revised downwards in parallel with the government debt rating.
The principal methodology used in rating Bank CenterCredit, House Constr. Sav. Bank of Kazakhstan JSC, Halyk Savings Bank of Kazakhstan, AO RAIFFEISENBANK, Absolut Bank, Bank VTB, JSC, Alfa-Bank, Sberbank, VTB24, Asian – Pacific Bank, Bank Saint-Petersburg PJSC, Transkapitalbank, International Financial Club, RGS Bank, SME Bank, Vozrozhdenie Bank, SB Sberbank JSC, Russian Agricultural Bank, Metallinvestbank JSCB, Natixis Bank JSC, Eximbank of Russia, Center-Invest Bank, Russian Regional Development Bank, Far Eastern Bank, Rusfinance Bank, Bank of Moscow, Commercial Bank Agropromcredit, NBD Bank, Gazprombank, JSB Rosbank, DeltaCredit Bank and ING Bank Eurasia was Banks published in January 2016.
The principal methodologies used in rating Development Bank of Kazakhstan, Agency for Housing Mortgage Lending JSC, Fund Of Financial Support for Agriculture and Vnesheconombank were Banks published in January 2016, and Government-Related Issuers published in October 2014.
The principal methodology used in rating DBK Leasing was Finance Companies published in October 2015.
Moody’s National Scale Credit Ratings (NSRs) are intended as relative measures of creditworthiness among debt issues and issuers within a country, enabling market participants to better differentiate relative risks. NSRs differ from Moody’s global scale credit ratings in that they are not globally comparable with the full universe of Moody’s rated entities, but only with NSRs for other rated debt issues and issuers within the same country. NSRs are designated by a “.nn” country modifier signifying the relevant country, as in “.za” for South Africa. For further information on Moody’s approach to national scale credit ratings, please refer to Moody’s Credit rating Methodology published in June 2014 entitled “Mapping Moody’s National Scale Ratings to Global Scale Ratings”.
THE LIST OF AFFECTED RATINGS:
The BCAs of the following entities were placed on review for downgrade:
Halyk Savings Bank of Kazakhstan
AO RAIFFEISENBANK Absolut Bank Alfa-Bank Sberbank Asian - Pacific Bank Bank Saint-Petersburg PJSC Transkapitalbank International Financial Club RGS Bank Vozrozhdenie Bank Metallinvestbank JSCB Eximbank of Russia Center-Invest Bank
Commercial Bank Agropromcredit
NBD Bank
DeltaCredit Bank
The long-term ratings of the following entities were placed on review for downgrade due to government and affiliate support:
Development Bank of Kazakhstan
DBK Leasing
House Constr. Sav. Bank of Kazakhstan JSC
Bank VTB, JSC Alfa-Bank Sberbank VTB24
Agency for Housing Mortgage Lending JSC
SME Bank
SB Sberbank JSC
Fund of Financial Support for Agriculture
Eximbank of Russia
Russian Regional Development Bank
Far Eastern Bank Bank of Moscow Vnesheconombank
The FX deposit ratings of the following entities were placed on review for downgrade due to the country FX deposit ceiling:
Russian Agricultural Bank Natixis Bank JSC Rusfinance Bank Gazprombank JSB Rosbank ING Bank Eurasia
The ratings of the following entity were affirmed and placed on negative outlook:
Bank CenterCredit
The material has been provided by InstaForex Company – www.instaforex.com