S&P downgrades RCB after Russian partner exit

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Standard and Poor’s rating agency downgraded RCB bank’s long-term issuer credit rating to B+ from BB- over the impact of its previous major shareholder, the Russian VTB, pulling out of the bank to shield its assets from Russia sanctions.

The agency also placed Cyprus’ third-largest lender on CreditWatch with negative implications.

“RCB Bank`s business prospects will likely be affected by weakened volumes, lack of support from VTB Bank (previously its largest shareholder), business origination, and the potential second-hand effects of Russian economic activity, including deposit run-offs,” S&P said.

The development comes two weeks after RCB Bank announced a change in its share structure, as major stakeholders VTB Bank sold a 46.29% stake to shield its assets from UK sanctions following Russia’s invasion of Ukraine.

VTB Bank PJSC sold its 46.3% stake in RCB to the bank’s Cypriot shareholders, who represent the management, as part of a plan “to protect RCB Bank from escalating geopolitical tensions.”

The announcement was made on 24 February, the day Russia invaded Ukraine.

VTB was included on the UK and the EU sanctions lists.

Standard and Poor’s noted: “RCB Bank has been protected through a mix of forward planning actions and a change of control.

“VTB Bank’s sale of its stake in RCB Bank contributed to alleviating RCB Bank’s financial profile.”

The agency said RCB’s capitalization and risk profile have improved by unwinding its largest loan in Kazakhstan, which made up over 30% of its loans.

“As a result, we now expect our risk-adjusted capital ratio to be sustainably above 10%.

“The loan book is now also more granular, provided there are no further shocks that affect the bank.

“RCB Bank also increased its long-term funding through the issuance of a €200 mln senior-nonpreferred instrument and a €300 million term deposit (both funded by VTB Bank), providing some buffer for customer deposit outflows.

“RCB Bank’s business prospects and the sustainability of its business model will be hampered by its new stand-alone model.

“Without VTB’s support for business growth, the bank will have to reshuffle its business strategy.

“In our view, this will take time and might be complicated given the bank`s niche and limited franchise.”

It said reduced loan volumes, which declined by over 30% following the unwinding of RCB’s largest loan in January, and volatile market conditions will “likely weigh on the bank’s profitability prospects in the next 12-18 months.”

Niche focus

S&P notes that RCB’s market franchise in Cyprus is limited compared to the two largest players (about 8% loan market share).

“Its niche focus might hamper its business profile due to second-hand effects from the military conflict between Russia and Ukraine.”

S&P is not optimistic about RCB’s future as it expects its ratings to come under further pressure.

“Negative CreditWatch placement reflects our opinion that the increased geopolitical and economic risks to the Russian economy could further constrain RCB Bank’s customer deposit outflows and its funding profile.”

It said there were also uncertainties on the “pending regulatory approval and any potential governance risks that could arise from historical links between RCB Bank and VTB Bank”.

The agency said it aims to resolve the CreditWatch once there is more clarity on the full macroeconomic repercussions of the sanctions against Russia and its related entities and the evolution of the geopolitical conflict, and visibility on the volatility of RCB’s customer deposits, and the regulatory approval of the change of control.

VTB is Russia’s second-largest bank with assets of €184 bln and 95,000 employees.

Following its invasion of Ukraine, the UK government approved sanctions that banned Russia’s economically vital industries and companies from raising finance on the UK’s money markets.

RCB Bank was founded in 1995 and is a major financial institution in Cyprus.

The bank’s network includes branches in Nicosia, Limassol, Larnaca, Paphos and Luxembourg.