Alfa-Bank “relatively well positioned” in weakening Russian economy
Among Russia’s three largest private banks, AlfaBank is best positioned to cope with the weakening outlook for the Russian economy, Moody’s Investors Service said in a new report.
An economic downturn will put pressure on the asset quality and profitability of the country’s financial institutions, including the three largest private banks by total assets that are the focus of the report, AlfaBank (deposits Ba1 stable, BFSR D stable/BCA ba2), Bank Otkritie Financial Corporation (ex-Nomos Bank, re-branded in June following the merger with Otkritie Group) (Ba3 stable, D- stable/ba3) and Promsvyazbank (Ba3 on review for downgrade, D- on review for downgrade)/ba3).
The new report discusses two key requirements that determine banks’ ability to thrive in the challenging domestic operating environment: (1) large loss-absorption cushions, and (2) low funding and operating costs.
Moody’s observes that of Russia’s three largest private banks, Alfa has the largest loss-absorption cushion and lowest cost of funding. In terms of the loss-absorption cushion, Alfa has the highest excess capital, reserves, and recurring pre-provision income of the three banks. In terms of costs, Alfa’s operating expenses are higher than those of Otkritie, but its cheap funding more than offsets this disadvantage.
If a capital increase from existing shareholders is needed, Moody’s considers Alfa to have more flexibility than Otkritie or PSB. In Moody’s view, Alfa’s greater flexibility is underpinned by support from the bank’s ultimate owner - Alfa Group Consortium - which is cash-rich following the near $14 bln sale of its 25% stake in oil company TNK-BP to Rosneft.
Alfa-Bank’s subsidiary recently concluded the takeover of the Bank of Cyprus Ukrainian operations, Bank Kypru.
In contrast, Otkritie’s shareholder, Otkritie Financial Corporation, has no significant nonfinancial assets and is highly leveraged as a result of its acquisition of NOMOS in 2012. For PSB’s controlling shareholders, the Ananiev brothers, the bank is their largest asset, which suggests that their capacity to support the bank in case of financial distress is relatively low.
The lower ratings of Otkritie compared with Alfa reflect the weaker loss-absorption cushion of the former and its higher appetite for credit risk. Moody’s also observes that Otkritie is highly dependent on volatile revenue sources such as earnings from investment-banking operations. The bank also faces strategic and operational challenges stemming from the recent change in its controlling shareholder and ongoing integration with other banks which is now under way.
Moody’s review for downgrade of Promsvyazbank’s ratings on July 9 was triggered by the negative trends in the bank’s asset quality and earnings-generating capacity; and, the bank’s relatively weak lossabsorption buffer, as reflected in its modest capital cushion and low loan loss reserves compared to the volume of problem loans.
Moody’s review will seek to obtain greater clarity on Promsvyazbank’s ability to raise new capital over the next three months as planned, and the bank’s asset quality dynamics as well as the sustainability of its earnings-generating capacity in the coming years. At the same time, the bank’s ratings remain supported by its entrenched market franchise, low related-party exposure compared with peers, a track record of sound financial performance and a stable funding profile.