Moody’s downgrades SME Bank to Ba2

Moody's Investors Service said it downgraded SME Bank's long-term local currency debt and deposit ratings to Ba2 from Ba1, as well as the baseline credit assessment (BCA) and adjusted BCA to b2 from b1.

The bank's short-term foreign currency deposit rating of Not-Prime, long-term foreign currency deposit rating of Ba2 and counterparty risk assessments of Ba1(cr)/Not-Prime(cr) were affirmed.

The outlook on all the bank's long-term global scale ratings remains negative.

Moody’s said the action was triggered by the recently increased failures of small and mid-sized Russian banks that led to impairment of SME Bank's assets and translated into BCA downgrade to b2 from b1.

Following the increased number of failures in the Russian banking system, SME Bank's problem loans (individually impaired loans to banks and customers) peaked at 15.2% of its gross loans as of Sept. 30 (year-end 2015: 7.1%; year-end 2014: 3.7%), the agency said.

Historically low recovery rates on this asset class points to a very high likelihood that SME Bank will have to notably increase loan loss reserves on these problem exposures from the current level of RUB 10 billion (11.4% of gross loans) in the next 12 months.

Moody's estimates additional credit losses of up to one third of the bank's regulatory tier 1 (N1.1), creating substantial risk of its rapid erosion from the currently high level of 15% (Nov. 1).

This deterioration in assets and increased likelihood of capital erosion has led the agency to reassess the bank's solvency metrics and downgrade the BCA to b2 from b1, Moody’s explained.

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