Moody's downgrades Absolut Bank's deposit ratings to B1; outlook stable
MOSCOW. May 31 (Interfax) - Moody's Investors Service has downgraded the long-term local- and foreign-currency deposit ratings of Absolut Bank (Russia) to B1 from Ba3, the agency said in a press release.
Concurrently, Moody's has affirmed the bank's E+ standalone bank financial strength rating (BFSR) (equivalent to a baseline credit assessment of b1), as well as its Not Prime short-term local- and foreign-currency deposit ratings. The outlook on the long-term ratings is stable.
Moody's assessment is primarily based on the public statements made by Absolut Bank's former shareholder, KBC Group (KBC), and representatives of Russia's Non-State Pension Fund "Blagosostoyanie" (NSPF Blagosostoyanie, not rated) which controls Absolut Bank's new shareholder, Open Joint Stock Company "United Credit Systems" ("United Credit Systems", not rated). The rating agency's assessment is also based on Absolut Bank's audited financial statements for 2012 prepared under IFRS.
The rating action completes the review initiated by Moody's in January 2013 following the announcement made by KBC -- which at that time owned a 99% stake in Absolut Bank via its subsidiary KBC Bank NV (deposits A3 stable, BFSR D+ stable/BCA baa3) -- that it would sell its stake in Absolut Bank to a group of Russian companies managing assets of Russia's NSPF Blagosostoyanie. On 24 May 2013, the parties announced the completion of the deal whereby "United Credit Systems", controlled by NSPF Blagosostoyanie, has acquired 100% stake in Absolut Bank.
Moody's explains that up until the finalisation of the transaction, Absolut Bank's long-term deposit ratings had benefited from one notch of support uplift from the bank's b1 baseline credit assessment (BCA), which reflected the rating agency's assessment of a low probability of parental support from KBC. On initiation of the review, Moody's had signalled its intention to remove this one notch of uplift on completion of the transaction, and following completion, Absolut Bank's long-term deposit ratings were downgraded to B1 (with stable outlook) and are now aligned with the bank's b1 BCA.
The rating agency adds that Absolut Bank's global local currency (GLC) deposit ratings of B1/Not Prime do not currently incorporate any support either from its new direct shareholder, "United Credit Systems", or from the ultimate parent, NSPF Blagosostoyanie, as Moody's does not rate these entities and therefore it is not possible for the rating agency to incorporate parental support in accordance with Moody's Joint Default Analysis Methodology.
According to Moody's, Absolut Bank's standalone BFSR of E+ (equivalent to a b1 BCA) is constrained by the bank's weakened franchise, as reflected in a reduction of its loan book by approximately 50% during the period 2008-12, which, in turn, undermines Absolut Bank's recurring earnings generation, as the bank reported weak return on average assets (ROAA) and return on average equity (ROAE) of 1.1% and 6.9%, respectively, in 2012.
The rating agency also notes Absolut Bank's heightened dependence on concentrated sources of funding, although this will likely be offset going forward by financial facilities provided by NSPF Blagosostoyanie.
Overall, Moody's expects that the new ownership structure will likely contribute to gradual restoration of Absolut Bank's business volumes and market franchise, but the rating agency will also need to assess the quality of the potential growth.
More positively, Absolut Bank's standalone credit quality is underpinned by the bank's solid capital cushion (with Basel II Tier 1 and total capital adequacy ratios reported at 20.8% and 22.7%, respectively, at year-end 2012) and the recent improvements in its risk profile and credit quality metrics. In particular, the bank's 10 largest credit exposures accounted for about 47% of its Tier 1 capital, and its aggregate exposure to the construction and real estate sectors stood at 18% of Tier 1 capital at year-end 2012, which compare favourably to Absolut Bank's Russia-based peers.
There is currently little scope for upwards rating pressure; however, this could develop over time following improvement in Absolut Bank's franchise value and profitability metrics, if they continue to be accompanied by good capital adequacy and sound asset quality.
Negative pressure could be exerted on Absolut Bank's ratings as a result of any weakening of the bank's financial fundamentals, in particular, its profitability, asset quality and/or liquidity profile.
Headquartered in Moscow, Russia, Absolut Bank reported total audited IFRS assets of US$3.5 billion and total shareholder equity of US$584 million as at year-end 2012.
