Moody's assigns B3/NP/E+ to Derzhava Bank; stable outlook

Stocks and Financial Services Press Releases Wednesday May 16, 2012 14:16
London--16 May--Moody's

London, 16 May 2012 -- Moody's Investors Service has today assigned the following ratings to Derzhava Bank: E+ standalone bank financial strength rating (BFSR) mapping to a baseline credit assessment (BCA) of b3, B3 long-term local and foreign currency deposit ratings, and 'Not Prime' short-term local and foreign currency deposit ratings. All the bank's long-term ratings carry a stable outlook.

Moody's assessment is primarily based on Derzhava's audited financial statements for 2010 -- prepared under IFRS, and unaudited financial statements as at 31 December 2011 -- prepared under Russian Accounting Standards (RAS).

RATINGS RATIONALE

According to Moody's, Derzhava's ratings are constrained by: (i) high market, credit and liquidity risk appetite, (ii) weak franchise value, and (iii) weak recurring revenue generation. At the same time, the ratings reflect the bank's currently adequate liquidity position.

Moody's explains that Derzhava's appetite for market and credit risks stems from its sizeable investments in risky financial instruments (that accounted for around a third of Tier 1 capital), and from high borrower concentration (of up to 3x Tier 1 capital). Moody's views these risk concentrations as a significant challenge for the bank given its modest capital cushion (14% as at YE2011).

Moody's notes that Derzhava's depositor concentration is considerably higher compared to similarly rated peers. As a result, the rating agency views Derzhava's significant liquidity cushion as necessary, with free-from-pledge liquid assets exceeding 30% of total liabilities as at YE2011.

Derzhava has a relatively small scale of operations, limited business geography and narrow customer base operating from a single office in Moscow. According to Moody's, in the absence of a clearly articulated strategy, Derzhava's ability to maintain its current customer base and overall franchise value will prove challenging in the longer term.

Moody's adds that Derzhava's recurring revenue generation capacity is also weak, as 60% of its pre-provision income is derived from trading transactions. The bank's relatively solid bottom-line profitability under RAS in 2011 was a result of release of loan loss reserves.

WHAT COULD CHANGE THE RATINGS UP / DOWN

According to Moody's, Derzhava's ratings have limited upside potential in the medium term. Some upward pressure could be exerted on the ratings if the bank augments its capital base and/or its provision buffer. Derzhava's ratings could also be positively affected as a result of improvement of the bank's core profitability and franchise value, provided the level of related-party transactions and/or risky investments do not increase.

However, Derzhava's standalone BFSR and deposit ratings could be downgraded as the result of a significant decrease in the liquidity buffer, or substantial and ongoing deterioration of the bank's asset quality. An increase in the level of the bank's related-party transactions and/or risky investments could also exert downward pressure on its ratings.

PRINCIPAL METHODOLOGIES

The methodologies used in this rating were Bank Financial Strength Ratings: Global Methodology published in February 2007, and Incorporation of Joint-Default Analysis into Moody's Bank Ratings: Global Methodology published in March 2012. Please see the Credit Policy page on www.moodys.com for a copy of these methodologies.

Headquartered in Moscow, Russia, Derzhava reported -- under (unaudited, non-consolidated) RAS -- total assets of US$422 million and total equity of US$67 million as at 31 December 2011; net income for 2011 stood at US$8 million.

REGULATORY DISCLOSURES

For ratings issued on a program, series or category/class of debt, this announcement provides relevant regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides relevant regulatory disclosures in relation to the rating action on the support provider and in relation to each particular rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides relevant regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

The rating has been disclosed to the rated entity or its designated agent(s) and issued with no amendment resulting from that disclosure.
Information sources used to prepare the rating are the following : parties involved in the ratings, public information, and confidential and proprietary Moody's Investors Service information.
Moody's considers the quality of information available on the rated entity, obligation or credit satisfactory for the purposes of issuing a rating.

Moody's adopts all necessary measures so that the information it uses in assigning a rating is of sufficient quality and from sources Moody's considers to be reliable including, when appropriate, independent third-party sources. However, Moody's is not an auditor and cannot in every instance independently verify or validate information received in the rating process.

Moody's Investors Service may have provided Ancillary or Other Permissible Service(s) to the rated entity or its related third parties within the two years preceding the credit rating action. Please see the special report "Ancillary or other permissible services provided to entities rated by MIS's EU credit rating agencies" on the ratings disclosure page on our website www.moodys.com for further information.

Please see the ratings disclosure page on www.moodys.com for general disclosure on potential conflicts of interests.

Please see the ratings disclosure page on www.moodys.com for information on (A) MCO's major shareholders (above 5%) and for (B) further information regarding certain affiliations that may exist between directors of MCO and rated entities as well as (C) the names of entities that hold ratings from MIS that have also publicly reported to the SEC an ownership interest in MCO of more than 5%. A member of the board of directors of this rated entity may also be a member of the board of directors of a shareholder of Moody's Corporation; however, Moody's has not independently verified this matter.

Please see Moody's Rating Symbols and Definitions on the Rating Process page on www.moodys.com for further information on the meaning of each rating category and the definition of default and recovery.
Please see ratings tab on the issuer/entity page on www.moodys.com for the last rating action and the rating history.

The date on which some ratings were first released goes back to a time before Moody's ratings were fully digitized and accurate data may not be available. Consequently, Moody's provides a date that it believes is the most reliable and accurate based on the information that is available to it. Please see the ratings disclosure page on our website www.moodys.com for further information.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

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