November 27, 2012 |
• In our opinion, Russia-based Mezhtopenergobank OJSC (MTEB) has a moderate business position, weak capital and earnings, moderate risk position, average funding, and adequate liquidity.
• We are assigning our 'B/B' long- and short-term ratings and our 'ruA-' Russia national scale rating to MTEB.
• The stable outlook balances the positive impact of MTEB's gradually expanding customer franchise on its funding profile and earnings generation, with its still limited market share in Russia, high concentrations in real estate and construction, and weak capitalization.
Standard & Poor's Ratings Services said today that it has assigned its 'B/B' long- and short-term counterparty credit ratings to Russia-based Mezhtopenergobank OJSC (MTEB). The outlook is stable. At the same time, we assigned our 'ruA-' Russia national scale rating to the bank.
The ratings reflect the 'bb' anchor for a bank operating primarily in Russia, as well as MTEB's "moderate" business position, "weak" capital and earnings, "moderate" risk position, "average" funding, and "adequate" liquidity, as our criteria define these terms. We assess MTEB's stand-alone credit profile (SACP) at 'b'. We do not incorporate any parent or government support into the ratings.
We view MTEB's business position as "moderate" based on the bank's still limited market share in Russia. Still, the bank targets growth in line with the banking sector average, with annual 20% growth rates, further business diversification followed by a reduction of its exposures to the construction sector, and the development of retail products.
We assess MTEB's capital and earnings as "weak." The bank's risk-adjusted capital (RAC) ratio before diversification adjustments was 4.7% at year-end 2011. We project the RAC ratio will stand slightly below 5% over the next 12-18 months, taking into account an annual 20% loan growth and MTEB's planned issue of RUB785 million preferred shares by year-end 2013 and of RUB500 million common shares in 2014.
Our "moderate" assessment of MTEB's risk position primarily reflects the bank's high concentrations in residential real estate and construction, which we understand the bank will scale back. The bank's concentration risk is mitigated by its long-standing expertise in the construction industry, thorough analysis of developers and regular monitoring, policy not to lend to start-up developers, and short-term loan maturities.
The bank's asset quality has been generally stable in recent years and in line with the banking sector average. Following the increase in the cost of credit at the peak of the 2008/2009 financial crisis, loan loss provisions started to recover. MTEB's nonperforming loans (NPLs; overdue more than 90 days) amounted to 4.03% on June 30, 2012, and 3.08% on Oct. 1, 2012, after a RUB238 million write-off. Restructured loans accounted for 6.4% of the loan book on Oct. 1, 2012. We expect asset quality to remain fairly stable, with NPLs of about 4% over the coming year and the cost of credit in line with the banking sector average. MTEB's loan loss reserves fully cover its NPLs.
MTEB's funding is "average" and liquidity "adequate," in our view. MTEB's funding base is mainly comprised of customer deposits (83% of liabilities). The bank's share of retail deposits significantly increased to 48% at year-end 2011 after its merger with Alemar Bank. The loan-to-customer deposits ratio was 103.5% on June 30, 3012, in line with the system average. MTEB's deposit base is rather diversified, with its top 20 clients accounting for 26% of total deposits. The bank also has RUB3.7 billion worth of promissory notes issued (13% of the funding base) and plans to place a RUB1.5 billion three-year bond in the near future.
The stable outlook balances the positive impact of MTEB's gradually expanding customer franchise on its funding profile and earnings generation, with its still limited market share in Russia, high concentrations in real estate and construction, and weak capitalization.
We would consider taking a positive rating action if the bank improved its capitalization and maintained an RAC ratio sustainably above 5%. This could occur thanks to additional capital injections, or if MTEB's retained earnings increased at a faster pace than its risk-weighted assets owing to its more diverse revenue streams.
We would consider taking a negative rating action if MTEB's asset quality deteriorated significantly, with NPLs and cost of credit rising above the banking sector average. We would also consider lowering the rating if significant loan growth in risky segments resulted in an RAC ratio below 3%, or if liquid assets markedly diminished, thereby weakening the bank's liquidity position.
|Full company name||PJSC «Mezhtopenergobank»|
|Country of risk||Russia|
|Country of registration||Russia|