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Bank Tavrichesky 'B-' And 'ruBBB-' Ratings On Watch Neg On Regulatory Capitalization Risks And Uncertain Asset Quality

December 18, 2014 | Standard & Poor's

MOSCOW (Standard & Poor's) Dec. 17, 2014--Standard & Poor's Ratings Services today placed its 'B-' long-term corporate credit rating and its 'ruBBB-' Russia national scale rating on Russia-based Bank Tavrichesky on CreditWatch with negative implications.

At the same time, we affirmed our 'C' short-term rating on the bank.

The CreditWatch placement reflects our view that Bank Tavrichesky may face increasing difficulty meeting the regulatory capital requirements of the Bank of Russia in the next 90 days. In particular, this may come from the rapid devaluation of the Russian ruble (RUB) and the resulting revaluation of foreign currency denominated assets that increase risk-weighted assets. We currently consider Bank Tavrichesky to be at risk with regulatory capital adequacy, as measured by the central bank's N1 ratio of 10.07% as of Dec. 1, 2014, just 7 basis points (bps) above the minimum.

We understand that Bank Tavrichesky takes proactive measures to boost its regulatory capital, with plans to attract two subordinated loans from its minority shareholder Norwegian Sparebank 1 Nord-Norge, with a value of approximately RUB362 million and RUB540 million. The bank has also planned an equity injection for the end of March 2015 of RUB504 million. While the bank expects the first subordinated debt to come before the end of 2014, we note that this will be only a minor relief for the bank, providing an effect within only 70 bps in terms of the N1 ratio, according to our estimates. Because we focus on on strong forms of capital, we foresee no immediate impact on our risk-adjusted capital ratio. Consequently, we believe that a necessary capital buffer will be built only after a further Tier 1 capital injection takes place or after market conditions stabilize.

If we assume that all of the planned capital strengthening occurs, although there would be less pressure on Bank Tavrichesky's capital position, the created capital buffer may not be sufficient to ward off the rising asset quality issues we expect in 2015 and the ruble's persistent weakness.

Indeed, we observe, that according to reporting forms under Russian accounting standards, the amount of accrued but not paid interest steadily increased through 2014 to 3.3% on Nov. 1, 2014, from 1.1% of the gross loan book on Jan. 1, 2014--a high level compared with Russian peers. We also note that the bulk of this increase was due to one large group of borrowers. While the bank expects to collect this interest in the first quarter of 2015, we note that this exposure may be subject to impairment charges, further squeezing capital ratios.

We also consider that intensifying pressure on capital is due to some fundamental pressures on the bank's business model, with high related-party lending and high foreign-currency mismatches. We consider that capital alone is unlikely to materially alleviate pressure in the longer term on the financial profile if these fundamental business model vulnerabilities remain.

The resolution of the CreditWatch will depend on Bank Tavrichesky's ability to maintain a substantial buffer close to 100 bps above the regulatory capital ratio of the Bank of Russia. We will also consider the evolution of the bank's asset quality and the resilience of the business model in resolving the CreditWatch. We expect to have a better understanding of these matters in 90 days, because we will have greater clarity on the timing of capital injections and collection of accrued interest from the borrowers.

We could lower the ratings by at least one notch if we see that Bank Tavrichesky remains close to breaching the regulatory capital adequacy ratio, if we observe the bank's inability to collect the accrued interest resulting in deterioration of asset quality, or if we see risks of instability in the business model throughout what we view as a complicated 2015 for Russian banks.

Company: Tavrichesky AKB

Full company name
Country of riskRussia
Country of registrationRussia


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