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Rating Action: Moody's affirms A2/P-1 rating of Black Sea Trade and Development Bank; changes outlook to negative
Global Credit Research - 19 Mar 2015
Frankfurt am Main, March 19, 2015 -- Moody's Investor Service (Moody's) has today changed the outlook on Black Sea Trade and Development Bank (BSTDB)'s A2 rating to negative from stable. In a related action, Moody's has affirmed BSTDB's A2/P-1 ratings.
Key drivers for the change of the rating outlook to negative are:
1. Increased risks to BSTDB's asset quality, due to a deteriorating operating environment in Russia and the CIS region;
2. A weakening of Moody's assessment of the BSTDB's strength of member support as a consequence of Moody's recent downgrade of Russia's sovereign bond rating to Ba1 from Baa3.
RATINGS RATIONALE
RATIONALE FOR THE NEGATIVE OUTLOOK
FIRST DRIVER: INCREASED RISKS TO BSTDB'S ASSET QUALITY
The negative outlook on the BSTDB's A2 rating is driven by the increased risks to the bank's asset quality, against the background of Moody's forecasts that Russia's (Ba1 negative) economy will contract by 5.5% in 2015 and 3.0% in 2016, Moody's projection that Ukraine's (Caa3 negative) economy will contract by 6% in 2015, as well as uncertainty related to the Greek government's (Caa1; on review for downgrade) current financial situation. As a result, the risk of unpredictable and rapidly deteriorating conditions negatively affecting asset quality, which could lead to a rapid growth in the share of non-performing loans (NPLs) as a percentage of total loans, has recently increased.
The BSTDB's loan portfolio shows significant exposure to Russia and Ukraine (which accounted for 24% and 8.5% of total loans, respectively, as of end-2013), which increases the bank's vulnerability to the expected recession in both countries and the correlation amongst the BSTDB's members and assets. Although the exposure to Greece is more limited (4.9% of total loans), the risk of a renewed Greek financial crisis adds to risks faced by the Black Sea Economic Cooperation (BSEC).
SECOND DRIVER: WEAKENING ASSESSMENT OF BSTDB'S STRENGTH OF MEMBER SUPPORT
Moreover, Russia, Greece and Ukraine are amongst the BSTDB's main shareholders (with 16.6%, 16.6% and 13.6% of subscribed capital, respectively), as is Turkey (Baa3 negative, with 16.6% of subscribed capital). In the event of major economic and financial stresses on these countries, which could lead to downgrades of their sovereign ratings, the bank's strength of shareholders support would be considerably impacted in terms of even lower callable capital from investment-grade rated shareholders and weighted median shareholder rating, with consequences for BSTDB's overall creditworthiness.
Due to the downgrade of Russia's government bond rating to Ba1 from Baa3, BSTDB's callable capital from investment-grade-rated shareholders has already declined by 25% (which is equivalent to Russia's share in callable capital) to EUR789 million, from EUR1.05 billion. As a consequence, the coverage of BSTDB's debt stock by callable capital from investment-grade rated shareholders has significantly decreased, which weakens our assessment of contractual support, a key indicator in assessing a multilateral development bank (MDB's) strength of member support, which is one of the key rating factors in Moody's methodology for rating Multilateral Development Banks and Other Supranational Entities.
RATIONALE FOR THE RATING AFFIRMATION AT A2
The rating affirmation is supported by BSTDB's high amount of usable equity relative to its loan book, and low leverage, a significant amount of callable capital, and substantial liquid assets which support BSTDB's resilience to the challenging macroeconomic operating environment. Despite the Russian rating downgrade to Ba1, the average median weighted shareholder rating - another key indicator to assess an MDB's strength of member support in our Supranational Bond Rating Methodology - remains at Baa3.
BSTDB's usable capital amounted to EUR641 million at year-end 2013. This includes paid-in capital, reserves and profits and can be utilized to absorb losses on assets and to repay creditors. BSTDB's usable capital increased by 7% in 2013, mainly as a consequence of a EUR13.3 million net income gain in 2013 and continued paid-in capital contributions from member states related to the capital increase in 2007. BSTDB's profits have on average been stable and positive since 2008, ranging from EUR10 million to EUR14 million, with return on usable capital and return on assets averaging 5% and 1.4% respectively over 2008-13. We view profitability as neutral in our assessment of capital adequacy.
The BSTDB's liquidity policy sets the minimum level of liquid assets held at 50% of the next 12 months' net cash requirements, and the bank has consistently held liquid assets in excess of this. The breadth of the cash coverage is adequate, as it includes not just debt service, but also budgeted loan disbursements and administrative expenses; the bank could prioritize debt service over loan disbursements if it needed to.
The level of NPLs is relatively high compared to other A-rated MDBs. While the bank has historically had low NPLs, they have increased steadily since 2010, as several BSEC members were among those hit worst by the post-global-crisis economic downturn. As a result, the bank's NPL ratio rose to 7% in 2011 from 1.2% in 2008-09. During 2013, one NPL was successfully restructured, and by year-end the ratio had fallen to 5.6%. However, this level is high for the MDB sector and considering the difficult economic environment in which the bank operates, risks of renewed impairment of asset quality have recently heightened significantly.
WHAT COULD MOVE THE RATING UP/DOWN
BSTDB's rating could face upward pressure if the challenging macroeconomic environment in which it operates improves or stabilizes, provided there is a continued downward trend in NPLs and risk management were to further improve.
Conversely, a deterioration of shareholders' credit quality and their ability to support BSTDB in case of need could lead to a revision of BSTDB's rating. A deterioration in capital adequacy or liquidity, for instance caused by weakening loan or treasury asset quality, would cause downward pressure on BSTDB's rating. A significant weakening of the credit profiles of BSTDB's major borrowers or shareholders would also exert downward pressure, as would any reduction in the likelihood of callable capital injections from shareholders in case of stress.
METHODOLOGY
The principal methodology used in these ratings was Multilateral Development Banks and Other Supranational Entities published in December 2013. Please see the Credit Policy page on
www.moodys.com for a copy of this methodology.
REGULATORY DISCLOSURES
For ratings issued on a program, series or category/class of debt, this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the rating action on the support provider and in relation to each particular rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on
www.moodys.com.
For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this rating action, and whose ratings may change as a result of this rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.
Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.
Please see
www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.
Please see the ratings tab on the issuer/entity page on
www.moodys.com for additional regulatory disclosures for each credit rating.
Marco Zaninelli
Asst Vice President - Analyst
Sovereign Risk Group
Moody's Deutschland GmbH
An der Welle 5
Frankfurt am Main 60322
Germany
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454
Alastair Wilson
MD-Global Sovereign Risk
Sovereign Risk Group
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454
Releasing Office:
Moody's Deutschland GmbH
An der Welle 5
Frankfurt am Main 60322
Germany
