TEXT-Fitch rates Expobank LLC at 'B';outlook stable

Wed Dec 19, 2012 7:14am EST

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(The following statement was released by the rating agency)

Dec 19 - Fitch Ratings has assigned Russia-based Expobank LLC (EB) a Long-term Issuer Default Rating (IDR) of 'B' with a Stable Outlook. A full list of rating actions is at the end of this comment.

RATING ACTION RATIONALE AND DRIVERS

EB's ratings reflect the bank's narrow franchise, highly concentrated balance sheet, some asset quality concerns, negative operating profitability and planned expansion through M&A activities. At the same time, the ratings take into account the currently reasonable capitalisation and comfortable liquidity position.

At end-H112, the bank reported modest levels of non-performing loans (NPLs; more than 90 days overdue) and restructured exposures, accounting for 4.4% and 1.8% of the total portfolio, respectively. However, Fitch's review of EB's 20 largest loan exposures (representing 66% of total loans, or 96% of the corporate book at end-H112) indicates that almost half of these were project financing exposures with long tenors and as yet untested quality. Borrowers with whom EB's shareholders have/had connections, companies controlled by the shareholders' business partners and clients of banks where the management has previously worked accounted for almost half the corporate loan book. However, reported related party lending was a low 1.9% of gross loans.

Customer accounts, the bank's core funding source (73% of total liabilities at end-H112), were highly concentrated, with the top 20 accounts making up 51% of total client funds. 12 of the 20 largest deposits were from individuals, and one-third of balances from individuals were sourced from shareholders and key management personnel. To diversify its funding, the bank is seeking to develop private banking services, although this could be challenging, in Fitch's view.

EB's shareholders plan to actively pursue bank acquisitions, with the aim of making purchases at significant discounts to book value. Acquisitions may be made on to EB's balance sheet, or by the shareholders directly, with both options having already been used for transactions in H212. Although Fitch views the current market situation as broadly favourable for such deals, the strategy carries considerable risks, and there is significant uncertainty attached to its sustainability.

The bank's liquidity position was sound at end-10M12 with liquid assets (cash and equivalents, net short-term interbank placements and unpledged bonds repoable with the Central Bank of Russia) covering 59% of customer accounts. The total regulatory capital ratio stood at 17% at end-10M12 (13.8% Tier 1 ratio), and Fitch estimates the bank could reserve 17% of its loan book without breaching minimum capital requirements. However, both the liquidity and capital positions could be volatile, depending on the frequency and terms of bank acquisitions.

RATING SENSITIVITIES

Downward pressure on EB's ratings could arise if there was a marked deterioration in asset quality and/or substantial losses resulting from bank acquisitions, causing a significant weakening of the bank's capital position, or if deposit outflows and/or acquisitions cause a marked tightening of liquidity. A marked increase in related party lending or deterioration in the quality of credit underwriting could also lead to a downgrade.

Upside potential for the bank's ratings is limited. However, strengthening and diversification of the bank's franchise, improvements in performance and a demonstrated track record of successfully managing bank acquisitions, would be positive for the credit profile.

EB was purchased from Barclays Bank plc in Q411 by a group of individuals, headed by Igor Kim. Mr. Kim currently holds a 70% stake in the bank.

The following ratings have been assigned to EB:

Long-Term foreign and local currency IDRs: 'B', Outlook Stable

Short-Term foreign currency IDR: 'B'

Support Rating: '5'

Viability Rating: 'b'

National Long-Term Rating: 'BBB-(rus)', Outlook Stable

Support Rating Floor: No Floor

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