TEXT-S&P affirms VTB Bank at 'BBB', raises short-term rtg to 'A-2'

Tue Dec 18, 2012 7:05am EST

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(The following statement was released by the rating agency)

Dec 18 -

Overview

-- Russia-based VTB Bank JSC is a government-related entity that we believe has a "very high" likelihood of receiving extraordinary government support if needed.

-- We are affirming our 'BBB' and 'ruAAA' ratings on VTB. At the same time, we are raising our short-term ratings on VTB to 'A-2', the level of the sovereign rating, from 'A-3'.

-- The stable outlook on VTB reflects our anticipation of the Russian government directly or indirectly supporting VTB's capital building to ensure that the bank maintains an adequate competitive footing relative to other industry participants.

Rating Action

On Dec. 18, 2012, Standard & Poor's Ratings Services raised its short-term counterparty credit ratings on Russia-based VTB Bank JSC to 'A-2' from 'A-3'. At the same time it affirmed its 'BBB' long-term counterparty credit ratings and 'ruAAA' Russia national scale ratings on the bank. The outlook is stable.

Rationale

The upgrade follows a similar action on the Russian Federation (foreign currency BBB/Stable/A-2; local currency BBB+/Stable/A-2; Russia national scale 'ruAAA') and the revision of our criteria on the linkage between the long-term and short-term ratings on sovereigns (for further details see: "Ratings on Russia Affirmed on External Strength; Short-Term FC Rating Raised To 'A-2' On Criteria Change; Outlook Stable," published June 27, 2012, on RatingsDirect on the Global Credit Portal). According to the criteria, a short-term rating on a sovereign is derived uniquely from the long-term rating by applying a linkage consistent with that applied to corporate entities.

The ratings on VTB, which is 75.5% owned by the Russian Federation, are based on our opinion of its status as a government-related entity (GRE). In our opinion, the likelihood that the state would provide timely and sufficient extraordinary support to VTB if needed is very high, owing to VTB's very important role in the economy and very strong links with the government. We therefore incorporate three notches of uplift above VTB's stand-alone credit profile (SACP) of 'bb' into the long-term ratings on VTB.

VTB's SACP reflects our 'bb' anchor and our assessment of the bank's "strong" business position, "moderate" capital and earnings, "moderate" risk position, "average" funding, and "adequate" liquidity, as our criteria define these terms.

Our assessment of VTB's short-term liquidity position incorporates our view of the bank's good access to government funding, as shown by GRE funding, which comprised 32% of its total liabilities as of June 30, 2012. In addition, the granularity and diversity of VTB's customer deposit base has improved and VTB's retail banking franchise has strengthened on the back of its recent acquisitions of TransCreditBank (BBB-/Stable/A-3) and Bank of Moscow (not rated).

Outlook

The stable outlook reflects our anticipation that VTB will improve its capital adequacy over the medium term through Tier 1 capital increases and slower expansion of risk assets. We also expect the Russian government to directly or indirectly support VTB's capital building to ensure that the bank operates from an adequate competitive footing in the industry. Russia plans to sell up to 20% of its shares in VTB over the medium term, depending on market conditions. Nevertheless, in our opinion the state will maintain majority ownership and control over the bank for several years, and VTB's very strong links with the government will likely be maintained in the medium term.

We would lower our ratings on VTB if over the next 18-24 months the bank failed to improve its capital adequacy to a moderate level, reflected in a risk-adjusted capital ratio of at least 5%, or if VTB's link to the government weakened. If the government were to relinquish its majority stake in VTB, we would consider VTB's link to the state to have weakened under our methodology and reduce the uplift included in the rating. A significant deterioration of the operating environment for banks in Russia could also lead to a downgrade.

We could raise the ratings if VTB's SACP improved, if we raised the credit rating on the Russian Federation, and if VTB retained its strong link to and important role for the Russian government. A sustained improvement in VTB's risk position could lead to an improvement in the SACP.

Ratings Score Snapshot

To From

Issuer Credit Rating BBB/Stable/A-2 BBB/Stable/A-3

SACP bb bb

Anchor bb bb

Business Position Strong (+1) Strong (+1)

Capital and Earnings Moderate (0) Moderate (0)

Risk Position Moderate (-1) Moderate (-1)

Funding and Liquidity Average Average

and Adequate (0) and Adequate (0)

Support +3 +3

GRE Support +3 +3

Group Support 0 0

Sovereign Support 0 0

Additional Factors 0 0

Related criteria and research

Related criteria

-- Banks: Rating Methodology And Assumptions, Nov. 9, 2011

-- Banking Industry Country Risk Assessment Methodology And Assumptions, Nov. 9, 2011

-- Group Rating Methodology For Banks, Nov. 9, 2011

-- Bank Hybrid Capital Methodology And Assumptions, Nov. 1, 2011

-- Rating Government-Related Entities: Methodology And Assumptions, Dec. 9, 2010

-- Bank Capital Methodology And Assumptions, Dec. 6, 2010

Related research

-- Capital And Funding Constraints Hold Back Russian Banks' Resurgence, Dec. 3, 2012

-- TransCreditBank, Nov. 2, 2012

-- Russian Federation, July 27, 2012

-- JSC VTB Bank, June 15, 2012

-- Banking Industry Country Risk Assessment: Russia, March 19, 2012

Ratings List

Ratings Affirmed; Upgraded

To From

VTB Bank JSC

VTB-Leasing

Counterparty Credit Rating BBB/Stable/A-2 BBB/Stable/A-3

Ratings Affirmed

VTB Bank JSC

VTB-Leasing

Russia National Scale ruAAA/--/--

VTB Bank JSC

Certificate Of Deposit BBB

VTB-Leasing Finance

Counterparty Credit Rating BBB/Stable/--

Senior Unsecured ruAAA

Senior Unsecured BBB

VTB Bank JSC

Senior Unsecured BBB

Senior Unsecured cnA

Senior Unsecured ruAAA

Subordinated BBB-

VTB Capital S.A.

Senior Unsecured cnA

Senior Unsecured BBB

Subordinated BBB-

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