S&P affirms long-term credit ratings of Bank VTB (Russia) at “ВВВ”; outlook “Stable”

November 9. KASE

S&P affirms long-term credit ratings of Bank VTB (Russia) at "ВВВ"; outlook "Stable"Standard & Poor’s Ratings Services today said it affirmed the ratings on Russian bank JSC VTB Bank (VTB) and its subsidiaries. We also affirmed the ‘ruAAA’ Russia national scale ratings on VTB and VTB-Leasing. The outlook on all ratings is stable. The ‘BBB’ long-term counterparty credit ratings on VTB and its subsidiaries VTB-Leasing and VTB-Leasing Finance were placed on CreditWatch with negative implications on March 1, 2011.

The ratings on VTB reflect the bank’s ownership by the state, strong commercial position, and improved funding profile after its recent acquisitions of Bank of Moscow (BOM; unrated) and TransCreditBank (TCB; BB+/Stable/B). We have raised VTB’s stand-alone credit profile (SACP) to ‘bb’ from ‘bb-‘, reflecting the positive commercial impact of the acquisitions and the substantial capital and liquidity support that BOM received from the Deposit Insurance Agency (DIA) when VTB increased its stake in BOM to 81% at the end of September 2011. The support from the DIA will enable BOM to book a gain of approximately RUB150 billion ($5 billion) and to take an equivalent provision charge, thereby increasing its loan loss reserves to approximately RUR 300 billion, or 48% of gross loans. In our opinion, this substantial reserving will enable VTB to acquire BOM’s severely damaged loan portfolio with limited downside risk of further losses.

The stable outlook reflects our expectation that the VTB group will maintain its satisfactory earnings and moderate capital over the medium term. We estimate that VTB will be close to its net income target of RUB100 billion for full-year 2011, despite a difficult second half in securities sales and trading. We expect VTB’s consolidated retained earnings in 2012 to be similar to 2011’s.

We forecast that our Risk-Adjusted Capital (RAC) ratio on VTB will remain in the range of 5-6% over the medium term due to high retained earnings and a somewhat slower annual 15% expansion of risk-weighted assets over the next 2-3 years.

Over the medium term, the Russian government intends to further privatize VTB Bank, but to retain majority control. It plans to sell another 10% of its shares in 2012, market conditions permitting. In our opinion, and despite potential partial privatizations, the government will maintain control over VTB for the next several years.

We could raise VTB’s ratings if the stand-alone creditworthiness of VTB and the Russian Federation improved and VTB Bank retained its strong links and important role to the Russian government. Upward pressure on Russia’s ratings could occur if the government put in place policies that broadened the economic base and improved growth performance, or if the government’s net creditor position increased significantly.

We could lower VTB’s ratings if the stand-alone creditworthiness of VTB and the Russian Federation deteriorated, or if VTB’s links to the Russian government weakened. A re-widening of the non-oil budgetary deficit, which would mean a further increase in the oil price at which the budget would remain in balance, would imply even greater dependency on key export prices and could put downward pressure on the sovereign rating. Lastly, a loss of majority control would weaken VTB’s links to the government under our methodology, and lead to a reduction of the uplift of VTB’s issuer credit rating over its SACP.

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