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B&N Bank 'B-/C' Ratings Affirmed; Outlook Negative; Off CreditWatch Negative
21-Jan-2016 06:36 EST
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•B&N Bank PJSC has strengthened its capital position by transferring
Russian ruble (RUB) 6 billion of subordinated debt to common equity and
reclassifying another RUB9.9 billion of subordinated debt as perpetual
capital instruments.
•Additionally, B&N recently deconsolidated problematic ROST Bank from its
balance sheet.
•We believe that these factors show an easing of the short-term pressure
on B&N's capital and risk position.
•We are therefore affirming our 'B-/C' counterparty credit ratings and
'ruBBB-' national scale rating on B&N and removing them from CreditWatch
with negative implications.
•The negative outlook reflects our concerns regarding high operating risks
in Russia, as well as potential downside risks for the bank's asset
quality and capital position in the next 12-18 months. We also believe
the planned merger between B&N and MDM Bank could entail operational and
financial risks.
MOSCOW (Standard & Poor's) Jan. 21, 2016--Standard & Poor's Ratings Services
today affirmed its 'B-/C' long- and short-term counterparty credit ratings on
Russia-based B&N Bank PJSC. The outlook is negative.
At the same time, we affirmed our 'ruBBB-' Russia national scale rating on the
bank.
The affirmation reflects our view that the recent deconsolidation of
problematic ROST Bank and additional capital support for B&N have together
somewhat eased the pressure on B&N's capital position. The negative outlook
acknowledges the uncertainty in the bank's financial profile given the planned
merger with MDM Bank (B/Negative), another midsize bank in Russia with a
sizable amount of non-performing loans (14.1% as of June 30, 2015).
In December 2015, B&N received regulatory approval to deconsolidate ROST Bank,
a Russia-based financial institution that B&N previously took under a
government-orchestrated financial rehabilitation procedure. One of B&N's
ultimate beneficiaries, Mikhail Shishkhanov, has become a direct owner of ROST
Bank. We believe deconsolidation is overall marginally positive for B&N's
credit profile, because the risks of a failed entity (mostly related to its
corporate loan book) are now offloaded from its balance sheet. However, B&N
still remains exposed to the risks of ROST Bank directly through the Russian
ruble (RUB) 250 billion (about $342 million) interbank loan (although with
monthly interest payments). Further evolution of this exposure will depend on
the exact details of a plan of financial rehabilitation, which has yet to be
approved by the Central Bank of Russia and the Deposit Insurance Agency (DIA).
We believe that this exposure is adequately captured by our moderate risk
position score.
We also positively view the recent capital support provided to B&N by its
owners by transferring RUB6 billion of subordinated debt into equity and
reclassifying another RUB9.9 billion of subordinated debt as perpetual capital
instrument, which makes it eligible for inclusion in additional tier-1 capital
under local regulation. We now consider these instruments as having
intermediate equity content, because of their perpetual nature and the bank's
ability to cancel interest payments upon its sole discretion.
We anticipate that in 2016 B&N will be able to execute all the necessary
procedures to merge with MDM Bank, another Russia-based institution which was
acquired by B&N owners in 2015. Since MDM Bank is better capitalized and has a
marginally better credit standing, in our opinion, the overall merger should
be positive for B&N's capital position, provided that the execution of the
transaction is managed smoothly. We anticipate that risk-adjusted capital
(RAC) ratio will increase to above 3% by the end of 2016, if we take into
account the merger and additionally planned RUB10 billion capital injection
from the owners. Should the merger be delayed, or B&N's post-merger capital
position not recover as fast as we expect, we might consider revising our view
of B&N's capital position downward.
The negative outlook primarily reflects our concerns regarding increasing
operating risks in Russia, as well as potential downside risks for the bank's
capital position, which we believe could materialize in the next 12-18 months.
We also think the planned merger between B&N and MDM Bank could entail
operational and financial risks given the weak economic environment in Russia.
We could consider a negative rating action if the bank does not manage to
sustainably recover its capital position within the next 12 months, indicated
by our RAC ratio remaining below 3%. A negative rating action could also be a
result of materialized integration risks from the merger with MDM Bank. We
believe that integrating two large banks in current market conditions could be
a difficult task. Therefore, we believe there is a possibility of unexpected
negative developments, weakening the financial profiles of both B&N and MDM
Bank.
An outlook revision to stable would depend on the stabilization of operating
conditions in Russia, as well as on progress in integration of MDM Bank. We
could consider revising the outlook to stable if we believe that the systemic
importance of B&N (or a joint bank) within the Russian banking sector has
increased.
RELATED CRITERIA AND RESEARCH
Related Criteria
•Bank Hybrid Capital And Nondeferrable Subordinated Debt Methodology And
Assumptions, Jan. 29, 2015
•Standard & Poor's National and Regional Scale Mapping Tables, Sept. 30,
2014
•National and Regional Scale Ratings, Sept. 22, 2014
•Quantitative Metrics For Rating Banks Globally: Methodology And
Assumptions, July 17, 2013
•Group Rating Methodology, Nov. 19, 2013
•Revised Market Risk Charges For Banks In Our Risk-Adjusted Capital
Framework, June 22, 2012
•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
•Banks: Commercial Paper I: Banks, March 23, 2004
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