Moody's changes outlook on Credit Bank of Moscow's ratings to negative
MOSCOW. June 19 (Interfax) - Moody's Investors Service has changed the outlook on the B1 long-term global local and foreign currency deposit and senior unsecured debt ratings of Credit Bank of Moscow (CMB) to negative from stable and has affirmed all of the bank's global scale ratings, the ratings agency said in a statement.
At the same time, Moody's Interfax Rating Agency has downgraded CMB's long-term national scale credit ratings to A2.ru from A1.ru. Moscow-based Moody's Interfax is majority owned by Moody's, a leading global rating agency.
"The outlook change reflects Moody's concerns that the worsening economic conditions in Russia are likely to translate into a deterioration of CMB's financial fundamentals. In particular, potential asset quality deterioration is likely to deplete the bank's capital cushion and put some pressure on its liquidity, which is heavily dependent on wholesale funding," says Vladlen Kuznetsov, a Moscow-based Moody's Assistant Vice President-Analyst and lead analyst for this issuer.
Moody's notes that CMB's asset quality is particularly vulnerable to exposure to the sectors that currently dominate its loan portfolio such as trade and construction materials, which are currently experiencing difficulties. Although borrowers in these sectors vary in terms of financial standing, with some displaying quite solid financials, CMB's asset quality has already started to deteriorate in line with the overall macroeconomic environment, reflected in an increase in overdue loans and potential problem loans. Such loans increased several times from year-end 2007. In addition, the retail portfolio (1.4x equity) and, in particular, the mortgage portfolio (which accounts for 78% of equity and encompasses around 10% of restructured and overdue loans) also show signs of deterioration. This situation is aggravated by significant concentrations of loans in proportion to equity (e.g. the top 20 loans accounted for more than 1.7x total equity), thus placing additional pressure on economic capital.
Moody's explains that it has applied a number of scenarios (base-case and stressed) to the banks' loan books and reveals that CMB's capital adequacy could rapidly decline in the event of overall asset quality starting to deteriorate. However, a new RUB3 billion capital injection is expected to support the capital adequacy level above 8% in the base-case scenario, assuming the bank's loan book will not grow materially over the course of 2009. Moody's notes that the capital is expected to be registered by the end of June 2009. However, the planned growth (the loan book is expected to grow by 1.5 times during 2009) is likely to offset the benefits of additional capitalization.
Liquidity, while currently adequate, could be challenged by the significant increase in restructured loans during the period of planned growth. Moody's estimates that an increase in the ratio of extended loans to 15% of the loan book will force CMB to decrease new business generation by 40% in order to repay one-third of customer deposits, all financing from the Central Bank of Russia (CBR), which represents 19% of non-equity funding, and other short-term wholesale funding (around 17% of funding base). In addition, the bank has a good liquidity cushion with which to repay all short-term funding in case of restructuring the majority of CMB's loan book if the bank stops to generate new business. However, Moody's cautious that the bank's significant growth strategy, including a greater reliance on short-term funding in a deteriorating macroeconomic environment with an accompanying increase in delinquencies, is likely to place liquidity under pressure.
Moody's previous rating action on CMB was on 23 September 2008 when the rating agency changed the outlook on the bank's ratings to stable from positive.
Headquartered in Moscow, Russia, CMB reported total consolidated assets of US$2.1 billion and total shareholders' equity of US$218.7 million at year-end 2008. CMB is active in corporate and retail, with the majority of its operations concentrated in Moscow.