Yesterday, on 22 September 2008, S&P revised outlooks on ratings of seven Russian banks (Bank Soyuz, Commercial Bank Petrocommerce, National Factoring Company, Rosbank, Rusfinance Bank, Surgutneftegazbank, TransCreditBank) from positive to stable. Among the reasons the agency cites tightened liquidity situation and tougher refinancing conditions in Russia, which are expected to pressure banks’ financial performance and financial flexibility, as well as hinder their strategic expansion goals.

 

We believe that these rating actions will have no impact on spreads, which already price in by far lower credit quality as indicated by ratings of S&P. While we acknowledge that the recent liquidity squeeze once again showed certain systemic weaknesses inherent to the Russian banking sector, it also seems to us that the revision of outlooks reflects S&P’s general view on the rating drift in the industry rather than addresses the impact on credit profiles of individual banks.

 

To make it more specific, in case of TransCreditBank (TCB) it is hard to find any reason from the first paragraph, which would be a suitable argument to justify an outlook revision from a bottom-up perspective. For instance, we see no heavy reliance on capital market funding at TCB: loans-to-deposits ratio stood at 127.4% at end-Q1 2008. Furthermore, we believe that credit assessment of a BB-rated Russian bank should capture its inability to access both local and international capital markets for a prolonged period of time. This becomes especially obvious in the light of the current global credit turmoil, which lasts already for more than a year with no signs of relief visible in the short-term. With regard to its expansion plans, TCB mainly relies on customer deposits to fund its growth. Much of these funds come from related parties, mostly from the parent company Russian Railways and its subsidiaries. In our view, the inability to roll over these deposits would hinder expansion goals of the bank. At the same time we want to stress that zero or negative asset growth on its own is not a threat to credit quality as long as it does not negatively impact liquidity, loan book quality or franchise value.