Russian Peresvet Bank 'B+/B' Ratings Affirmed Despite Increased Economic And Industry Risks In Russia; Outlook Stable

 
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Research Update:
Russian Peresvet Bank 'B+/B' Ratings
Affirmed Despite Increased Economic
And Industry Risks In Russia; Outlook
Stable
Primary Credit Analyst:
Roman Rybalkin, CFA, Moscow (7) 495-783-4094; roman.rybalkin@standardandpoors.com

Secondary Contact:
Ekaterina Marushkevich, CFA, Moscow (7) 495-783-4135;
ekaterina.marushkevich@standardandpoors.com

Table Of Contents

Overview

Rating Action

Rationale

Outlook

Ratings Score Snapshot

Related Criteria And Research

Ratings List

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Research Update:
Russian Peresvet Bank 'B+/B' Ratings Affirmed
Despite Increased Economic And Industry Risks In
Russia; Outlook Stable
Overview
• We forecast that the Russian economy will contract in 2015 and then
  experience a prolonged period of, at best, slow growth, which will weaken
  Russian banks' asset quality and profitability.
• We expect the deteriorating economic environment will bring higher
  economic risks for Russian banks than we previously anticipated. For
  example, we expect lending growth will slow in 2015-2016 while credit
  costs increase.
• We consider Peresvet Bank's risk profile to be better than peers', due to
  the bank's sustainably stronger asset quality performance and higher
  capitalization than the system average.
• We are therefore affirming our 'B+/B' global scale and 'ruA+' national
  scale ratings on Peresvet Bank.
• The stable outlook reflects our expectation that Peresvet Bank's
  financial profile will show resilience compared with similarly rated
  peers during a challenging 2015.

Rating Action
As previously announced on Feb. 24, 2015, Standard & Poor's Ratings Services
affirmed its 'B+/B' long- and short-term counterparty ratings on Russia-based
JSCB Peresvet Bank. The outlook is stable.

At the same time, we affirmed the 'ruA+' Russia national scale rating on the
bank.

Rationale
The affirmation reflects our expectation that Peresvet Bank will be able to
cushion the impact on its credit standing of the higher credit losses and weak
profitability we anticipate, due to the deteriorating economic conditions in
Russia.

In our view, economic prospects in Russia over the next couple of years are
likely to remain significantly weaker than we had anticipated. We expect the
Russian economy to contract in 2015 and to see a prolonged period of, at best,
slow growth that will undermine the creditworthiness of both corporate and
retail clients. We anticipate that credit costs will be significantly higher

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Research Update: Russian Peresvet Bank 'B+/B' Ratings Affirmed Despite Increased Economic And Industry Risks
                                                                                     In Russia; Outlook Stable

than we expected for the next couple of years, depressing banks' margins and
profitability. We also expect Russian borrowers' limited access to external
capital markets and deteriorating investors' confidence will increase the
pressure on banks' funding profiles. We forecast that credit costs will reach
4.5%-5.5% of total loans in 2015-2016, and that, at best, the banking sector
will report only marginally positive profitability, with a significant
downside risk (see "Various Rating Actions Taken On Russian Banks Due To
Rising Economic Risk," published Feb. 24, 2015, on RatingsDirect).

In our view, both economic risk and industry risk have worsened for banks
operating in Russia, causing us to reassess our Banking Industry Country Risk
Assessment on Russia to group '8' from group '7'. Economic and industry risk
trends remain negative and we expect to see the operating environment for
Russian banks deteriorate further. As a result, we have revised down our
anchor--the starting point in assigning an issuer credit rating to a bank--for
banks operating in Russia to 'bb-' from 'bb'.

We have also revised our assessment of Peresvet Bank's risk position to
"adequate" from "moderate," to reflect the bank's financial metrics closer to
those for peer banks at a similar rating level. Therefore, we have maintained
our assessment of the bank's stand-alone credit profile (SACP) at 'b+'.

We believe that Peresvet Bank's capitalization will remain adequate in the
next 12-18 months. We project our risk-adjusted capital ratio for the bank,
before adjustments for concentration and diversification, will remain in the
8.0%-8.5% range, which is substantially higher than for similarly rated banks
in Russia. We base our forecast on the likely 15%-18% growth per year of
Peresvet Bank's balance sheet in the next 12-18 months, mainly on the back of
an expanding loan book.

Although we understand that Peresvet Bank has supported its net interest
margin at about 4.3% in 2014, we expect this margin will deteriorate by 25-50
basis points in the next 12-18 months and to be further offset by a
revaluation of currency swaps to cover the bank's short foreign currency
balance sheet position. Despite better-than-average loss experience and
changes in the provisioning policy that took place in 2013, we also factor in
a manageable rise in credit costs to 1.5% in 2015 and to 1.0% in 2016,
compared with 1.5% in 2009--when the Russian economy contracted by 8%--and a
2.2% peak in 2008.

Peresvet Bank's risk position compares favorably with those of rated peers
domiciled in countries where we assess economic risk at '8'. In particular,
concentrations on the largest borrowers appear to be adequate compared with
similarly rated banks (with the top 20 exposures constituting approximately
160% of total adjusted capital as of Dec. 31, 2014, compared with about 200%
for most peers). Peresvet Bank has a stronger-than-average loss experience,
with an average cost of risk of 0.6% in 2008-2014. Although this figure is
partly driven by the change in the provisioning policy in 2013 that resulted
in massive recovery of provisions, we expect nonperforming loans (NPLs; loans
overdue for more than 90 days) to remain very low. NPLs stood at less than 1%

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Research Update: Russian Peresvet Bank 'B+/B' Ratings Affirmed Despite Increased Economic And Industry Risks
                                                                                     In Russia; Outlook Stable

of total loans in 2014. We also note that the bank has a higher-than-average
share of loans with cash collateral (that is, a pledge of deposits with
Peresvet Bank or promissory notes of the bank itself). As of Sept. 30, 2014,
approximately 16% of the loan book had such collateral.

We consider that Peresvet Bank's unique ownership structure, in particular its
link with the Russian Orthodox Church, partly explains the bank's track record
of strong operating performance, because it ensures the sustainability of
business flows through different cycles. Moreover, when margins are squeezed,
the structure strengthens borrowers' willingness to pay.

Outlook
The stable outlook on Peresvet Bank reflects our expectation that the bank
will maintain much lower credit losses and problem loans than the system
averages in 2015, despite the recession we anticipate in Russia. We expect the
bank will generate sufficient earnings, while expanding its activities,
consequently avoiding pronounced erosion of its capital ratios and gradually
improving the granularity of its funding base.

We could lower the ratings in the next 12-18 months if Peresvet Bank's
liquidity cushions further reduced, if it had increasing recourse to
short-term funding sources, or if it continued its dependence on central bank
funding. If the bank's relationships with its largest clients from the
government-related entity sector deteriorate, resulting in deposit
withdrawals, this may also trigger a negative rating action. We could also
downgrade the bank if it fails to maintain at least moderate capitalization
following faster-than-expected expansion of credit risk or rapid weakening in
asset quality.

We do not expect to raise the ratings on Peresvet Bank in the current
depressed economic environment.

Ratings Score Snapshot
                                     To                              From
Issuer Credit Rating                 B+/Stable/B                     B+/Stable/B

SACP                                 b+                              b+
 Anchor                              bb-                             bb
 Business Position                   Moderate (-1)                   Moderate (-1)
 Capital and Earnings                Adequate (0)                    Adequate (0)
 Risk Position                       Adequate (0)                    Moderate (-1)
 Funding and                         Average (0)                     Average (0)
 Liquidity                           Adequate                        Adequate

Support                              0                               0

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Research Update: Russian Peresvet Bank 'B+/B' Ratings Affirmed Despite Increased Economic And Industry Risks
                                                                                     In Russia; Outlook Stable

 GRE Support                              0                              0
 Group Support                            0                              0
 Sovereign Support                        0                              0

Additional Factors                        0                              0

Related Criteria And Research
Related Criteria
• Bank Hybrid Capital And Nondeferrable Subordinated Debt Methodology And
  Assumptions, Jan. 29, 2015
• Quantitative Metrics For Rating Banks Globally: Methodology And
  Assumptions, July 17, 2013
• Banks: Rating Methodology And Assumptions, Nov. 9, 2011
• Banking Industry Country Risk Assessment Methodology And Assumptions,
  Nov. 9, 2011
• Bank Capital Methodology And Assumptions, Dec. 6, 2010

Related Research
• Various Rating Actions Taken On Russian Banks Due To Rising Economic Risk,
   Feb. 24, 2015
• Russia Foreign Currency Ratings Lowered To 'BB+/B'; Outlook Negative,
  Jan. 26, 2015
• Standard & Poor's Revises Its Crude Oil And Natural Gas Price Assumptions,
   Jan. 9, 2015

Ratings List

Ratings Affirmed

JSCB Peresvet Bank
 Corporate Credit Rating                B+/Stable/B
 Russia National Scale                  ruA+

Additional Contact:
Financial Institutions Ratings Europe; FIG_Europe@standardandpoors.com

Complete ratings information is available to subscribers of RatingsDirect at
www.globalcreditportal.com and at spcapitaliq.com. All ratings affected by
this rating action can be found on Standard & Poor's public Web site at
www.standardandpoors.com. Use the Ratings search box located in the left
column. Alternatively, call one of the following Standard & Poor's numbers:
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(46) 8-440-5914; or Moscow 7 (495) 783-4009.

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