Repost: Russian Banks Placed on S&PWatch Negative
PR Newswire - May 28, 1998 07:22
ÿÿÿ LONDON, May 28 /PRNewswire/ -- In light of the renewed bout of market turbulence, sharply higher interest rates and pressures on the rouble, Standard & Poor's has today placed the ratings of seven Russian banks on CreditWatch with negative implications.
The banks are vulnerable to this turbulence in three primary ways:
-- Declining values of their government bond portfolios will result in trading losses.
-- Foreign currency exposures could, if the rouble does not hold, result in trading losses as well as heightened credit risk on foreign currency denominated loans, and liquidity issues from maturing foreign currency debt.
-- Deteriorating economic environment could impact the development of the loan portfolio.
Russian banks face potentially greater dangers from the renewed volatility in interest rates than they did in 1997, as the central bank struggles to support the rouble.ÿ The ink is barely dry on the 1997 results (reported on IAS standards) by Russian banks.ÿ On the basis of those, one could have breathed a sigh of relief that the year was no worse than it was as a result of the emerging market turbulence that hit Russia hard in the fourth quarter. This year, the turbulence is worse.
Russian banks remain heavily reliant on income from their securities portfolios.ÿ The bulk of these are treasury securities.ÿ Because they are funded generally with non-market rate deposits, banks are very asset sensitive.ÿ Fluctuations in rates result in variation in net interest margins, though they are offset by trading gains or losses.ÿ While Standard & Poor's believes that these trading losses were partly deferred by various means in 1997, the same possibilities may not offer themselves in 1998, and in any case losses could be much larger.
A precipitous drop in the rouble would spell disaster for the banking system as a whole.ÿ The banks are vulnerable to a currency devaluation in a number of ways.ÿ During 1997, most banks switched to a short dollar position on the balance sheet.ÿ Protestations that they are hedged with forwards are difficult to verify.ÿ In any case the hedges are often with other Russian banks so that the counterparty risk is high.ÿ Another issue is that they increased their reliance on funds from abroad through Eurobond and syndicated loan borrowings.ÿ The latter mature in 1998.ÿ A third issue is that often over half of the loan portfolio is dollar denominated so that a sharp devaluation would increase the debt burden on borrowers, transforming currency risk into credit risk.
Loan quality had been improving through 1997.ÿ However, prolonged periods of high rates, as well as lower oil prices, could impair borrowers' ability to pay.ÿ In addition, rampant loan growth of 1997 gives rise to concern about the future.ÿ However, necessary that loan growth was for developing a real banking business, and however low a base it started from (banks are still nowhere near fully loaned up) a doubling of the loan book is difficult even for the most experienced bankers to maintain control over.
The currency exposure, the rapid loan growth and the need for capital are all necessary evils for the Russian banks given the structural issues in the economy.ÿ They are the results of high and unstable interest rates that make dollar borrowing attractive, the lack of access of most banks to retail deposits because of the State Savings Bank's near monopoly on consumer deposits, and the fact that commercial lending is almost entirely new to this post-inflationary transition economy.ÿ Access to capital is constrained because the banks are privately owned and capital markets still small.ÿ Thus the fledgling banking system desperately needs a period of relative stability in the economy in order firm up its flying skills.ÿ Unfortunately, in the current environment events may conspire against it.ÿ The ratings, all in the single-'B' range, incorporate the risks of substantial volatility.ÿ They do not, however, incorporate a systemic crisis such as could ensue from a currency crisis, !
or an extended period of extremely high real interest rates. If the current turbulence escalates, ratings could be lowered, Standard & Poor's said. -- CreditWire ÿÿÿ RATINGS ON CREDITWATCH NEGATIVEÿÿÿ RATING
ÿÿÿ Inkombank (AB))
ÿÿÿ Counterparty rtgÿÿÿÿÿÿÿÿÿÿÿÿÿÿÿÿÿÿÿÿÿÿ B+
ÿÿÿ Vozrozhdenie Bank
ÿÿÿ Counterparty rtgÿÿÿÿÿÿÿÿÿÿÿÿÿÿÿÿÿÿÿÿÿÿ B+
ÿÿÿ Bank Imperial
ÿÿÿ Counterparty rtgÿÿÿÿÿÿÿÿÿÿÿÿÿÿÿÿÿÿÿÿÿÿ B+
ÿÿÿ Alfa Bank
ÿÿÿ Counterparty rtgÿÿÿÿÿÿÿÿÿÿÿÿÿÿÿÿÿÿÿÿÿÿ B
ÿÿÿ Alfa-Russia Finance B.V.
ÿÿÿ Sr unsecd debtÿÿÿÿÿÿÿÿÿÿÿÿÿÿÿÿÿÿÿÿÿÿÿÿ B
ÿÿÿ Rossiyskiy Kredit Bank
ÿÿÿ Counterparty rtgÿÿÿÿÿÿÿÿÿÿÿÿÿÿÿÿÿÿÿÿÿÿ B/B
ÿÿÿ Bank Loan rtgÿÿÿÿÿÿÿÿÿÿÿÿÿÿÿÿÿÿÿÿÿÿÿÿÿ B
ÿÿÿ Rossiyskiy Kredit Securities B.V.
ÿÿÿ Sr unsecd debtÿÿÿÿÿÿÿÿÿÿÿÿÿÿÿÿÿÿÿÿÿÿÿÿ B
ÿÿÿ Aljba Alliance
ÿÿÿ Counterparty rtgÿÿÿÿÿÿÿÿÿÿÿÿÿÿÿÿÿÿÿÿÿÿ B/B
ÿÿÿ SBS-AGRO Bank
ÿÿÿ Counterparty rtgÿÿÿÿÿÿÿÿÿÿÿÿÿÿÿÿÿÿÿÿÿÿ B+
ÿÿÿ Bank Loan rtgÿÿÿÿÿÿÿÿÿÿÿÿÿÿÿÿÿÿÿÿÿÿÿÿÿ B+
ÿÿÿ SBS-Agro Finance B.V.
ÿÿÿ Sr unsecd debtÿÿÿÿÿÿÿÿÿÿÿÿÿÿÿÿÿÿÿÿÿÿÿÿ B+
SOURCEÿ Standard & Poor's CreditWireÿÿÿÿ
/CONTACT:ÿ Tanya Azarchs, New York, 212-208-1543, Richard Thomas, London,
44-171-826-3627, both of Standard & Poor's/
ÿÿÿ /Web site:ÿ ratings.standardpoor.com
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