S&P lowers Promsvyazbank long-term ratings to 'B', affirms short-term rating
LONDON. Sept 11 (Interfax) - Standard & Poor's Ratings Services has lowered its long-term counterparty credit ratings on Russia-based Promsvyazbank OJSC (PSB) to 'B' from 'B+', the ratings agency said in a statement.
At the same time, S&P affirmed the short-term ratings on PSB at 'B'. In addition, S&P removed all long-term ratings from CreditWatch with negative implications, where they were placed on June 17, 2009. The outlook is stable.
"The downgrade on PSB reflects our opinion of the significant systemwide risks in the Russian Federation and in the Russian banking sector," said Standard & Poor's credit analyst Sergey Dementiev. S&P expects the Russian economy to contract 8% in 2009, which may lead to further erosion in PSB's asset quality, high provisioning requirements, strains on the bank's funding, and marginal capitalization. However, S&P believes that PSB's good franchise and adequate corporate governance partially mitigate these negative factors.
The ratings on PSB reflect the bank's stand-alone credit profile and do not include any uplift for extraordinary external support either from the owners or the government. In line with the Russian banking industry, asset quality has been rapidly deteriorating since autumn 2008. Standard & Poor's estimates that nonperforming loans (principal and/or interest overdue by more than 90 days, and restructured loans) rose to 7%-9% of gross loans in first-half 2009, driven by mounting losses in the retail book, and will continue to increase in second-half 2009. In the agency's opinion, additional provision for loan impairments is likely to cause a net loss for PSB for the year. Credit exposure to related parties was over one-third of adjusted total equity (ATE; based on Standard & Poor's methodology) at June 30, 2009.
PSB is vulnerable to high concentration in corporate deposits, and it experienced a 14% corporate deposit outflow in October 2008. During the liquidity squeeze of fourth-quarter 2008, PSB borrowings from the Central Bank of Russia reached $1.7 billion. This declined to $430 million (4% of liabilities) at Sept. 1, 2009. The bank's liquidity position has stabilized, but we believe that funding remains a point of vulnerability for PSB and most private sector Russian banks.
Capitalization has declined over the past few years due to rapid credit expansion. As the loan portfolio decreased in first-half 2009, ATE-to-adjusted assets recovered to about 9% from 8%. Prospects for internal capital generation are dim over the medium term, and the bank is considering various alternatives to raise external capital.
"We expect that PSB's financial performance will continue to erode as the recession takes its toll on Russian companies and households that are customers of the bank," Dementiev said. "Nonetheless, we believe that PSB has sufficient pre-provision operating income and overall franchise strength to survive the downturn under our base-case scenario," he added. In addition, in the agency's view, the supportive actions of the Russian government have calmed the turbulence in the funding markets and cushioned the shock of the recession for the banking sector.
A rating upgrade would be dependent on a return to profit, an increase in high quality Tier 1 capital, and reduced related-party exposure. S&P would lower the ratings on PSB if credit and liquidity erode beyond our expectations, and if the bank's financial and business profiles deteriorate to a significant degree.