Moody's downgrades Investtradebank's deposit ratings from 'B2' to 'B3', outlook stable
LONDON. Aug 15 (Interfax) - International ratings agency Moody's Investors Service has downgraded Investment Trade Bank's (Investtradebank) long-term local and foreign currency deposit ratings from 'B2' to 'B3', the agency said in a press release.
The outlook on the ratings is stable.
Concurrently, Moody's affirmed the bank's E+ standalone financial strength rating (BFSR) with stable outlook, as well as its Not Prime short-term local and foreign currency deposit ratings.
Moody's rating action on Investment Trade Bank's ratings is primarily based on the bank's audited financial statements for 2012 prepared under International Financial Reporting Standards (IFRS), the press release said.
The rating announcement primarily reflects Investment Trade Bank's weakening asset quality and potentially insufficient coverage of problem loans by loan loss reserves, its weak financial performance stemming from elevated credit losses, as well as the low capital adequacy level.
Moody's notes the bank's weakening asset quality metrics: although the share of loans overdue by more than 90 days increased moderately to 5.7% of total gross loans at year-end 2012 from 5.3% reported a year earlier, the share of corporate loans that are "impaired but not overdue" soared to 15.5% of gross loans from 7.2% as of year-end 2011. Against the background of these impairment dynamics, the coverage of problem loans (including 90+ overdue and impaired loans) by loan loss reserves (LLRs) appears low -- with the LLRs accumulated at year-end 2012 accounting for 9.1% of the gross loan book (2011: 7.8%). Moody's believes that Investment Trade Bank's management heavily relies on the collateral behind the impaired loans when estimating the bank's provisioning needs, however the rating agency has so far observed only limited progress in the sale of repossessed property by the bank. Moody's also notes high concentration of Investment Trade Bank's loan portfolio to the risky construction and real-estate segments: at January 1, 2013 these credit exposures together stood at 117% of the bank's total equity (a minor improvement from 149% reported at year-end 2011), the press release said.
Moody's explained that heavy provisioning charges (4.14% of average gross loans) have already hit Investment Trade Bank's profitability in 2012, whereby the bank posted a net IFRS loss of 400 million rubles for that year.
The rating agency does not rule out the possibility that further substantial credit losses may occur once the impaired loans migrate to the non-performing category.
Moody's cautions that Investment Trade Bank's capitalization does not provide an adequate buffer to cope with the above-mentioned asset-quality challenges. Although the bank's statutory capital adequacy (N1) ratio was boosted to 11.8% at July 1, 2013 through an attraction by the bank of a 2-billion-ruble subordinated loan, Moody's notes that willingness and financial flexibility of the shareholders to inject Tier 1 capital to the bank are uncertain. Importantly, according to the bank's audited financial statements for 2012 prepared under IFRS, approximately 34% of its equity remains tied up with non-core property holding repossessed as a result of foreclosure on defaulted loans. This further decreases the loss-absorption capacity of the capital buffer, while simultaneously jeopardizing the bank's financial performance as the liquidity of these assets is questionable and the current volatile economic conditions in Russia may drive material fluctuations in its market value, the press release said.
More positively, Moody's notes Investment Trade Bank's relatively good earning generation with pre-tax pre-provision income (PPI) accounting for 2.48% of average total assets in 2012, sound cost efficiency as reflected in its cost-to-income ratio of 52% in the same reporting period, as well as the bank's historically granular core customer funding.
An upgrade of Investment Trade Bank's deposit ratings is unlikely given the above-mentioned negative rating factors. Any upgrade may only materialize following a significant improvement in the bank's capital base and other financial fundamentals, and following a substantial reduction of its non-core investments and credit concentration levels, the press release said.
Investment Trade Bank's ratings could be downgraded if the bank faces further significant losses due to a reduction of fair value of its non-core assets and/or defaults by large borrowers, and if these losses are not sufficiently matched by capital injections from the shareholders.
Any material weakening of Investment Trade Bank's liquidity profile may also lead to a downgrade of its ratings, Moody's said.