September 28, 2009 |
|Fitch Ratings-London/Moscow-28 September 2009: Fitch Ratings has today assigned Russia-based Troika Dialog Group Limited (TDGL) a Long-term foreign currency Issuer Default Rating (IDR) of ‘B+’ with a Stable Outlook. TDGL, registered in the Cayman Islands, is the ultimate holding company of the Russia-based investment banking group, known as Troika Dialog. The agency has simultaneously downgraded Russia-based ZAO Standard Bank’s Long-term foreign currency IDR to ‘B+’ from ‘BBB’, whilst assigning a Stable Outlook, and affirmed its Individual Rating at ‘D/E’, whilst removing it from Rating Watch Evolving, following the completion of its acquisition by TDGL. A full rating breakdown is provided at the end of this comment.|
The ratings assigned to TDGL reflect Troika Dialog’s good investment-banking franchise in Russia, currently low leverage, experienced management team and its good risk management. The ratings also factor in the current and prospective benefits from the company’s partnership with Standard Bank Group (SBG), following SBG’s acquisition of a 33% stake in TDGL. In particular, Fitch views positively that, as a result of the deal, Troika Dialog has received a USD200m cash equity injection and a 100% stake in ZAO Standard Bank, leaving the firm with some USD300m of fresh equity. However, its ratings also take into account the group's reliance on the high risk profile of Russia’s capital markets which make for volatile revenues and could cause liquidity problems in case of sharp market downward movements.
Market risk is inherent in most of Troika Dialog’s operations, and Fitch considers the group’s exposure to Russian market risk to be high, although the company has markedly reduced its risk appetite and leverage since the onset of the market crisis in Russia in Q308. Apart from inventories designated for market-making activities and its proprietary trading portfolio, the company’s on-balance-sheet exposure to market risk includes a sizeable portfolio of less liquid principal investments. The gains and losses on these are unpredictable, and can positively or negatively impact consolidated earnings and capital.
Until mid-2008, TDGL’s consolidated performance was strong, with ROAE well above 50% since 2004, but it suffered material mainly market-related losses in Q308, leaving the company just marginally profitable in the financial year ending end-September 2008. Mark-to-market adjustments on principal investments contributed significantly to those losses. Although TDGL returned to profitability in Q408, Fitch believes that its profits are likely to remain challenged throughout the rest of 2009 and potentially 2010 as investment banking revenues remain subdued and brokerage commissions and asset management fees stay low, following asset depreciation and reduced business volumes.
The group’s funding and liquidity profile is a key rating factor. Troika Dialog relies heavily on market-based funding sources which are typically short-term and subject to early termination and collateral calls. Reliance on short-term funding is further exacerbated by volatility in client funds which may be subject to significant outflows during market stresses. At the same time, Fitch views positively that Troika Dialog has managed to maintain its liquidity throughout this difficult market environment and, following repayment of a USD130m syndicated loan in July 2009, has no near-term debt maturities. After the USD200m cash injection from SBG and a significant reduction in the repo business, the company’s liquidity has improved and now appears to have returned to historical levels. In a further positive note, Troika Dialog has recently secured a five-year USD150m unsecured loan facility from the European Bank for Reconstruction and Development (EBRD) which is currently mainly undrawn.
Rating actions on ZAO Standard Bank reflect the completion of its acquisition by TDGL. The bank’s Long-term IDR is now at the same level as the rating of TDGL, as the agency believes the bank will operate as an integral part of the group. Fitch understands that a significant part of the bank’s business has been essentially winding down in recent months, while management practices are being brought into line with Troika Dialog’s standards. It is intended that ZAO Standard Bank will be renamed Bank Troika Dialog within six months. Since end-2008, the bank’s assets have more than halved, with significant reductions taking place in its derivatives portfolio, commercial and bank loans as well as its securities portfolio. Management has been successful in renegotiating the terms of loan agreements, resulting in a considerable reduction in the loan portfolio maturity profile. On the liabilities side, ZAO Standard Bank returned an unsecured facility to the Central Bank of Russia and repaid a number of bank loans, while clients withdrew about a quarter of corporate deposits. At present, the bank’s assets total approximately USD400m.
Apart from SBG’s 33% stake, TDGL will continue to be controlled by a partnership of approximately 100 managers and employees. The core operating subsidiary of SBG is the Standard Bank of South Africa (‘BBB+’/Stable Outlook).
The rating actions are as follows:
Troika Dialog Group Limited:
Long-term foreign currency IDR: assigned at 'B+'; Outlook Stable
Short-term IDR: assigned at 'B'
Support Rating: assigned at '5'
Support Rating Floor: assigned at 'No floor'
ZAO Standard Bank:
Long-term foreign currency IDR: downgraded to 'B+' from ‘BBB’; removed from Rating Watch Negative (RWN); Stable Outlook
Short-term IDR: downgraded to ‘B’ from ‘F3’; removed from RWN
Support Rating: downgraded to '4' from ‘2’; removed from RWN
National Long-term Rating: downgraded to 'A-(rus)' from ‘AA+(rus)’; removed from RWN; Stable Outlook
Individual Rating: affirmed at 'D/E'; removed from Rating Watch Evolving
Company: Troika-D Bank
|Full company name||Joint Stock Company TROIKA-D BANK|
|Country of risk||Russia|
|Country of registration||Russia|