(The following statement was released by the rating agency)
June 28 -
Overview
-- We believe B&N Bank's historically high concentration risks in Russia's weak construction and commercial real estate sectors will continue to decline. This has led us to change our assessment of the bank's risk position to moderate from weak.
-- In our view, B&N Bank also has a moderate business position, weak capital and earnings, average funding, and adequate liquidity. We assess B&N Bank as having sufficient liquidity for the next 6-12 months.
-- We are therefore raising our long- and short-term credit ratings on Russia-based B&N Bank to 'B/B' from 'B-/C' and the Russia national scale rating to 'ruA-' from 'ruBBB+'.
-- The stable outlook reflects our anticipation of a continuous improvement of the bank's risk position within the next 12-18 months as lending concentrations reduce and if the bank successfully implements its new strategy.
Rating Action
On June 28, 2012, Standard & Poor's Ratings Services raised its long-term counterparty credit rating on Russia-based B&N Bank to 'B' from 'B-' and the short-term counterparty credit rating to 'B' from 'C'. The outlook is stable.
At the same time, we raised the Russia national scale rating to 'ruA-' from 'ruBBB+'.
Rationale
The rating actions reflect the revision of our assessment of B&N Bank's risk position to 'moderate' from 'weak', as defined in our criteria. We base this on our anticipation of a substantial reduction of the bank's single-name and industry concentrations over the next two years. Concentration in commercial real estate and construction loans fell to 34% in 2011 from approximately 45% in 2010. We believe it will decline further by the end of 2012 and continue to do so if the bank successfully implements its new business strategy. This strategy aims to increase lending to small and midsize enterprises and individuals and eliminate the largest exposures.
As of Dec. 31, 2011, the top 20 borrowers represented more than 400% of B&N Bank's adjusted total equity (ATE) and 50% of its loans. By our calculations, these concentrations should decrease to about 260% of expected ATE in 2012, taking into account a planned equity increase of $100 million before the end of the year.
We assess B&N Bank's funding as 'average' and its liquidity as 'adequate', which underpins the raising of the short-term rating to 'B' from 'C'. We believe the bank to have sufficient liquidity for the next 6-12 months. This is based on our view of an adequate liquidity cushion that exceeded 20% of the bank's assets as of March 30, 2012, comprising cash, interbank placements, and liquid securities available for sale-and-repurchase transactions.
The bank's stand-alone credit profile (SACP) is at 'b', and our assessment of other components of the SACP is unchanged. Our ratings on B&N Bank reflect the 'bb' anchor we use for commercial banks operating in Russia and the bank's 'moderate' business position, 'weak' capital and earnings, 'moderate' risk position, 'average' funding, and 'adequate' liquidity.
We regard the bank's business position as 'moderate' due to its limited market shares. B&N Bank is a midsize commercial bank active in 34 regions of Russia, and it has a nationwide market share of less than 1% in loans and deposits. We assess capital and earnings as 'weak,' reflecting our projected risk-adjusted capital (RAC) ratio for the bank, before diversification, of 3.9%-4.3% over the next 18-24 months. The long-term counterparty credit rating reflects B&N Bank's SACP and does not include any uplift for extraordinary external support, either from the bank's shareholders or the government.
Outlook
The stable outlook reflects our assessment that the bank will likely maintain a positive financial performance, improve its margins, and generate adequate revenues to maintain its capitalization. Continuous reduction of concentrations in the loan book is crucial to our risk assessment and maintenance of the ratings.
We could take a positive rating action if the bank posted more conservative growth rates over time, without a significant deterioration of asset quality.
We could lower our risk assessment to 'weak' from 'moderate' and subsequently take a negative rating action if, contrary to our expectation, the bank were unable to reduce concentrations or experienced a setback in executing its new strategy. Deterioration of asset quality beyond what we anticipate, a sharp decline in liquidity reserves, or deposit outflows could also result in a negative rating action. If the RAC ratio were to deteriorate to less than 3%, this could also prompt a downgrade.
Ratings Score Snapshot
To From
Issuer Credit Rating B/Stable/B B-/Positive/C
SACP b b
Anchor bb bb
Business Position Moderate (-1) Moderate (-1)
Capital and Earnings Weak (-1) Weak (-1)
Risk Position Moderate (-1) Weak (-2)
Funding and Average and Average and
Liquidity Adequate (0) Adequate (0)
Support 0 0
GRE Support 0 0
Group Support 0 0
Sovereign Support 0 0
Additional Factors 0 0
Related Criteria And Research
-- Banks: Rating Methodology And Assumptions, Nov. 9, 2011
Ratings List
Upgraded; CreditWatch/Outlook Action
To From
B&N Bank
Counterparty Credit Rating B/Stable/B B-/Positive/C
Russia National Scale ruA-/--/-- ruBBB+/--/--
Senior Unsecured ruA- ruBBB+
Senior Unsecured B B-
Certificate Of Deposit B/B B-/C
(Bangalore Ratings Team, Hotline: +91 80 4135 5898 satish.kb@thomsonreuters.com, Group id: BangaloreRatings@thomsonreuters.com, Reuters Messaging: satish.kb.thomsonreuters.com@reuters.net)
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