Moody's changes Bank Saint-Petersburg Outlook from stable to negative
MOSCOW. Oct 24 (Interfax) - Moody's Investors Service has changed to negative from stable the outlook on Bank Saint-Petersburg's standalone D- bank financial strength rating (BFSR), Ba3 long-term foreign currency deposit and B1 foreign currency subordinated debt ratings, the agency said in a press release.
Moody's has also affirmed the aforementioned long-term ratings, as well as the provisional Ba3 foreign currency senior unsecured, the provisional B1 foreign currency subordinated debt, and the Not-Prime short-term foreign currency deposit ratings.
The negative outlook on Bank Saint-Petersburg's long-term ratings reflects Moody's concerns about the risks associated with (1) the ongoing decline of the bank's pre-provision profit and net interest margin that undermines its ability to absorb potential losses and (2) the bank's recently weak loan book performance that has been exerting pressure on its bottom-line profitability and capital, i.e constraining growth of the bank's capital and business, thereby weakening the bank's ability to sustain increasing competition in the corporate lending segment (the bank's core revenue contributor). Moody's considers that Bank Saint-Petersburg's long-term ratings would likely be repositioned in a lower rating category if the bank is unable to stabilise its pre-provision income and capital in the next 12 to 18 months.
In H1 2012 Bank Saint-Petersburg's net interest income declined to 3.51% of average interest-earning assets (YE2011: 4.48%; YE2010: 4.70%; YE2009: 4.66%) as funding costs increased in line with the market trend while the bank's ability to transfer these rising costs onto customers was limited due to subdued loan demand. Moreover, additional problem loans crystallised in 2011 which lead to higher loan loss provisions and negative pressure on net income. The decline of Bank Saint-Petersburg's net interest margin, which represents the bank's core revenue contributor, negatively affected its recurring earnings power, as the bank's pre-provision income declined to 2.19% of risk-weighted assets in H1 2012 (YE2011:3.65%; YE2010: 3.92% YE2009: 5.15%).
Bank Saint-Petersburg's weak loan book performance in 2011 has led to the growth of the bank's problem loans (defined as individually impaired in the corporate segment, and 90+ days overdue in the retail segment) to RUB32.2 billion, or 13.2% of gross loans as at end-June 2012, from RUB22.0 billion, or 10.9% of gross loans as at YE2010. This growth has placed significant negative pressure on the bank's profitability and capital adequacy as the initial level of loan loss provisions, which stood at 9.6% of gross loans at YE2010, was insufficient to cover the expected level of losses that crystallised in 2011 - H1 2012. Moody's expects problem loans to continue undermine the bank's profitability in the coming year, as the rating agency expects that the accumulation of additional reserves will erode the bank's still healthy pre-provision income.
In Moody's view, the problem loan pressure negatively weighs on the bank's capital adequacy, as its internal capital generation has been recently weak while its risk-weighted assets have grown. As at end-June 2012, the bank's Tier 1 and total capital ratios under Basel I declined to 9.33% and 12.86%, respectively (2011: 10.17% and 13.92%, respectively). Currently tight capital adequacy constrains the bank's growth and weakens its ability to sustain credit and market shocks. This weakness is partly mitigated by the recent issuance of US$101 million subordinated debt that is to be included into Tier 2 capital.
Moody's notes that Bank Saint-Petersburg's ratings have limited upside potential as captured in the negative outlook. However, the outlook can be changed to stable if the bank stabilises its capital adequacy and profitability at higher levels.
Moody's says that Bank Saint-Petersburg's ratings could be downgraded if the bank is unable to stabilise its pre-provision income and capital at healthy levels in the next 12 to 18 months.
Headquartered in Saint-Petersburg, Russia, Bank Saint-Petersburg reported total (unaudited IFRS) assets of RUB341 billion ($10.4 billion) and shareholder equity of RUB39.5 billion ($1.2 billion) at June 30, 2012. Net income for the first six months of 2012 was RUB 237 million ($7 million), a substantial decline compared to RUB4.5 billion as at June 2011.
