S&P increases Russian banking sector ratings
By Our Banking Bureau | 04 Sep 2002
4 September 2002
At the same time, S&P says that it has raised its long-term counter-party credit ratings on four other Russian banks, as follows:
- Alfa Bank and OJSC Commercial Bank Petrocommerce: raised to single-B-minus from triple-C-plus
- MDM Bank: raised to triple-C-plus from triple-C
- International Moscow Bank: raised to single-B from single-B-minus.
The outlook on
Alfa Bank and MDM Bank were revised to stable from positive;
all four banks now have stable outlooks. All short-term
ratings were affirmed.
The rating actions reflect the improvement in the Russian
economic environment during the past three years, which
has increased business opportunities for Russian banks
and reduced the extremely high credit risk linked to clients
in the public and private sector, says Scott Bugie, a
managing director in S&P Financial Services Group.
The actions also reflect the banking sectors progress
in rebuilding after the massive defaults that followed
the August 1998 financial crisis. The three years of development
and expansion that started in second-half 1999 have brought
the sector to a stage where a glimmer of real banks can
be seen, he says.
Many private-sector banks now generate a material volume
of business outside their financial industrial groups
(FIG), and top-tier Russian banks now can offer clients
a broader range of products instead of just cash management
services. Moreover, new capital is moving into the sector,
and several banks are emerging as profitable. Foreign
banks are showing increased interest in the sector, and
the retail banking market is growing.
While this progress is laudable, notes Bugie, the sector
nevertheless remains underdeveloped and Russian banks
still rank among the riskiest in the world. Moreover,
the leading private-sector banks are greater credit risks
than the large rated Russian industrial companies. FIGs
continue to dominate the Russian economy, and FIG banks
remain captive to the funding needs and revenue flows
of the FIGs to which they belong. Private-sector banks
in Russia remain small in terms of capital and economic
power, and consequently have very high single-party risk
concentrations with their much larger Russian industrials
clients.
The dominance of the giant state-owned savings bank, Sberbank
(not rated), distorts pricing on both sides of the balance
sheet. General credit culture is underdeveloped in Russia,
and the legal system is unpredictable in relation to enforcement
of claims. Lastly, banking supervision and regulation
has been ineffectual to date, although this could change
with the recent appointment of a new Central Bank head.
The potential for Russian banks to raise their creditworthiness
to a level close to or as strong as that of the highest-rated
Russian entities (currently double-B-minus) will be limited,
unless the Russian banking sector addresses many of these
weaknesses, adds S&Ps credit analyst Ekatrina Trofimova.
The four banks that received upgrades have all improved
their commercial position during the past three years.
International Moscow Bank does not face the risk factors
associated with FIG membership, as it is owned by a consortium
of foreign banks, led by Bayersiche Hypo und Vereinsbank.
Its independent status and foreign-bank supervision attracts
top-grade clients.
Both Alfa Bank and MDM Bank have successfully expanded
their networks and extended their franchises, and have
built capital through retained earnings.
Recent bank acquisitions by MDM have brought many new
customers to the MDM banking group, but these may prove
difficult to integrate. OJSC Commercial Bank Petrocommerces
strategic role within LUKoil OAO, Russias largest oil
company, was reinforced by the latters $115 million capital
increase in the bank in late 2001, and the bank continues
to expand its business outside of the LUKoil group.
The positive outlooks on the other banks primarily reflect
the potential that Russias improving economy will provide
uplift to the credit ratings of many Russian banks in
the future, if the banks can meet the challenge. International
Industrial Banks capital strength and useful political
connections help it gain corporate banking business.
Ural-Siberian Banks
good business franchise and improved financial profile
make it well positioned to achieve its expansion plans.
For both, successful management of credit risk and further
diversification of business lines will be key to the future
ratings. Menatep St. Petersburg faces a similar challenge,
with the additional need to raise capital to support the
expansion of risk assets.
Surgutneftegazbank and TransCreditBank are somewhat smaller
players closely linked to their respective owners Surgutneftegaz
and the Russian railways, respectively. The future role
of these two banks within their respective groups will
be the primary element that drives their ratings.
The future rating of Impex Bank will depend on the banks
ability to truly rebuild its franchise and financial performance
while shaking off the negative legacy of its past link
to the failed Rossiyskiy Kredit Bank.