21 Sep 2009 13:48

Moody's downgrades Russia's Gazprombank to Baa3/E+; stable outlook

MOSCOW. Sept 21 (Interfax) - Moody's Investors Service has downgraded the following ratings of Gazprombank: bank financial strength rating (BFSR) to E+ from D-, long-term foreign and local currency deposit and debt ratings to Baa3 from Baa2 as well as the short-term foreign currency bank deposit rating to Prime-3 from Prime-2, the ratings agency said in a statement.

The outlook on all ratings is stable.

Concurrently, Moody's Interfax Rating Agency affirmed Gazprombank's Aaa.ru national scale rating for deposits. Moscow-based Moody's Interfax is majority-owned by Moody's, a leading global rating agency. This rating action concludes the review initiated on the BFSR in

April 2009.

The downgrade of the BFSR (which currently maps to a Baseline Credit Assessment (BCA) of B2), reflects the weakening in Gazprombank's financial fundamentals, in particular, weak capital position in relation to risks taken. The bank's shareholder equity decreased sharply in H2 2008, as a result of a large mark-to-market loss of around RUB90 billion (US$3.1 billion) on foreign exchange derivatives and securities, which was equivalent to 40% of H1 2008 equity (IFRS data). In order to hedge the large foreign exchange derivative position, the bank was thus forced to rapidly grow its FX-denominated loan book which resulted in further pressure on capital. As a result, the Tier 1 ratio declined to 7.8% at year-end 2008 from 19.9% at year-end 2007.

The pressure on Gazprombank's capital derives largely from its high exposure to credit and market risks. The rating agency's application of various scenarios (anticipated and worse-than- expected) to the bank's loan books suggests that Gazprombank's capital adequacy could suffer a further decline as its overall asset quality deteriorates, and that it is therefore likely to need additional recapitalization from its parent.

In addition to the credit risk, Gazprombank faces significant market risk arising from basis risk on its delta-hedged derivative position, which is also exerting significant pressure on its capital. As a result of potential defaults in the loan book, the derivative FX position could become imperfectly hedged and, in the event of a simultaneous significant exchange rate fluctuation, Moody's would expect Gazprombank to face further capital pressure.

Moody's views favorably the RUB25 billion (US$840 million) Tier 1 subordinated loan that Gazprombank received from its shareholders in Q3 2009 as well as the RUB75 billion (US$ 2.5 billion) Tier 2 loan approved by state corporation Vnesheconombank. The rating agency notes that while the subordinated deposits help the bank to comfortably meet the regulatory capital requirements, this capital is of a lower quality and is not eligible to cover potential credit losses and permanent market losses.

The downgrade of Gazprombank's debt and deposit ratings incorporate weaker stand-alone financial standing of the bank reflected in the downgrade of bank's BFSR to E+ (mapping into a BCA of B2) from D- (mapping into a BCA of Ba3). At the same time, Gazprombank's debt and deposit ratings continue to incorporate Moody's assessment of a very high probability of parental support from the leading Russian gas group Gazprom (stand-alone credit risk profile equivalent to a Ba1 and an issuer rating of Baa1/stable), and from the Russian government (debt rating of Baa1/stable), which in Moody's opinion, should provide the majority of support.

The previous rating action on Gazprombank was on 30 April 2009, when Moody's placed the D- BFSR on review for possible downgrade and affirmed all other ratings with a stable outlook.

Headquartered in Moscow, Russian Federation, Gazprombank -- the country's third-largest bank -- reported total assets of US$60.4 billion, equity of US$4.3 billion and profit of US$483 million under IFRS at end-Q1 2009. The parent, Gazprom, is a monopoly in the natural resources sector, controlled by the government of Russia. Gazprombank is the main settlement vehicle within Gazprom Group, and handles over 75% of the group's settlements. In addition, the bank actively participates in Gazprom's investment projects, and a large share of its deposits (ca. 33% at the end of Q1 2009) is related to the group. Gazprombank is an important payroll agent for the group, and its branch network is in suitable locations in order to best conduct these operations.