Moscow, December 07, 2012 -- Moody's Interfax Rating Agency has today downgraded the national scale rating (NSR) of Solidarnost to Ba2.ru from Baa3.ru. NSRs carry no specific outlook.
Moody's assessment is primarily based on Solidarnost's 2012 monthly accounting statements prepared under local statutory accounting rules (Russian Accounting Standards or RAS), as well as its audited financial statements for 2011 prepared under IFRS.
Please see ratings tab on the issuer/entity page on moodys.com for information on Global Scale Rating.
The rating downgrade reflects Solidarnost's weak capital buffer and vulnerable liquidity position, which are amplified by sizeable borrower and depositor concentrations.
Moody's notes that Solidarnost's capital adequacy has weakened considerably over past two-and-a-half years. The bank's regulatory capital adequacy ratio (so-called "N1") declined to 12.0% as at end-October 2012 (YE2011: 15.0% and YE2009: 18.1%). This sharp decline reflected Solidarnost's weak profitability at times when the bank had to create additional loan loss reserves against its deteriorating assets. In 2012, the bank increased its loan volumes for the first time since 2008, which again exerted additional pressure on its capital adequacy.
According to Moody's central stress-test scenario, Solidarnost's capital and loan loss reserves (accounting for 4.5% of total loans, according to RAS, as at end-October 2012) provide insufficient buffer against potential credit and market losses. According to Moody's stress test, the bank's capital adequacy ratio could decline below the minimum regulatory requirements (10%) under the rating agency's central scenario. The rating agency does not expect this capital deficit to be eliminated in next 12-18 months given the bank's moderate recurring profitability and uncertainty relating to shareholders' willingness and capacity to inject sufficient amount of core Tier 1 capital.
Moody's notes that, in addition to relatively weak capital and loan loss reserves, Solidarnost's high borrower concentration (credit exposure to the 20 largest groups of borrowers amounted to 2.6x the bank's capital) intensifies the bank's risks, rendering it susceptible to the performance of only a handful of borrowers.
Moody's believes that significant pressure will be exerted on Solidarnost's liquidity in the event of any market stress due to the bank's reliance on secured funding facilities (from the Central Bank of Russia) for around 20% of its total funding in Q2-Q3 2012 and its predominantly short-term customer deposit base (over 90% of customer funds had a maturity of less than one year). The bank's liquidity management is also complicated by some customer funding concentration, with the 20 largest depositors accounting for almost a quarter of the bank's non-equity liabilities as of end-August 2012.
WHAT COULD CHANGE THE RATINGS UP/DOWN
Solidarnost's ratings have limited upside potential in the medium term. However, positive pressure could be exerted on the ratings if the bank's capital adequacy and funding structure is materially improved. Simultaneously, Solidarnost would need to demonstrate a sustained track record of improving recurring profitability.
Further pressure could be exerted on Solidarnost's ratings if its liquidity position, asset quality and/or capital adequacy deteriorates beyond Moody's central scenario.
The methodologies used in this rating were Moody's Consolidated Global Bank Rating Methodology published in June 2012, and Mapping Moody's National Scale Ratings to Global Scale Ratings published in October 2012. Please see the Credit Policy page on www.moodys.com for a copy of these methodologies.
Domiciled in Samara, Russia, Solidarnost reported -- as at 31 December 2011 -- total IFRS assets of $589 million.
Moody's Interfax Rating Agency's National Scale Ratings (NSRs) are intended as relative measures of creditworthiness among debt issues and issuers within a country, enabling market participants to better differentiate relative risks. NSRs differ from Moody's global scale ratings in that they are not globally comparable with the full universe of Moody's rated entities, but only with NSRs for other rated debt issues and issuers within the same country. NSRs are designated by a ".nn" country modifier signifying the relevant country, as in ".ru" for Russia. For further information on Moody's approach to national scale ratings, please refer to Moody's Rating Methodology published in October 2012 entitled "Mapping Moody's National Scale Ratings to Global Scale Ratings".
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Moody's Interfax Rating Agency (MIRA) specializes in credit risk analysis in Russia. MIRA is a joint-venture between Moody's Investors Service, a leading provider of credit ratings, research and analysis covering debt instruments and securities in the global capital markets, and the Interfax Information Services Group. Moody's Investors Service is a subsidiary of Moody's Corporation (NYSE: MCO).
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