Moody’s Investors Service on Friday upgraded the bank financial strength rating (BFSR) of OJSC OTP Bank (Russia) to D- (mapping to Ba3 on the long term scale) from E+ (mapping to B1 on the long term scale) with a stable outlook, Dow Jones reported on Friday.
At the same time, the rating agency affirmed the bank’s long-term and short-term local and foreign currency deposit ratings at Ba1/Non-prime. The outlook on the long-term ratings remains negative.
Moody’s said the re-assessment of the bank’s BFSR is largely based on audited financial statements for 2010 prepared under IFRS.
The following is the text of Moody’s press release:
According to Moody’s, the upgrade of OTPR’s BFSR to D- is based on the following: improved market positions and diversification of business supported by good access to funding in crisis times; development of risk models and seasoning of business in Russia has resulted in improved and more sustainable risk-adjusted profitability due to a decline in risk costs and improved cost efficiency; and improvement in the bank’s asset quality and diminished pressure on capital from credit risks as reflected in a notable decline in exposure to the risky construction and real estate sectors as well as the reduction of its borrower concentrations.
Moody’s notes that, in contrast with many of its peers, OTPR has improved its market positions during the recent financial crisis by extending its lending activity and geographical coverage thanks to a solid core retail deposit base and low dependence on third-party wholesale funding, which allowed the bank to continue growing its loan portfolio. According to audited financial statements under IFRS at year-end-2010, third-party wholesale funding accounted for only 8% of total liabilities. While the bank intends to grow this source of funding, management does not expect it to exceed 20% of non-equity funding and it may be substituted by parental funding in case of need.
OTPR’s bank-specific risk cost associated with the retail book decreased significantly as a result of development of risk models and seasoning of business. This, together with the bank’s cost-cutting measures, and improved economies of scale, improved the risk adjusted performance, which enabled the bank to demonstrate solid return on equity (ROE) of over 25% in 2010. In addition, exposure to long-term Russian-based risk decreased, thereby easing pressure on equity (exposure to the construction and real estate sectors reduced from approximately 100% of equity at end-H1 2009 to 39% at year-end 2010, for example).
OTPR’s BFSR continues to be underpinned by: steadily strengthening franchise and leading positions in certain niche products which benefit from improved technology and funding; minimal corporate governance concerns as the bank is not involved in related party lending; sound liquidity as a result of prudent liquidity management; and adequate capitalization supported by the parent through regular capital injections and sound internal capital generation.
At the same time, Moody’s notes that OTPR’s BFSR continues to be constrained by: the still sizable cost base which continues to exert pressure on profitability (albeit to a much lesser extent than in the past); high dependence on the parent — OTP Bank (Hungary) — in terms of ongoing business support, which exposes the bank to divestiture risks — as funding from the parent accounted 22% of non-equity funding at year-end 2010; still higher-than-average appetite for long-term Russian-based risks, such as real estate and construction; and low diversification of the corporate franchise.
OTPR’s Ba1 deposit ratings incorporate a very high probability of parental support from OTP Bank (Hungary), and consequently receive a two-notch uplift from the bank’s Ba3 standalone rating (BCA). Moody’s assessment of a very high probability of parental support is based on the significant operational integration, strong strategic fit of OTP with OTP Bank Group, as Russia is one of three strategic foreign markets for the group, and the parent’s demonstrated willingness to provide ongoing capital and liquidity support. At the same time, there remains the risk that the Russian market could lose its attractiveness, such that OTPR may be considered non-strategic at a future date.
The negative outlook on the deposit ratings of OTPR reflects the negative outlook on the Baa3 standalone rating of OTP Bank (Hungary), the bank’s support provider.
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