At the same time, Moody's affirmed DeltaCredit's Baa2 local-currency senior secured debt rating (with stable outlook), which benefits from an explicit and irrevocable guarantee issued by the bank's ultimate parent, Société Générale (SocGen, A2 stable; C- /baa2 stable). SocGen holds an 82.4% stake in Russia-based Rosbank which, in turn, owns 100% of DeltaCredit.
RATINGS RATIONALE -- STANDALONE RATINGS
Moody's says that today's rating action on DeltaCredit reflects some concerns that this mortgage lender could be increasingly challenged to maintain its market shares and financial fundamentals amidst the current volatile operating environment. Competition in the mortgage market from larger state-owned Russian banks is intensifying, which could lead to margin erosion and loss of market share for DeltaCredit. Moody's notes that DeltaCredit pursues a challenging task of diversifying its funding base away from parental resources, which could be difficult and more costly in the current environment. In addition, the rating agency sees some pressure on DeltaCredit's capitalisation due to potential regular dividend payouts to Rosbank, DeltaCredit's immediate parent since 2011.
The rating agency noted that in the first nine months of 2012, the stock of gross mortgage loans on DeltaCredit's consolidated balance sheet grew by 10%, whereas the growth of the mortgage market in Russia exceeded 20% over the same period, according to the Central Bank of Russia (CBR). Moody's believes that this slowdown is partly because of the need for DeltaCredit to substitute the previously cheap and readily available financing from SocGen with market funding sources which are in short supply and/or more expensive. Due to the gradual diversification away from parental funding, the share of SocGen/Rosbank funding in DeltaCredit's total liabilities declined to 60% at 30 September 2012, from 84% as at year-end 2010. However, the cost of the newly attracted financing is rising, which will likely suppress the bank's net interest margin in the medium term, despite the fact that some of the increase in funding costs can be passed onto borrowers.
Moody's added that the dividend policy pursued by DeltaCredit's immediate parent, Rosbank, represents another risk because the latter is likely to withdraw dividends from its mortgage subsidiary going forward. A recent example is a RUB1 billion dividend that DeltaCredit paid to Rosbank in mid-2012, representing 45% of DeltaCredit's net income for 2011. The rating agency acknowledges that DeltaCredit's capital buffer is currently high, with the bank reporting a Basel I total capital adequacy ratio of 29.92% as at 30 September 2012. However, the bank's lending growth coupled with the regular dividend payouts may erode this capital cushion over time.
Moody's notes positively the consistently superior quality of DeltaCredit's mortgage portfolio: loans overdue by more than 90 days accounted for just 0.72% of total gross loans as of 30 September 2012. This is a strong metric compared to the market average indicators of around 3% (according to the CBR), and this continues to underpin DeltaCredit's standalone credit profile.
RATINGS RATIONALE -- SUPPORTED RATINGS
Moody's further explained that DeltaCredit's Baa3 long-term global local and foreign currency deposit ratings continue to incorporate an assessment of a high probability of support to DeltaCredit from its ultimate shareholder, SocGen. This support assessment results in a two-notch rating uplift from DeltaCredit's ba2 standalone credit profile. The negative outlook assigned on DeltaCredit's Baa3 long-term deposit ratings reflects the negative outlook assigned on its D BFSR.
DELTACREDIT'S LOCAL-CURRENCY SENIOR SECURED DEBT
The Baa2 long-term rating (with stable outlook) assigned to DeltaCredit's local-currency senior secured debt, which benefits from an explicit and irrevocable guarantee issued by SocGen, is at the same level and carries the same outlook as the ba2 standalone credit assessment of its guarantor.
WHAT COULD MOVE THE RATINGS DOWN/UP
DeltaCredit's ratings are underpinned by the bank's currently strong capitalisation and profitability, robust asset quality, and the financial and operational backing from SocGen. At the same time, the bank's ratings are constrained by its modest market franchise and the high dependence of its business model on parental funding. DeltaCredit's standalone ratings might be downgraded if the bank faces material funding constraints that potentially impose limits on its business expansion or contribute to a decline in profitability metrics. A downgrade might also be caused by deterioration of DeltaCredit's asset quality, especially if not compensated by adequate capital levels. Any weakening capacity of SocGen to provide support may exert downwards pressure on DeltaCredit's debt and deposit ratings, as could potential shifts in the parent bank's willingness to provide such support. Upwards pressure on DeltaCredit's ratings is limited given the negative outlook.
The principal methodology used in this rating was Moody's Consolidated Global Bank Rating Methodology, published in June 2012. Please see the Credit Policy page on www.moodys.com for a copy of this methodology.
Domiciled in Moscow, Russia, DeltaCredit reported -- under unaudited IFRS -- total assets of $2.5 billion and total shareholders' equity of $374 million as at 30 September 2012. Net IFRS profits for the first nine months of 2012 stood at $46.7 million.
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Olga G Ulyanova Vice President - Senior Analyst Financial Institutions Group Moody'sInvestors Service Limited, Russian Branch 7th floor, Four Winds Plaza21 1st Tverskaya-Yamskaya St.Moscow 125047 Russia Yves J Lemay MD - Banking Financial Institutions Group JOURNALISTS: 44 20 7772 5456 SUBSCRIBERS: 44 20 7772 5454 Releasing Office: Moody's Investors Service Ltd. One Canada SquareCanary WharfLondon E14 5FA United Kingdom JOURNALISTS: 44 20 7772 5456 SUBSCRIBERS: 44 20 7772 5454 (C) 2012 Moody's Investors Service, Inc. and/or its licensors and affiliates (collectively, "MOODY'S"). All rights reserved.
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