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Moody's Interfax downgrades Petrocommerce Bank's National Scale Rating to Baa1.ru from A2.ru

August 3, 2014



Moody'sInterfax Rating Agency has today downgraded the national scale long-term deposit rating (NSR) of

Petrocommerce Bank to Baa1.ru from A2.ru. The NSRs carry no specific

outlooks.

The downgrade of Petrocommerce's rating is driven by (1) its weak

profitability stemming from recently high provisioning charges against

problem loans; and (2) its deteriorated capital levels.

Moody's assessment of the issuer's ratings is largely based on the

announced sale of Petrocommerce to Otkritie Holding as well as the bank's

audited financial statements for 2013.

Please see ratings tab on the issuer/entity page on moodys.com for

information on Global Scale Rating.

RATINGS RATIONALE

--- WEAK PROFITABILITY

New provision charges, largely from the bank's recently recognised legacy

problem loans, meant that Petrocommerce Bank recorded losses of RUB9.7

billion (according to audited IFRS) in 2013. As of year-end 2013, the

level of Petrocommerce's problem loans (defined as individually impaired

in the corporate segment, and 90+ days overdue in the retail segment)

remained significant: 22% of the gross loan book (2012: 23.7%), despite

sales of a portion of the bank's problem loans in 2013. Most of these

problem loans are concentrated in the corporate segment, representing

legacy loans that Petrocommerce originated before the 2008-09 global

financial crisis. In Moody's view, the likelihood of recovery for most of

these problem loans is limited over the next 12-18 months.

Moody's says that despite some progress in diversifying into higher-margin

business Petrocommerce demonstrated weak pre-provision income (net of

gains from the sale of loans to the shareholder) relative to total

assets: year-end 2013: 1.3% and year-end 2012: 1.6%.

--- DETERIORATED CAPITAL LEVELS

On the back of this adverse performance, Petrocommerce has a modest

capital buffer with which to absorb potential losses arising from further

asset-quality erosion. This is because the bank reported substantial

erosion of its capital base, with the total capital adequacy ratio (CAR)

and Tier 1 ratio falling to 15.4% and 9.7% (Basel I), respectively, at

year-end 2013 (year-end 2012: 18.0% and 14.7%).

At the same time, Moody's expects that the bank's new shareholders will

continue to support the bank, thereby helping to dilute problem assets as

a proportion of new performing loans, and optimising its organisational

structure. Moody's also notes that the bank's existing legacy problem

loans are largely recognised, and their provisioning has improved.

According to the sale agreement, Petrocommerce's current major

shareholder (IFD Kapital Group) will dispose of its controlling stake in

Petrocommerce to Otkritie Holding: a leading Russian financial

institution, which also controls Otkritie Financial Corporation Bank

OJSC (OFCB, deposits Ba3 stable; BFSR D- stable/BCA ba3) and its

subsidiary banks. Moody's expects the deal to be closed by year-end 2014

with Otkritie Holding accumulating more than 95% of Petrocommerce;

thereafter, Petrocommerce will fully merge with OFCB under the latter

name.


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Source: EMBIN (Emerging Markets Business Information News)


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