Renaissance Kaznachei (Russia) -- Moody's downgrades Renaissance Financial Holding Limited to B2; outlook negative
The rating action is based on the audited IFRS accounts for 2011 and the unaudited IFRS accounts for H1 2012.
Moody's said the downgrade of Renaissance Financial Holding Limited's long-term issuer ratings to B2 reflects the company's (1) continued loss-making performance -- for the third consecutive year -- which negatively affects its financial fundamentals; and (2) challenges to adjust to the unfavourable economic environment in its main markets following the global financial crisis.
Renaissance Financial Holding Limited has been unsuccessful in its efforts to develop a balanced profit-generating model during the past three years against the background of changing market realities and challenging operating environment. Moreover, the costly investment banking workforce and IT platform are no longer matched with its earning opportunities because demand for investment products in Russia has declined and competition has intensified (including from state banks). Moody's observes that some of the company's expenses were due to expansion plans outside the Commonwealth of Independent States, and the company had achieved some success in geographical diversification into emerging markets outside Russia. However, the rating agency notes that the new revenues are not sufficient to compensate for the significant drop in trading income on the Russian market after 2008 and the subsequent reduced investment banking transactions. As a result, the compensation-to-revenue ratio and non-compensation-to-revenue ratio were as high as 57% and 51%, respectively, in H1 2012; therefore, expenses exceeded operating revenues. According to the company, significant cost-cutting efforts have being undertaken in 2012, but these are expected to impact the company's profitability only in H2 2012 and 2013.
Moody's said that in H1 2012, Renaissance Financial Holding Limited's revenues from the operating activities (excluding extraordinary items and income from trading with the Renaissance group -- which is de-facto support from the group) were extremely low (approximately $30 million in H1 2012, vs. approximately $220 million in 2011), such that Renaissance Financial Holding Limited would have reported a loss of at least $110 million or 13% of the 'beginning period equity' in H1 2012 (vs. the $14 million loss actually reported). However, due to extraordinary gains (e.g., revaluation, reserves recovery and trading gains with related parties), Renaissance Financial Holding Limited lost only 1.5% of its 'beginning period equity' in H1 2012.
Liquidity and Capital
As a result of the decline in Renaissance Financial Holding Limited's equity and some increase in illiquid positions, liquidity has become more vulnerable as equity is below the level of the company's illiquid assets. However, liquidity still remains adequate, and the company is capable of facing a medium-sized, prolonged and unexpected market dislocation given the short maturity of the majority of assets. According to the company, some illiquid positions have been sold in H2 2012 and there are plans to sell a significant share of illiquid assets by the end of Q1 2013. In addition, Moody's observes that capital is still sufficient to absorb substantial market losses.
The negative outlook on the ratings of Renaissance Financial Holding Limited reflects Moody's view that the company will face continued risks as it seeks to rebuild its profit-generating business model, and that future losses will negatively impact financial indicators such as capital and liquidity.
WHAT COULD CHANGE THE RATINGS UP/DOWN
Negative pressure could be exerted on Renaissance Financial Holding Limited's ratings as a result of continued operational loss-making performance, and/or any increase of illiquid risk assets in proportion to equity. Any significant reduction of capital as a result of further losses could also have negative rating implications.
Renaissance Financial Holding Limited's ratings are unlikely to be upgraded in the medium term. However, the rating outlook may be changed to stable in case of (1) significant improvements in profitability; and (2) sustained reduced involvement in financing of illiquid assets, including other group segments.
The principal methodology used in this rating was Global Securities Industry Methodology published in December 2006. Please see the Credit Policy page on www.moodys.com for a copy of this methodology.
Renaissance Financial Holding Limited is the investment banking arm of the Renaissance Group, which also includes consumer finance, asset management and merchant banking. The company reported total consolidated assets of approximately $5 billion and total equity of approximately $901 million under (unaudited) IFRS at end-H1 2012.
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