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Fitch Affirms Evrofinance Mosnarbank at 'B+'; Outlook Stable
December 9, 2016 / 1:14 PM / a year ago

Fitch Affirms Evrofinance Mosnarbank at 'B+'; Outlook Stable

(The following statement was released by the rating agency) MOSCOW, December 09 (Fitch) Fitch Ratings has affirmed Russia-based Evrofinance Mosnarbank’s (EMB) Long-Term Issuer Default Ratings (IDRs) at ‘B+'. The Outlook is Stable. A full list of rating actions is available at the end of this commentary. KEY RATING DRIVERS The affirmation of EMB’s Long-Term IDRs reflects the bank’s stable credit profile over the last 12 months and our expectation that the negative impact from the economic downturn on the bank’s credit profile will remain limited. The ratings reflect the standalone profile of EMB, as expressed by its Viability Rating of ‘b+', and do not take into account potential support from the Russian and Venezuelan authorities. This is due to continued delays to the ratification of an intergovernmental agreement, initially signed by Russia (BBB-/Stable) and Venezuela (CCC) in 2011 to transform the bank into an international financial institution (IFI), equally owned by the two governments directly or through government agencies. Currently, EMB is owned by Gazprombank (BB+/Stable; 25% plus one share), VTB Bank (25% plus one share) and the National Development Fund of Venezuela (50% minus two shares). EMB’s ratings are constrained by a limited and concentrated franchise, moderate profitability, volatile funding and a lack of a defined alternative strategy in case the transformation plan is cancelled. At the same time the ratings positively consider EMB’s solid capitalisation, ample liquidity and reasonable asset quality. Credit risk stems primarily from EMB’s sizeable securities book (around 58% of assets at end-1H16), loan book (22%) and off-balance sheet contingencies (14%). These are of mostly reasonable quality, and Venezuelan exposures (in the form of sovereign and quasi-sovereign bonds) were a moderate 21% of Fitch Core Capital (FCC) at end-3Q16. Fitch estimates that at end-3Q16 around 70% of EMB’s securities book was repo-able with the Central Bank of Russia. Loan book asset quality has deteriorated sharply, with NPLs and restructured loans rising to 11% and 30%, respectively, at end-3Q16 from 2.6% and 6%, respectively, at end-3Q15. Positively, reserve coverage of NPLs remained sufficient at 1.2x at end-3Q16 (end-3Q15: 1.7x), while solid capital provides a further buffer and asset quality outside of the loan book is also strong. EMB’s tier 1 and total regulatory capital ratios were a strong 18% and 21%, respectively, at end-3Q16, providing a solid buffer against market and credit risks. However, since 2013 the bank has distributed 100% of local GAAP net income as dividends to shareholders. EMB’s balance sheet has been volatile, driven by sporadic inflows of large short-term placements by Venezuelan entities, reflecting the bank’s focus on trade finance and settlement operations. However, these have been prudently covered with liquid assets. At end-3Q16, EMB’s total available liquidity, net of potential debt repayments within one year, was sufficient to repay a high 82% of customer accounts. EMB’s 1H16 net interest margin remained broadly unchanged from 2015’s levels, at around 6.5%. However the bank’s fee and commission income has declined rather significantly, driven by the shrinking of its trade finance/settlement business. EMB’s non-interest income continued to decrease to 2% of gross revenues in 1H16, from 15% in 2015 and 40% in 2014. This, coupled with a high capital base, translated into a low 2.7% return on equity in 1H16. The recent volatility of EMB’s comprehensive income was to a large extent caused by the performance of Venezuelan and Russian securities. EMB’s Support Rating of ‘5’ and Support Rating Floor of ‘No Floor’ reflect Fitch’s view that support from the bank’s shareholders or the Russian/Venezuelan authorities, while possible, cannot be relied upon. RATING SENSITIVITIES Should EMB become an IFI, this would likely lead to an upgrade of its IDRs, although the level of the ratings would depend on the ratings of Russia and Venezuela, Fitch’s assessment of the bank’s policy role and the extent of the shareholders’ capital commitments. Capital deterioration as a result of a significant increase in leverage; a prolonged period of elevated credit losses in excess of pre-impairment profitability, or contingent risks from the shareholders would lead to a downgrade. Upside for EMB’s VR is currently limited given the bank’s narrow franchise and moderate performance. The rating actions are as follows: Long-Term Foreign and Local Currency IDRs: affirmed at ‘B+'; Outlooks Stable Short-Term Foreign Currency IDR: affirmed at ‘B’ National Long-Term Rating: affirmed at ‘A-(rus)'; Outlook Stable

Viability Rating: affirmed at 'b+' Support Rating: affirmed at '5' Support Rating Floor: affirmed at 'No Floor' Contact: Primary Analyst Sergey Popov Associate Director +7 495 956 9981 Fitch Ratings CIS Ltd 26 Valovaya Street Moscow 115054 Secondary Analyst Maria Kuraeva Associate Director +7 495 956 9901 Committee Chairperson James Watson Managing Director +7 495 956 6657 Media Relations: Elaine Bailey, London, Tel: +44 203 530 1153, Email: elaine.bailey@fitchratings.com; Julia Belskaya von Tell, Moscow, Tel: +7 495 956 9908, Email: julia.belskayavontell@fitchratings.com. Additional information is available on www.fitchratings.com Applicable Criteria Global Bank Rating Criteria (pub. 25 Nov 2016) here Additional Disclosures Dodd-Frank Rating Information Disclosure Form here _id=1016205 Solicitation Status here Endorsement Policy here ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. 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