Russian bank risk assessment revised to Group 7

Standard & Poor's Ratings Services said that it revised its Banking Industry Country Risk Assessment (BICRA) on The Russian Federation to Group 7 from Group 8. (See "Banking Industry Country Risk Assessment On Russia Revised To Group 7 From Group 8," published today on RatingsDirect.) At the same time, Standard & Poor's changed its assessment of the Russian government's propensity to provide support to private sector banks to "supportive" from "support uncertain." Standard & Poor's also affirmed its estimate of the incidence of gross problematic assets (GPAs) in the Russian financial system under a reasonable (but not catastrophic) scenario of economic recession at 35%-50%.
"These actions reflect Russia's increased political and regulatory commitment to ensure the stability of the banking sector," said Standard & Poor's credit analyst Ekaterina Trofimova, "as highlighted by the Central Bank of Russia's effective management of liquidity pressures related to the global credit crunch since summer 2007."
"Certain structural factors also have contributed to an improvement in the banking sector's risk profile, including greater customer and business line diversification, lengthening track record of good performance, better overall management, and decreasing dependence on opportunistic gains and capital markets income," added Ms. Trofimova.
The improving creditworthiness of the Russian Federation (foreign currency BBB+/Positive/A-2; local currency A-/Positive/A-2) greatly reduces the potential of a repeat of the catastrophic sovereign local currency default of 1998. Banks also benefit from the better creditworthiness of Russian industrial companies, including in non-resource-based sectors; ample domestic liquidity (boosted by high energy revenues); stronger private consumption; and greater accumulated wealth in the country.
Russia's BICRA and GPA range remain higher than those of certain comparable markets. This is due to two broad factors: institutional weakness and aggressive credit expansion financed by foreign borrowings. Weaknesses in the legal and supervisory framework in Russia create risks for banks. There remains a lack of transparency of bank and corporate ownership, and opposition from parties with vested interests constrains progress in bank reform. High single-party concentrations in loans and deposits remain.
"Credit has expanded at a breakneck pace for several years, increasing the potential for a disorderly period of readjustment if Russia's economic expansion slows considerably or becomes negative," said Ms. Trofimova.
The fact that Russian banks have financed a material part of the growth with foreign borrowings creates additional liquidity and currency risks for the sector.
The BICRA reflects the strengths and weaknesses of a country's banking system relative to those in other countries. BICRAs classify countries into 10 groups ranging from the strongest banking systems (Group 1) to the weakest (Group 10) from the perspective of country risk.