2 Dec 2013 20:03

S&P improves Soyuz bank rating to positive

MOSCOW. Dec 2 (Interfax) - Standard & Poor's (S&P) has improved its long-term counter-party rating outlook on Bank Soyuz from stable to positive and has affirmed the rating of "B", the agency said in a press release.

S&P also raised the short-term counterparty credit rating to "B" from "C". "We also raised our Russia national scale rating on the bank to 'ruA' from 'ruA-'," the press release says.

"The rating actions reflect our view that Bank Soyuz's earnings capacity and the quality of its revenues are improving, which should support a gradual buildup of capital. We believe this stems from Bank Soyuz's new strategy, which focuses on increasing the efficiency of its cooperation with parent company Ingosstrakh and with Basic Element," S&P said.

"We anticipate that the bank's credit portfolio will start to increase in 2014 and achieve growth rates of 20%-25% in 2015. In our view, Bank Soyuz is unlikely to obtain additional external capital over the next two to three years. Therefore, we consider retained earnings to be its only means of building up capital in the near future. At the same time, increasing the retail loan portfolio would support a net interest margin of about 4% in next 12-18 months," the press release says.

"As a result of cost optimization and loan portfolio recovery, Bank Soyuz has shown substantially improved profitability this year. For the nine months ended Sept. 30, 2013, the bank recorded a net profit of Russian ruble (RUB) 1.7 billion (about $53 million), compared with RUB289 million for the corresponding period in 2012."

"We expect this trend to continue in 2014, with the bank generating RUB1.5 billion to RUB2 billion of net profit and a return on equity of 12%-14%. The bank's future profitability will likely benefit from higher margins in the retail segment and cooperation with Ingosstrakh--one of the largest non-life insurers in Russia--which has a large retail client base. We believe cross-selling capacities are substantial, and access to Ingosstrakh's clients could become a competitive advantage for Bank Soyuz, whose own retail franchise is otherwise limited. As a result, we believe that retained earnings will support the bank's capitalization at least at current levels. We project a risk-adjusted capital (RAC) ratio for Bank Soyuz, before adjustments for diversification, of 5%-6% over the next 12-18 months."

"However, although improving, we still assess Bank Soyuz's earnings capacity as

moderate because of challenges relating to its new strategy," it says.

"We base our ratings on Bank Soyuz on its 'bb' anchor for banks operating predominantly in Russia, and our view of the bank's "moderate" business position, "weak" capital and earnings, "weak" risk position, "average" funding, "adequate" liquidity, and "low" systemic importance in Russia, as defined in our criteria."

"The positive outlook reflects the possibility of an upgrade if the quantity and quality of Bank Soyuz's profitability continue to improve, allowing the bank to sustain its capital position at least at the current level. Stable core earnings sufficient to sustain a RAC ratio exceeding 5% over the business cycle would support an upgrade."